Wise use of extra fiscal space
Finance Ministry is determined to contain primary budget deficit at 1.7% of GDP for 2022
The Finance Ministry has decided to do everything in its power to hit the primary budget deficit target of 1.7% of gross domestic product – or even better – this year, in order to secure the confidence of the markets and postpone until 2023 any new benefits, due to the elections, according to sources.
Lower gas prices – at least in November – ensure some extra fiscal space, since the government will not have to dig deep into public coffers to subsidize electricity tariffs. Fiscal space is expected to be further strengthened by higher GDP growth than the budgeted 5.3%. It is possible, according to analysts and ministry estimates, that it will rise to 6%, or even higher.
However, for the time being at least, the ministry is very conservative in planning new support measures for this year, limiting itself to subsidizing diesel, the price of which has risen significantly. The cost of this measure, however, does not exceed 30 million euros per month, based on its previous implementation, so it will not exhaust the available space, which could reach and exceed €500 million should growth prove to be so dynamic.
If the ministry ultimately does stick to this line, the primary deficit could land well below 1.7% of GDP, up to 1.3% of GDP. Doing so would send a positive signal to markets in view of recovering investment grade, as well as the rising borrowing costs.
In contrast, a slowdown in growth is expected in 2023, with possible additional needs for measures, which the government will certainly want to satisfy in the run-up to the elections. The budget only foresees a reserve of €1 billion euros for subsidizing electricity rates, which may prove to be insufficient. Since the government has demonstrated its fiscal consistency in 2022, the ministry estimates that it could extend support in 2023, taking advantage of the fiscal flexibility that the European Union will continue to provide.
In any case, however, the goal of returning to a primary surplus will remain, estimated at 0.7% of GDP in the draft budget.
