The governor of the Bank of Spain, Pablo Hernández de Cos, has warned of the danger posed by indexing spending and salary items to the CPI due to the “feedback ” impact it would have on inflation that is already at relatively high levels.
During his intervention before the Congressional Budget Committee on the draft General State Budget for 2022, Cos stressed that “it is particularly important to avoid the widespread use of automatic indexation clauses (to inflation) in spending items that could additionally feed the current inflationary process “.
In addition, the governor has asked companies and workers to internalize “the fundamentally transitory nature of some of the main factors behind the current rise in prices and to seek an equitable distribution of the decline in income in the national economy compared to the rest of the world. world that imply the recent cost increases, in many cases concentrated in goods and services that our economy requires, but does not produce “.
If all these price increases translate into higher final prices and higher wages, there is a risk of generating a more severe and lasting inflationary process. De Cos warns that ” a feedback of prices and costs could be encouraged with adverse effects on competitiveness, economic activity and the well-being of citizens”.
Cos has anticipated that they will make “a significant downward revision” of their economic growth forecasts for Spain for this year. In addition, the governor of the Bank of Spain believes that some revenues in the General Budgets have been calculated too optimistically.
Cos explained that the Bank of Spain will not publish new macroeconomic projections until December, but has advanced that there will be a downward revision.
The latest forecasts
Current forecasts from the Bank of Spain project GDP growth of 6.3% in 2021 , which would decline slightly to 5.9% in 2022.
But, Hernández de Cos recalled, after these projections the INE significantly revised down its previous estimates of GDP growth in the second quarter of 2021 from 2.8% to the aforementioned 1.1%.
“A reduction of such a high magnitude implies, mechanically (…) a substantial reduction in the average GDP growth rate for 2021 and, to a lesser extent, also that of 2022,” he added, in statements collected by the EFE agency .
Hernández de Cos has pointed out the risks faced by the Spanish economy and has especially highlighted the evolution of the imbalances between the supply and demand of goods and the degree of persistence of inflationary pressures.
An inflated PGE?
When analyzing the main features of the project, Hernández de Cos has pointed out how the macroeconomic framework from which the accounts are drawn up establishes a growth of 6.5% and 7% for this year and the next, an average growth rate of almost one point above the consensus of the analysts for both years.
In the particular case of inflation, he has pointed out how the deflator used for private consumption remains at 1.3% , “only two tenths less than in September,” he said, which would imply, in case of an update based on it, a revision of more than 0.5 and 1 percentage points for the two years.
He also highlighted the effect that the maintenance of the rise in energy prices could have over time, which in the case of electricity would reach between two and three tenths of GDP after three years if an increase is consolidated permanent 10%.
Back with pensions
Pablo Hernández de Cos has once again warned that the price escalation could raise the estimated pension spending in the 2022 budget by about 3,500 million euros.
Hernández de Cos has found “certain risks of upward deviation” in budgeted pension spending. Thus, if inflation rises more than estimated, pension spending could rise by about 1,500 million in 2022 , to which would have to be added another 2,000 million for the compensation of pensions in 2021.
Hernández de Cos has insisted that “a review of the public pension system is still necessary to guarantee its sustainability”, a process that must be approached with “transparency” so that citizens can “conveniently plan their work and retirement decisions, and consumption and savings “.