"The impact on growth (of discretionary spending) is
assessed to be positive only in 2022, before turning mildly
negative in 2023 and more strongly negative over the 2024-25
period," the ECB said.
(Reporting by Balazs Koranyi
Editing by Mark Potter)
FRANKFURT, Feb 13 (Reuters) - Rapid euro zone inflation
will weigh on public finances over time, a European Central Bank
(ECB) study showed on Monday, confounding some views that
governments might benefit as debt is inflated away and nominal
tax revenues rise.
In a more normal bout of inflation and without automatic
spending adjustments, the bloc's debt ratio would indeed fall,
the ECB argued. But the energy shock, the subsequent slowdown in
growth, and rigid spending rules mean that governments' fiscal
position is negatively affected already after a year.
"In subsequent years, however, spending pressures intensify
and more than offset the benefits on the revenue side, leading
to nearly 0.5% of GDP deterioration in the budget balance level
in 2024," the ECB said in an Economic Bulletin Article.
While inflation normally boosts tax revenue, the energy
shock's income boost is modest, weighs on corporate
profitability, reduces overall growth and puts pressure on
nominal public spending.
"Moreover, the monetary policy reaction required to avoid
this inflation shock leading to undue second-round effects is
being translated into an increase in interest payments on
government debt," the ECB added.
The ECB has raised interest rates by 3 percentage points
since July and markets expect at least another percentage point
of increases before rates peak.
About a third of government spending is also indexed, mostly
to inflation, so high price growth automatically forces
governments to spend more, the ECB said.
The ECB added that excess government spending aimed at
curbing the harmful effects of inflation was only temporary and
would be reversed, so inflation was merely pushed out over a
longer period.
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