The rate of fiscal consolidation slackens but not the effortThe rate of fiscal consolidation slackens but not the effort

The government has announced a significant relaxation in the path of fiscal consolidation. Specifically, the new public deficit target for this year is 6.3% of GDP, 1.8 percentage points higher than the target agreed last July with the EC and 3.3 points higher than the figure presented in the Stability Programme last year. The support of the EC and the IMF for this revision highlights the new international consensus that is coming about in favour of a slower rate of adjustment in fiscal imbalances. This is expected to help speed up the rate of economic recovery. The reduction in the public deficit predicted for this year will therefore be just 0.7 percentage points, three times less than last year. So does this mean that the fiscal effort will be less?

Fiscal effort is the set of measures, both in terms of revenue and spending, that have to be taken to reduce the public deficit. Consequently these, in addition to the desired deficit reduction, also have to compensate the impact of the economic deterioration on revenue and spending and the end of temporary fiscal measures taken previously. This year, neither of these two effects will be irrelevant. According to the government's estimates, the end of the temporary fiscal measures taken last year, such as the suppression of the Christmas bonus for civil servants and the income gained through the fiscal amnesty, will reduce revenue and increase spending by 1.0% of GDP.

The economic situation will not help either. In this case, the effect of the rise in unemployment is one of the most important elements, both due to the impact this has on fiscal income — due to lower tax revenue — and also on spending, due to an increase in unemployment benefit. The growth seen in the public debt over the last few years is applying additional pressure. Although the average cost of this debt has remained relatively stable, its higher level has pushed financing costs from 16.9 billion euros in 2007 to 31.3 billion euros in 2012. This year the cost is likely to increase by a further 5.4 billion euros.

Given this scenario, considerable fiscal effort needs to be made. According to the government's estimates, the measures announced, both for revenue and spending, will result in savings for the public coffers of 4.4% of GDP. Among these measures, of note is the increased revenue from corporation tax and VAT, the latter due to the hike in this tax in September 2012. Lower expenditure on unemployment subsidies resulting from a change in how benefit is calculated will also help to reduce spending.

A fiscal effort of 4.4 p.p. should be enough to reduce the deficit by 0.7 percentage points, down to 6.3% of GDP. Given that the effect of the temporary measures is 1.0 p.p., the measures announced might even offset the effect of economic deterioration on the national accounts of up to 2.7 p.p., a figure that seems quite conservative given that, last year, with a similar fall in GDP to that predicted for this year, the effect of the economic decline was 2.2 p.p. All the evidence suggests, therefore, that the fiscal deficit target might be achieved. In any case, the government has shown itself willing to take additional measures in September should the effect of those taken to date is less than expected, or if the economic deterioration ends up being greater than expected.