The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, participated today in the Fórum Europa, organised by Nueva Economía Fórum, and stated that designing a credible and realistic medium-term fiscal strategy, involving all levels, would help manage the current uncertainty.
The President of AIReF said that the succession of shocks over the last two years has led to an extraordinary situation of uncertainty, with the outbreak of the pandemic, which brought disruptions to supply chains and the transport of goods; the energy crisis, which had already begun to develop in the middle of last year; and the Russian attack on Ukraine, which has intensified supply problems and the energy crisis and threatens to cause possible energy rationing in Europe next winter.
In the opinion of Cristina Herrero, this high level of uncertainty has posed an extraordinary challenge for AIReF, a young institution that has had to adapt to new ways of working, revise forecasting models and incorporate new procedures and techniques to fulfil its mandate. For example, AIReF had to revise its MIPRed real-time forecasting model to correct the lack of synchronisation that existed between the evolution of the job market and the macroeconomic situation.
In this regard, Cristina Herrero stressed the need for an improvement in the medium-term planning of policies that establishes clear objectives and clarifies the instruments necessary to achieve them. In her opinion, fiscal policy action to combat crises should be accompanied by a medium-term strategy to reduce uncertainty and gain credibility in debt markets.
Cristina Herrero highlighted that, in May, AIReF’s growth estimates practically matched those made by other agencies and forecast growth for the year as a whole of 4.3%. These forecasts warned of a series of risks that converged in a potential scenario of lower growth and stronger and more persistent inflation and the prospect of a quicker tightening of the monetary policy stance. Added to this was the uncertainty about the impact of the RTRP.
Since then, AIReF not only fails to see a reduction in these risks, but also that some of them are materialising. For example, China’s isolation measures and export restrictions have significantly heightened disruptions in value chains. Russia has also taken further steps to limit gas supplies to European economies, thus accentuating the energy emergency.
Against this backdrop, growth prospects have deteriorated and inflation has been at the heart of the debate. Moreover, inflation, in the anticipation of the prospects for the normalisation of monetary policy, is causing a deterioration in the price-competitiveness of the Spanish economy. All this, as Cristina Herrero pointed out, represents a very complex scenario that will lead to AIReF reassessing its growth and inflation scenario in the report that will be published on July 19th. AIReF will also revise its fiscal scenario as the adoption of new measures and the extension of others will, according to AIReF’s estimates, lead to a further deterioration of the 2022 deficit. In the opposite direction, the positive evolution of tax collection will result in an improvement in the expected balance. Taking both factors into account, AIReF will revise its public deficit estimate for 2022, currently set at 4.2%. In this regard, Cristina Herrero took the opportunity to highlight the risk involved in thinking that there is some scope for carrying out an expansive fiscal policy beyond the measures necessary to support vulnerable sectors and households. This is another risk that must be managed by designing the aforementioned medium-term fiscal strategy.
Fiscal rules
On the suspension of fiscal rules and the future reform of governance, Cristina noted that AIReF has continued to perform its supervisory work despite the suspension. And the Commission has continued to make recommendations, which were more qualitative at the start of the pandemic and now include quantitative elements for 2023, the year for which the Commission has recommended that the nationally-financed current expenditure of countries with high levels of debt should not exceed potential GDP.
She also noted that AIReF participated in the public consultation launched by the European Commission, which was published in March 2022. According to the contributions to that consultation, there is some consensus on the need for the EU’s economic governance to be more growth-friendly, to take account of social issues and to support the political priorities of the twin green and digital transition. It also recognises the need for the fiscal framework to support the resilience of EU economies to shocks and for debt sustainability to remain a core objective of fiscal rules. However, the adjustment paths towards lower public debt must be realistic and gradual. There is also some consensus on the need to simplify fiscal rules and strengthen national fiscal frameworks through greater participation of independent national fiscal institutions. This would make it possible to achieve greater ownership of the framework by the different countries. The Commission has said it will present a proposal with lines of reform in September or October.
For Cristina Herrero, the reform of the EU framework is an opportunity to reflect on those aspects of the national fiscal framework that have not worked as expected and that could be improved, such as the lack of internal consistency in the design and application of the rules, i.e., the structural balance, the expenditure rule and the debt rule. Compliance with one of them does not guarantee compliance with the others. Consistency between the national framework and the EU framework could also be improved, as could the application of fiscal requirements and the responsibility of each territorial administration to comply with the rules, thus strengthening ownership by such administrations.
Evaluation
Cristina Herrero highlighted the expansion and growth that evaluation is currently undergoing in Spain, following the turning point of the first commission of the Spending Review in 2017 at the request of the EU, which has been followed by the second commission covering the period between 2022 and 2026. This Central Government initiative has now been joined by the Autonomous Regions, which are identifying AIReF as a useful agent for channelling and fulfilling their self-evaluation interests. Specifically, there are already 11 Autonomous Regions that have approached AIReF to evaluate such important spending policies as healthcare, education, active employment policies and their social policies. However, there are already several recent laws or draft bills, such as the Minimum Living Income and the sustainable mobility legislation, which include articles establishing that the policy will be evaluated by AIReF a few years after implementation.
Cristina Herrero stated that during her mandate she proposed to strengthen and consolidate the area of evaluation at AIReF, not only to continue with the institution’s evaluation activity, but also because, in her opinion, budgetary sustainability, growth and evaluation are elements that are mutually dependent. In the past, short-term, linear spending cuts have been used to find budget stability. Evaluation, on the other hand, helps to know which policies and instruments work and which do not. This allows public resources to be focused more surgically and selectively toward the most efficient projects, which strengthens economic growth and the sustainability of public accounts in the medium term
Regarding the Law on Evaluation, the President of AIReF said that this Law basically aims to plan and establish a framework for the coordination of ex ante evaluation, independent from the ex post evaluation carried out by AIReF. In her opinion, despite being an important step in the right direction, the Law falls short of its ambition in relation to solving the main evaluation needs and challenges in Spain. For example, it does not address the strengthening of the country’s evaluation capacity, the production of and access to data for evaluation purposes or the configuration of a clear and stable institutional framework that that will determine who evaluates, how what is evaluated is decided and for what purpose.