These days many criticisms have been made of the General State Budget Bill for 2022, but what is its greatest sin has usually been overlooked: that they are procyclical budgets. That is to say, some budgets that, although they are based on the government’s expectation of strong growth for 2022, insist on reinforcing this already very strong economic recovery with a large increase in public spending, until reaching 7%. Much of that 7% growth in GDP will just be increased government spending.
Economic policy measures that accentuate the prevailing trend at any given time are called “procyclical” and those that try to offset the prevailing trend are called “countercyclical”. When there is a recession, countercyclical policy consists of increasing public spending and lowering interest rates and, when there is a very strong recovery, the opposite is normally done (that is, raising interest rates and reducing public spending: with them the consumerist euphoria or real estate speculation is stopped).
It is the responsibility of governments and central banks to understand what is appropriate at all times, and just as it would have been suicidal (“austericidal”) to make procyclical budgets for the year and a half that the acute phase of the pandemic has lasted (what that in that case it would have meant having reduced spending instead of increasing it) it also does not seem very appropriate that, when the economies are in clear recovery, the government wants to show off with an even greater recovery increasing public spending.
We must insist on praising both the Spanish government and most other governments for adopting an “anti-cyclical” policy during the pandemic: during recessions, anti-cyclical policies are adopted precisely to fight against the calamities of the recessive cycle.
But now that things are much better, that consumption and real estate investment are bordering on euphoria in many countries: does it make sense to push the euphoria even further, which is what a procyclical policy will do? Would it not be better, if not openly countercyclical policies, that they were at least neutral?
There are problems that can arise from these procyclical policies. The most obvious and traditional of all is the increase in inflation. But also the fact that this increase in demand that the budgets will promote will occur at a time when supply is falling, with which we will see the worst of all worlds: more demand and less supply, which will add another round of inflation to the already existing of an expansionary cycle.
Because the world is now suffering from what economists call a supply shock. sui generiswhich is being translated into fewer products on the market (whether semiconductors or motor vehicles; Christmas toys or fertilizers and even CO2, necessary for the preservation of some foods) and also shortage of some raw materials(fundamentally natural gas: European stocks are very low for this time of year, only two months away from winter) which is causing induced effects of an increase in the price of electricity and everything that needs gas or electricity to be produced or be preserved (food).
Also, incidentally, it is forcing the partial “lockout” of industrial plants that make intensive use of electricity in order to reduce their costs (in Spain, Sidenor, ArcelorMittal and Fertiberia).
In short, budgets They aim to increase demand when there is a decrease in supply.. A complicated situation for which neither this nor any government is directly responsible (although they are partially so due to some of their improvident policies such as those of the so-called Green Agenda) and that comes as a consequence of having stopped the global economy to combat the pandemic, and the corresponding mess that has occurred in global trade flows, which are now strangely clogged.
Trade imbalance risk
Another problem with the fact that the Spanish economy grows much more than those of other countries (something that the Prime Minister usually drops with pride in his public appearances) is the increase in imports and the relative decrease in exports with what that an eventual deficit in the balance of payments on the current account is encouraged, which would have to be financed with savings from abroad. And more so in a case like that of Spain, which has to matter almost all fossil energy it consumes and many other raw materials, at very high prices, after being depressed for 13 years.
To make matters worse, all of this may be happening in an environment of slowing economies: from China, immersed in its real estate default crisis and plagued by power outages and industry stoppages to save energy, to that of the US, which, with the latest data, already seems to have grown last quarter at a rate of only 0.29% quarterly.
In the history of the European socialist parties there is an unforgettable example of such errors: the one committed by the President of the French Republic, Francois Mitterrand, in the first three years of his government, left the Union of the Left. While the whole world was in recession, in 1980-1981, Mitterrand insisted that the French economy grow and applied a program of expansion of public spending.
Exaggerating, it can be said that nobody bought French products, but they did sell to a France that increased the purchasing power of its citizens. The result was that it became unsustainable and caused several devaluations of the currency (the French franc, then) and finally the departure of the communists from the government accompanied by a radical change in economic policy.
The situation of the European industry, so vulnerable at the moment due to the lack of components and the rise in energy prices (along with the threat of a trade war with the United Kingdom) makes an additional depreciation of the euro foreseeable, which will make the price of everything that is imported from countries outside the Eurozone.
Thus, to the 150% that the price of gas has risen so far this year (this was the case at the worst moment a few days ago) we must add a rise of almost 7% that has lowered the price of the euro against the dollar from Kings. This will further threaten the trade balance (the Spanish current account balance accumulates five months with a surplus: 4,600 million euros in the first seven months of the year).
Does the government believe its growth forecasts?
Thinking in a very twisted way, one could reach the conclusion that the government does not believe its forecasts of economic growth for the same reasons indicated above of deterioration of the global economy and that, by increasing public spending so strikingly, what it is doing are not procyclical policies but preventive countercyclical ones, but without telling anyone, just in case. A situation in which everything that grew in the Spanish GDP was due to the increase in public spending.
In this way, if the global economy stopped growing, the Spanish economy would have adequately covered itself to maintain a growth rate of 2% or 3%. And if, on the contrary, China, the US and Germany resume strong growth (in an ideal situation in which the global bottlenecks disappear and pre-pandemic normalcy is restored) the government will not care about the imbalances and will apply the long live the present fugitive! And the problems and imbalances… for the future.
This preventive approach (if it were the case, and if not, also) is only possible by the injection of money created out of thin air that the central banks are doing, directly or channeled through the Next Generation funds of the European Union.
Something that is causing a bipolar situation in which, for 18 months, consumers do not know if they are living in Mordor (due to the terror caused by the Covid-19 mortality and the subsequent economic recession) or in the worlds of Yupi where nothing happens to have an unsustainable public deficit and where you can continue living off the air. Or both at the same time. Waking up will not be very pleasant.