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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.
"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)
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