Fiscal Council points to risks in 2023-2024 budgets
The Fiscal Council has assessed the proposed state budgets for the next two years, finding they to some extent reflect the required course of action, but also contain shortcomings and entail risks, including a high level of discretionary expenditure in the form of investment and pay rises.
The council notes that in the given circumstances fiscal policy needs to maintain "flexibility to act fast, ensure effective measures to mitigate high prices, but avoid creating additional inflationary pressures and jeopardising the sustainability of public debt in the medium term".
Noting the need for fiscal neutrality, the council says that if stimulating demand further, fiscal policy would already work against the current monetary policy efforts to contain the upswing in inflation expectations and even against economic policy's own efforts to contain the effects of high prices.
From that aspect the budget documents proposed by the government entail many risks; the fiscal stimulus envisaged, mainly in the form of a further increase in the already high level of investment, is not necessary or appropriate in the current circumstances and trends, the council finds.
Apart from the continued boost in investment, the fast growth in expenditure is to a large extent a result of discretionary measures adopted after the passage of the original 2023 budget in autumn last year.
These measures, combined with a deteriorated state of public finances this year, the expected large-scale measures to address high energy prices and a slowdown in economic activity, contribute to the projected high deficit in 2023.
Under the budget proposals, the general public deficit is to reach 5% of GDP next year, or 2.4% of GDP when one-off factors are excluded. The latter figure is to stay at similar level in 2024, while the deficit inclusive of one-off factors is to decrease to 2.2% of GDP.
Public debt is projected to fall to 70% of GDP by the end of 2024, which means above the pre-pandemic level, while the risks of a possible deterioration in medium-term sustainability of debt are relatively limited, shows the Fiscal Council's analysis based on the proposed budget documents.
The council welcomed a high budget reserve budgeted to allow the government flexibility to act on high energy prices, but warned that it should be used for its intended purpose only and presented transparently.
"Measures to mitigate high prices must be effective and must not permanently worsen the situation of public finances, and it is therefore essential that they are temporary and as far as possible targeted to help the most vulnerable groups of the population and the most exposed parts of the economy," the council says. The budget documents do foresee that.
Discretion measures could deteriorate the state of public finances by about 2% of GDP a year, acting both on the revenue and expenditure sides.
Government current expenditure is projected to increase at a rate of around 6% a year over the next two years, roughly double the long-term average, and the risks of even higher growth are considerable, especially in the area of public sector pay.
One-off measures to mitigate high energy prices and Covid-19 epidemic are to represent EUR 1.86 billion of the EUR 3.31 billion of the deficit budgeted for next year, which means the remaining deficit, including discretion measures, will be EUR 1.45 billion, which is almost level with that in 2020 and much worse than before the Covid crisis.
In 2024, the budget deficit excluding one-off factors is projected to increase to EUR 1.69 billion, almost the full value of the deficit.
Investment is planned record high, in part due to the overlapping of several EU financial mechanisms, but the Fiscal Council does not believe the figure will be fully realised.
Improving the investment planning system or including a more realistic assessment of investment volumes in budgets could make an important contribution to increasing the transparency and credibility of budget plans.
The Fiscal Council repeats that the projections underlying the budget documents are difficult to assess, as their basis was set unrealistically in this year's revised budget. This increases the likelihood of higher-than-projected growth rates in 2023, especially for expenditure.