Airef believes war and inflation will reduce boost of European funds by 2022

MADRIDThe war in Ukraine has blown up the economic forecasts of the Independent Authority for Fiscal Responsibility (Airef) for 2022. Its president, Cristina Herrero, said the scenarios through which the Airef had calculated that the Recovery, Transformation and Resilience Plan could have an impact of 2.5 points on the GDP, in parallel to the estimates that the Spanish government had made, "are not fulfilled". "We counted on a favourable international context, low interest rates and lower inflation. These are conditions that are not present now," said Herrero on Tuesday. And she reiterated that "the positive impact of the plan will be revised downwards".

The president of the Airef did not want to specify with a figure how big the review will be. In fact, the agency plans to present new macroeconomic forecasts in the first week of April and has already anticipated that they will be worse than the current ones. In this sense, the Spanish government has assumed that the Russian invasion of Ukraine will "slow down" Spain's economic growth this year. For the moment, few people dare to give this numbers. CaixaBank research center has estimated that it will be "one point lower than expected before the conflict". CaixaBank Research put Spanish GDP growth at 5.5% this 2022 (far from the Spanish government's 7%) and, therefore, it could now fall to 4.5%. In turn, the Spanish Chamber of Commerce has cut its growth forecasts for the Spanish economy by 1.2 points, also from 5.5% to 4.3%, due to the impact of the war and energy prices.

This 2022 the impact of European funds was expected to make a big difference, Herrero acknowledged. There were two main reasons for this. On the one hand, the delay in the execution of the funds for 2022. The money was budgeted for last year, but it had not yet been tendered (according to the Spanish government's latest estimate, this accounts for some €2.6bn), meaning that the figures for this year were bloated. The second reason was the arrival of the most important disbursement of all those planned until 2026: €12bn this June. Airef's concern is not about the arrival of the money, linked to the achievement of different milestones the government has committed to with the EU, but about the Spanish government's execution capacity as a result of the impact of the war and the rise in prices in the current economic context. Here, Airef has again criticised the lack of information from the Spanish government and the difficulty in assessing the impact of the plan.

Inflation drives up VAT

As for the fiscal scenario, the Airef does see room for the Spanish government to approve fiscal measures to deal with the consequences of the war, especially regarding the rise in energy prices. Last year closed with a record-breaking tax revenue of over €223bn, as a result of the resumption of economic activity, and the Airef estimates that tax collection will not become a problem again. Now, this year the explanation of a possible good collection is not the return to "normality", but inflation. Airef points out that only of through value added tax (VAT) the State could raise an additional €3.5bn in 2022.

"Inflation is affecting goods that have a high inelasticity of demand, such as energy products: gas, oil or electricity," said Herrero. Inelastic goods are those considered basic necessities and, therefore, despite the rise in prices, do not register a proportional drop in demand. Thus, Herrero's words would endorse one of the options the Spanish government is considering: lowering the tax on fuel.

The executive has different options, but slashing the special fuel tax is the most likely. Sánchez's government has room to reduce up to 2.8% the tax on leaded petrol, 10.4% on unleaded petrol and 1.6% on diesel, staying within EU rules. Another option is to change the VAT applied to these fuels, which currently stands at 21%. However, this is where the EU could wade in, as Brussels has the obligation to include diesel and petrol in the list of products to which the maximum VAT rate applicable in the country must be applied. According to the State budgets of this 2022 (elaborated before the current inflation), the executive expected to collect up to €12.4bn only from the special fuel tax this year.

However, it is expected that the measures on fuels will not be the only ones that Sánchez will be able to move forward. The Spanish government is already pulling strings to agree on a "big deal" with the regional governments, unions, business associations and opposition parties to respond to the consequences of the war. Thus, new measures in energy matters are expected, beyond tax rebates. The executive will also seek to approve new fiscal stimuli and social protection measures for the most vulnerable families on March 29, after the European Council of the 24th and 25th