2024 budget gets on a war footing
Conflict in the Middle East could throw off growth, deficit, tax revenue, inflation projections
Once again, due this time to the situation in the Middle East, the Finance Ministry faces mounting uncertainties a few weeks away from revealing the draft 2024 budget.
Will international oil prices spike once more? This would boost the current account deficit and public spending, while reviving the only partially contained inflation and persistently high interest rates.
Will natural gas prices follow suit? This will not only further exacerbate the current account deficit but will also be a major cause for higher electricity bills, with the government’s margin to provide extensive assistance limited by its obligation to maintain a certain level of primary budget surplus.
Will the risk of terrorist attacks in cities around the world increase? This would restrict travel or even result in travel advisories, hitting hard at the country’s hopes for even more tourist arrivals to help the goal of a 3% economic growth in 2024.
Already, the Finance Ministry has been forced to make a small downward adjustment on gross domestic product growth and an upward one on debt as a percentage of GDP by the simple fact that the independent Statistics Authority revised the 2022 GDP figure to €206 billion from €208 billion, affecting 2023 estimates and projections. And if these adjustments are marginal, about 0.1% to 0.2% in either GDP and debt level, a protracted Middle East conflict would turn macroeconomic and fiscal projections upside down.
The ministry has not yet put figures on the likely Mideast outcomes, but its main fear, higher energy prices, is being borne out. Since October 6, the price of Brent oil has risen 11%, from $84 to about $93.50 per barrel. The hike in natural gas prices in energy exchanges has been even steeper, from €36 per megawatt-hour to €51 per MWh, or 41.7%.
Finance Ministry officials had begun drafting the 2024 budget on the assumption that the average barrel price of Brent oil would be $82 and the average price of natural gas no higher than €40 per MWh.
Higher energy prices will be felt on several fronts: the average consumer price index will rise more than the estimated 2.4%; the goal of reducing the current account deficit to 6%-6.5% of GDP will seem unattainable; VAT revenue, instead of being boosted by the higher gasoline prices, might be depressed by lower consumption there and on most other products.
