De Cos advocates an income pact that includes the public sector and avoids a generalized fiscal impulse

MADRID, 7 Jul. (EUROPA PRESS) -

The governor of the Bank of Spain, Pablo Hernández de Cos, considers that the income pact should include the public sector, avoiding both a generalized fiscal impulse and a generalized use of automatic indexation clauses in expenditure items in this context of escalation inflationary.

The governor of the Bank of Spain, like the Government, has once again insisted this Thursday on promoting this income pact, which involves companies and workers, within the framework of social dialogue, agreeing to share the "inevitable" loss of national income implied by the increase in the prices of imports of basic products.

"Avoiding this loop is precisely the priority objective of the income agreement that we have been defending in recent months at the Bank of Spain," the governor remarked during his speech at the first annual Conference on the Spanish Economy organized by the Bank of Spain.

And it is that, in this uncertain scenario before the war in Ukraine, one of the main points of concern is the significant increase in the rate of inflation at the world, European and Spanish levels. Specifically, inflation in Spain increased significantly in 2021 and accelerated further in early 2022, reaching 10% in June.

In addition, the governor has pointed out that although the price increases were initially concentrated in raw materials and food and seemed to be relatively temporary, in recent quarters their intensity has systematically surprised on the rise, spreading to the rest of goods and services of the consumer basket and showing signs of greater persistence.

For this reason, the analysis of the current inflationary episode, Hernández de Cos has stressed that a dynamic of wage moderation and a reduction in commercial margins will prevent the appearance of a feedback loop between prices and wages.

The governor explained that the recovery that the Spanish economy had been experiencing after the most acute phase of the pandemic has been attenuated by interruptions in the supply chain and, in the second half of 2021, by the increase in the prices of energy raw materials aggravated by the Russian invasion of Ukraine.

Despite this recovery that had begun, in the first quarter of 2022, Spain's GDP was still 3.3 percentage points below its pre-pandemic level, while in the euro area it was 0.5 percentage points above from its pre-crisis mark.

According to the latest projections by the Bank of Spain, published last June, in the absence of new shocks or an escalation of the war in Ukraine, the Spanish economy is expected to follow a path of gradual recovery, which could reach levels of Pre-pandemic GDP in the final stretch of 2023.

But the projections are surrounded by "extraordinarily high uncertainty", in particular related to the evolution of the war in Ukraine. Some of these uncertainties are already having a negative impact on the global economy and have the potential to significantly affect growth prospects.

For example, a hypothetical interruption of imports of energy raw materials from Russia would hit the European and Spanish economies hard. In fact, the latest Bank of Spain simulations show that such a scenario would have a negative impact of between 0.8% and 1.4% on Spanish GDP in the first year.

In addition, the Bank of Spain has again warned that in the coming years, public debt will remain very close to or even exceed current levels, unless an ambitious fiscal adjustment plan is applied.

Specifically, several simulations indicate that if no fiscal adjustment is made in Spain in the coming years, the pressure exerted by the aging of the population on public spending will cause the public debt/GDP ratio to increase.

On the contrary, in an alternative scenario in which a consolidation effort is made, consistent with maintaining the structural primary balance forecast in the latest Bank of Spain macroeconomics for 2024, the public debt ratio will be at levels close to 120 %.

If further fiscal adjustment were to take place, for example, if the structural primary balance improved by 0.5 percentage points each year until it reached equilibrium - a path more consistent with the rules of the Stability and Growth Pact - public debt could be reduced to 82% of GDP in 2040.

If this adjustment were accompanied by an ambitious package of structural reforms, the public debt ratio could be around 79% of GDP in 2040.

For this reason, the agency insists that a multi-year fiscal consolidation plan must be carefully designed and applied rigorously once the Spanish economy is on the path to recovery.

In this sense, he believes that the sooner this comprehensive plan is designed and announced, the better, since this would help increase confidence and reduce uncertainty, something especially important in the context of the normalization of monetary policy.