Fiscal advice: MEF’s plan to revive the economy could have unintended consequences for inflation

A week ago, the Ministry of Economy and Finance (MEF) released a Multi-Year Macroeconomic Forecast with economic forecasts for the coming years, which, according to tax council (KF).

In a recent paper, the CF indicated that it believes these estimates could pose negative risks to inflation.

The new MEF forecasts will be based on the economic recovery plan announced by the minister. Kurt Burneoand that it will be released in the coming weeks, but why is it considered to have a negative impact?

“As a result of the announced economic recovery plan, higher levels of government spending and a larger budget deficit are expected in 2022. due to high commodity prices, they should focus on restoring financial resilience, which has been weakened by the effects of the pandemic, and on accelerating the process of fiscal consolidation,” the board said.

CF warns that, according to MMM forecasts, this process of fiscal consolidation shifts more responsibility for reducing and maintaining fiscal deficit to the next government administration.

“Furthermore, CF believes that the decision to apply an expansive fiscal policy to promote short-term economic growth should be adequately supported in order to avoid undesirable consequences for inflation”, they note.

As indicated, the IEF forecasts are also considered optimistic in the short term, since they will generally underestimate the negative impact of external shocks on the domestic economy, as well as other factors, in 2023.

“(…) the real consequences of a permanent deterioration in the expectations of economic agents as a result of political instability and anti-investment measures in the world of work; the impact of rising inflation on private spending will not be taken into account; and it would be an underestimation of the empirical pattern that during the first year of the new subnational authorities, public investment contracts,” they note.

In the medium term, for the period 2024-2026, the KF believes that achieving economic growth rates of more than 3% will represent the biggest challenge in economic matters due to the effects of the pandemic, measures that add rigidity to the labor market. and high uncertainty affecting private investment.

Given this, they consider it necessary to promote concrete measures to restore expectations investments and reduce social conflicts around mining.

CF also indicates that the 3.4% economic growth forecast for 2023 will be inflated, implying a risk to government revenues.

“In particular, CF believes that the difficulty in achieving the MMM income level stems from: (i) the difficulty in achieving economic growth levels above 3.0 percent, in which tax refunds are higher than those provided for in the MMM. and (iii) the possibility that export commodity prices will be lower than expected,” they warn.

In addition, they point out that the main fiscal risks faced by public finance Peruvian women have lower income and higher spending levels than they did before the health emergency.

With regard to these risks, the council argues that it is necessary to ensure the reduction of the budget deficit through concrete measures that guarantee a permanent income and control over public spending.