Medina has huge savings in spending and a secret margin in income to lift inflation

The path to reduce this year’s government deficit to the equivalent of 1.9% of gross domestic product (GDP), as the government plans in the 2022 state budget (OE2022), will be aided by three factors of significant caliber, indicates the technical budget support. Unit (UTAO) in an analysis of the evolution of public accounts, published yesterday on Parliament’s website (UTAO Report No. 9/2022: Budget Evolution: January to April 2022).

According to the entity coordinated by economist Rui Baleiras, it is now possible to estimate values ​​for savings in expenditure due to relief in the pandemic situation and to understand the impetus given, for example, by European funds.

But there is a third, no less important vector: the sharp rise in prices that companies and end users have to endure, driving up tax revenues. This effect, as the Public Finance Council (CFP) recently noted, will be very visible, but only this year.

In 2023, inflation will fall with a bang in the public accounts. For example, pensions will see a record increase.

The unit assisting Parliament in budgetary matters says Fernando Medina’s finances have not yet revealed the amount of this latest bonus (inflation effect on revenue), which assumes an asset will be used later this year.

This is an important asset if the economic and budgetary situation deteriorates sharply, for example if interest rates rise and the economy slows down.

“It is important to note that the Predictive Treasury Department did not consider failure to act on the beneficial effects of inflation on public accounts in 2022 as measures of the inflation package,” UTAO notes.

“There is no quantification of targets at this level, but inflation this year will improve tax collection and not penalize spending on pensions and salaries, in the absence of cross-cutting changes in the parameters of these variables sensitive to the rise in the general price level (examples: update of IRS scales and IRC thresholds and annual variation percentages of salary and pension tables)”, explains the group of experts.

Good now, bad in 2023, warns the GVB

As Dinheiro Vivo reported in April, the CFP also discovered this margin, the value of which the government is keeping a secret.

High inflation, expected to accelerate in the coming months, will have destructive effects on government accounts, especially next year, the Council warned in its analysis of the OE2022 proposal.

In the short term, however, they say this year (2022), inflation offers some sort of relief, mainly through tax revenues and the fact that civil servant salaries have not been adjusted to reflect this higher inflation. serves as a temporary, but very relevant, brake on government spending.

Inflation is already above 8%, but officials have been rewarded this year (since January) with an increase of only 0.9%.

“As 2022 is the first year of an inflationary process that is not fully foreseen, the budget balance tends to improve in the very short term through various mechanisms that are, however, quickly running out,” said the entity chaired by Nazaré Cabral.

One of the volatile effects is the “automatic response of VAT revenues to the rise in the price of goods and services consumed by households”.

Another short-term effect arises from “failure to update the (non-split) IRS scales”.

The “predetermined increase in civil servants’ salaries” is also a big help, but only in 2022.

UTAO detects different slack compared to 2021

In addition to the fleeting boost that inflation provides, there are other perks to consider when running the OE2022.

Most relevant is the alleviation of the pandemic and consequently the public costs with the so-called “covid-19 policies”, which should allow the government to save more than €4.4 billion this year compared to the bills of 2021, the UTAO indicated in the above-mentioned analysis of the evolution until April, in the public accounts, which are used by the Treasury to calculate the monthly execution of expenditure and income.

This saving alone is equal to about 1.9% of GDP, exactly the deficit target that the government wants to achieve this year (in the national accounts).

This significant spending cut, if implemented, will ultimately determine “the right bills” and the desired budgetary gloss promised for 2022.

In 2021, the cabinet will have spent about 5279 million euros net on covid measures (i.e. more spending and less income). According to the expert group coordinated by Rui Baleiras, the covid bill this year should worsen the budget balance by 875 million euros.

It’s a monumental difference. Less 4404 million euros in net spending, which represents a decrease of more than 80% between 2021 and the forecast for the end of this year in the budget that has now been approved.

The UTAO states that this “reduces significantly (compared to the implementation of 2021) the financial effort of governments with the measures to fight the pandemic”.

But on the other hand, the measures of the “inflation and Ukraine” package should now “exacerbate the global equilibrium more than the Covid-19 measures”. The pandemic is being replaced by war, as it were.

more subsidies

As mentioned, UTAO also notes the large expected effect of European subsidies on expenditure, but without this being reflected in the closing balance (in more deficit), as the revenues (European funds) follow online.

“The year 2022 marks the acceleration in the implementation of the PRR, with an estimated expenditure of 3.2 billion euros, funded entirely by community grants. Of this total, about 3.1 billion euros should be implemented in the Central Administration and Social Services subsectors. Certainty”, note the experts.

Luís Reis Ribeiro is a journalist for Dinheiro Vivo