Energy crisis, Fitch: impact on public finances will hold back post Covid growth

Gas Hungary announces agreement with Gazprom to increase supplies

(Finance) – “The responses of Western European governments to crisis energy will entail huge fiscal costs, slowing the post-pandemic recovery of public finances. “This is what is stated in a report published by Fitch Ratings. Specifically, the impact on deficit and debt levels will reflect the answers policies and the starting points, which vary widely from country to country. Fitch’s macroeconomic forecasts have estimated that an almost complete close of the pipeline Russian it will trigger recessions in the eurozone and the UK, with contractions of GDP 0.1% and 0.2% respectively in 2023.

Based on the inflation estimates of the euro area and the United Kingdom, the rating agency has also calculated further increases by 30% -35% of retail prices of gas and electricity in addition to those already registered by 50% -60% from April 2021.

The document emphasizes that the nature and extent of answers policies and gods concerning financing will reflect the path of wholesale prices and the dependence of each country’s energy mix on Russian gas and dependence on Russian imports, as well as policy choices, including to what extent responsible politicians feel bound by the existing budget and debt. The finances public in most Western European countries they performed extremely well in 2022 thanks to their exceptional revenue growth, facilitating initial energy spending without significant revisions to governments’ deficit targets for 2022. However, the blow to growth will prevent that this strong revenue performance is repeated in 2023, while the indexation of performance social (including pensions) will put pressure on public spending.

In addition, the high inflation eliminated the ability to loosen the politics monetary to offset the impact on households and businesses, in contrast with the onset of the Covid-19 pandemic. The ECB will not absorb any further debt issuance, so the fiscal expansion will take place against a backdrop of much higher marginal borrowing costs. This could limit fiscal responses, particularly in some high-debt countries, although policymakers will weigh social and political pressures against the risks of adverse market reactions.

Fitch’s report looks at the solutions that the European Commission will be able to propose, especially with the revision of the Stability and Growth Pact and the possibility of new common loan schemes which would pool tax costs but which do not appear to have received the same support as the program NextGenerationEU during the pandemic. Also the possibility of taxing extra profits of energy companies seems unclear to the rating agency as the measure may not be applied by all Member States and would only cover a small fraction of the costs of protecting consumers and businesses.

“The impact on public finances will also depend on the duration of the energy crisis. Our macroeconomic forecasts assume that production and consumption from power adapt and that new import infrastructures become operational by 2024. This would allow for a reduction in tax support, “concludes the report.