Finance Ministry Optimistic… With The Highest Public Deficit In Europe (6.9%)

budget2021 amendmentsFinance minister, Maria Jesus Montero, celebrating her speech in parliament to explain the budget (2021)

Fernando González Urbaneja | The Finance Minister, always cheerful and confident, has presented the budget execution for 2021 with her usual optimism. The deficit stands at 6.9%, three points less than the previous year, a point and a half less than the government’s forecast. The minister gives herself a good mark, a top A, and the media receive the data with not a little optimism, 28% less than the previous year. With these figures, it is not surprising the minister believes that the Treasury has “slack” to tackle the problems posed by “Putin’s war”. Well, amen, Madam Minister.

These results are the consequence of strong growth in revenue in all tax categories, which is very positive data on the behaviour of economic agents in a year as complicated as last year. VAT revenues grew by 14%, despite the cuts in electricity in the second half of the year; personal income tax revenues grew by 7.5%, due to the increase in wage income; in companies the improvement was spectacular (50%) due to the recovery of company margins and profits; and special taxes on products grew by 5%. Overall, tax revenue increased to 223 billion euros (+23%), the highest figure in history. This rise also reaches social security contributions (+6.8%) due to the good evolution of employment. On this side of the accounts, all the figures are good.

On the other side of the account, that of expenditure, the evolution has not been very different, all expenditure is growing, especially the so-called social expenditure to deal with the effects of the crisis. Public policies to stimulate demand and sustain incomes, in addition to dealing with the pandemic.

Things get a bit more complicated with the last line, the public deficit: 6.9%, 80 billion euros financed mainly by the ECB at irrelevant prices. Compared with the previous year, the exceptional 2020, the deficit improves by 28%, more than three points of GDP. But at this point it is worth standing firm and looking at the details.

It is a very high deficit, the highest in Europe; more than double that of 2019, and more than the average for the previous five years. A large deficit that is bolstering a debt approaching 120% of GDP. Here, too, we are ahead of Europe, with a serious warning of a poor rating when it comes to financing on the market.

The minister sees some slack in the accounts, but there is also evidence of a tightening of the balance sheet. One has to be very bold and optimistic not to see that the budget is on the verge of bursting at the seams. Calling for tax cuts is irresponsible and thinking about raising taxes is dangerous. The Treasury has a chronic problem of tax exhaustion, reforms are needed, updating the main tax figures, which are difficult to do when there is an abundance of needs. Even more so for a government as weak as the current one. I insist, what is noticeable is the budgetary tightness, although the minister sees room for manoeuvre; it is the optimism of will which has little help from reason or reality.

About the Author

Fernando Gonzalez Urbaneja
Over 30 years working in economic journalism. Fernando was founder and chief-editor at El País, general editor at the business daily Cinco Días, and now teaches at Universidad Carlos III. He's been president of the Madrid Press Association and the Spanish Federation of Press Associations. He's also member of the Spanish press complaints commission.