Dear friends, good day to you!
In the economy, as in life, there is no free lunch. Someone always pays the bill. The only thing that changes is who, when, and in what way.
It is worth remembering this these days, as the government is asking Europe for greater fiscal flexibility so that it can deal with the consequences of the energy crisis and possibly temporarily reduce the Special Consumption Tax on fuels.
Kyriakos Mitsotakis has explained it clearly. Without a European exemption, he says, a reduction in the SCT must be offset by a cut in another expenditure or an increase in another tax, since otherwise the necessary fiscal space does not exist.
In the same direction, from a different starting point, the State Budget Office in Parliament is also moving. It favors targeted instead of horizontal measures and warns that generalized reductions in VAT and SCT have a large fiscal cost and lower effectiveness than targeted measures.
Up to this point, the arithmetic is rather simple.
If VAT on food is reduced, the consumer may pay less at the checkout, on the condition of course that the reduction actually passes through to prices. The State, however, will collect less. If the SCT is reduced, the driver may pay less at the pump, but the budget will lose revenue. If instead the price is subsidized, the cost again returns to the budget.
And if the bill is covered by borrowing, it does not disappear. It is simply transferred to the future and accrues interest.
Cyprus chose a different path. It is zeroing VAT on a range of basic products and reducing taxes on energy. It did not, however, discover some fiscal “free lunch.” Its own government explains that this possibility arose from surpluses and the significant reduction of public debt. In other words, it is using fiscal space that it had previously created.
This is exactly what risks being lost in the discussion about “flexibility.” It may be useful, even necessary in a crisis, as it allows a government to deal with an emergency without immediately cutting some other expenditure. It does not, however, turn spending into free money. And the more expensive money becomes, the more expensive the illusion becomes that the bill can simply be postponed.
Government bond yields are rising internationally, as investors worry about inflation, interest rates, and the level of government debt. The U.S. ten-year exceeded 5.34% intraday yesterday, at the highest levels since 2002, while strong pressures are also being recorded in the major European bond markets.
It is not a detail that concerns only traders. When the cost at which states borrow rises, sooner or later the cost of money for the entire economy is affected. And when a state finances today’s needs with more debt, tomorrow’s budgets are called upon to pay more interest.
The Budget Office also warned about this yesterday: the continuous escape clauses may at some point damage the credibility of Europe itself in the eyes of the markets.
Greece knows firsthand what happens when the markets begin to question the fiscal credibility of a state.
That is why the discussion cannot be exhausted by whether VAT, SCT should be reduced, or one more subsidy should be given. Nor by whether Brussels will allow greater fiscal flexibility. The real question is how this flexibility is used and who ultimately pays the bill.
It applies to a state, just as it applies to a business or a household. You can limit an expense, use your savings, or borrow. In the latter case, you can shift the payment to tomorrow.
Except that tomorrow the bill will still be there. And it will also have interest on it. Because flexibility may change the time or the way of payment. It does not abolish the bill. And it, sooner or later, is always paid.