National Bank: Leap in public investment in 2022, to a high of at least 18 years

An analysis of the State Budget for 2022 was carried out by the Financial Analysis Division of the National Bank, pointing out the goal of implementing a decisive step for the reduction of the deficit, after two consecutive years of intensively expansionary fiscal policy, in order to compensate.

As the EIB notes in its analysis, the strong GDP growth in 2021, which was strengthened by the continued implementation of targeted support measures, mainly in the first half of 2021, boosted tax revenues and allowed the phasing out of fiscal support in 2nd half of the year. The primary deficit of General Government (in terms of Enhanced Supervision) is estimated to decrease marginally to 7.3% of GDP in 2021 (from 7.9% of GDP in 2020). The improvement in fiscal figures is visible in the monthly data on the implementation of the state budget (on a modified cash basis), with the primary deficit being limited to 4.4% in the eleven months of 2021 from 8.2% in the corresponding period of 2020, and the fiscal revenues already exceed the Budget target by € 0.9 billion in the first 11 months of 2021.

Stronger-than-expected GDP growth in 2021 – which according to the EIB ‘s updated forecast will be 8.5% at constant prices compared to the Budget for Growth estimate of 6.9% – is expected to lead to a smaller deficit in 2021 in relative to the estimated by the Budget (close to 7% of GDP), further supporting revenues. In addition, the emerging growth outperformance in 2021 combined with the strong performance in government revenues in the second half of the year, create a more favorable starting point for revenue and overall fiscal performance in 2022 as the recovery remains GDP growth + 4.5% in 2022).

Undoubtedly, fiscal policy remained extremely supportive in 2021 to counter the effects of Covid-19, with the total value of government interventions amounting to € 15.8 billion or almost 9.0% of GDP for the whole year. The cyclically-adjusted General Government deficit is expected to rise to 4.8% of GDP in 2021, from 2.3% in 2020, which corresponds to a direct boost to economic activity in 2021 of the order of 2.5 percentage points.

The strong economic recovery has played a crucial role in achieving a modest reduction in government spending as a percentage of GDP, due to the small decline in the nominal deficit in 2021. In particular, although primary spending increased by 4.0% on an annual basis – mainly due to the additional costs associated with Covid-19, support for households and businesses from natural disasters and targeted subsidies to address rising energy costs – however, they fell by 1.2% as a percentage of GDP due to of the fastest growth of nominal GDP in 2021 (estimated by the Budget at 7.4% per year).

Tax revenues in 2021 increased by 4.7% per year, due to the sharp rise in VAT revenues (+ 11.4% per year) and corporate income tax (annual increase of 20.5%), with the profitability of In practice, the financial performance of profitable businesses, which is essentially the tax base, was even more resilient than the overall profitability data, for many already loss-making businesses.

However, tax revenues decreased as a percentage of GDP by 0.7%, as the increase was below the nominal GDP growth. This weakening is due to the much-anticipated decline in personal income tax revenues (by 0.7% of GDP or -5.2% per year in 2021) due to the suspension of the payment of the special solidarity contribution to the private sector, but also to offset a significant part of the shrinking income from work in 2020, due to the effects of the pandemic, through tax-free benefits.

Dramatic reduction of the primary deficit in 2022

The Budget for 2022 provides drastic reduction of General Government primary deficit by € 10.6 billion to 1.2% of GDP. The increase in revenues amid favorable macroeconomic conditions, while maintaining the relief implemented in 2021 along with the increased share of investment in government spending in 2022, reduce the risk of adverse effects from the gradual withdrawal of support due to a pandemic.

Primary expenditures (excluding public investment) will play a leading role in fiscal improvement, declining by 5.5% of GDP in 2022, through savings of € 9.5 billion from non-recurring measures implemented in 2021 due to Covid-19.

Most of the remaining part of the fiscal improvement in 2022 reflects an estimated increase of € 3.5 billion (0.5% of GDP) in tax revenues (+ 7.5% per year from + 4.7% per year in 2021) , supported by the ongoing recovery of economic activity. About 2/3 of this increase is expected to result from higher VAT revenues and excise duties, while the remaining 1/3 is related to income taxes, as revenues from income taxes of legal entities and individuals are expected to recover further, given of the significant increase in corporate profits in 2021 (+ 19.7% per year as approached by the estimated strengthening of the gross operating surplus in the economy in the 9 months of 2021).

Leap in public investment to a high of at least 18 years with a boost from the Recovery Fund

It is worth noting that for 2022 a significant increase in public investment is planned (+ 23.0% per year to € 11.0 billion) through the Public Investment Program (“PDE”) and the Recovery and Sustainability Fund.

In addition, the increase in public investment activity in 2022 appears even more impressive, if the costs related to the pandemic are excluded from the costs of the PDE in 2021 (mainly subsidy programs to support employment and the part of the repayable advances paid through PDE). Following this adjustment, the increase in PDB spending together with the Recovery Fund in 2022 amounts to 94.0% (by € 5.3 billion), with their level approaching 6.0% of estimated GDP. This ambitious target corresponds to the highest percentage of public investment in GDP in at least the last 18 years, based on budget data, and at the highest absolute level of public investment for as long as there is harmonized data from national accounts.

This aid is expected to have a particularly positive effect on economic growth and competitiveness, as the multiplier effect of increasing public investment in GDP is significantly higher than other categories of public expenditure and especially compared to transfers, where the momentum for saving is relatively high.

Therefore, the Budget estimates that in 2022 gross fixed capital formation in the economy as a whole will increase by 21.9% per year (+ € 4.8 billion) to 14.3% of estimated GDP, corresponding to higher rate than 2010.

Further debt relief

The strongest GDP growth in 2021 was also the most decisive factor in the better-than-expected course of public debt. General Government debt is estimated to have peaked as a percentage of GDP at 206.3% (€ 341 billion) in 2020, a year earlier than initially estimated, and is projected to fall to 197.1% of GDP (€ 350 billion). ) in 2021 and at 189.6% of GDP in 2022 (€ 355 billion). The decline in the debt-to-GDP ratio in 2021 and 2022 may be even greater (at 194% and 185%, respectively) if the strongest economic growth rate is taken into account, according to the EIB estimates (8.5% in fixed and 9.1% in nominal prices in 2021 and 4.4% in fixed and 6.4% in nominal prices in 2022).

The full text of the analysis (in English) is available here