Growth dividend under certain terms

Growth dividend under certain terms

Senior Finance Ministry officials have recently spoken of a so-called “growth dividend” that will be distributed to the people provided economic growth overshoots the recently upgraded government forecast for 5.9%.

The State General Accounting Office says that every percentage point of gross domestic product expansion means an increase in fiscal space by 0.3 percentage points, or some 500 million euros. Does that mean that if growth comes to 7% instead of 5.9%, the government will have an extra leeway of some €550 million?

Not exactly, say ministry officials. That will depend on the content of growth and on the kind of measures, they add.

They go on to explain that if growth relies on temporary factors, such as the suppressed need for consumption due to the lockdowns that will decline in 2022, then there can be no benefit to distribute to taxpayers as it will inflict more costs on the budget, nor can the government take additional permanent measures such as expanding the suspension of the “solidarity tax” on salaries to civil servants and pensioners.

In that context, the ministry is considering some additional support for tackling the effects of inflation, as long as it remains a problem over the coming months. Already the government has had to raise the amount of funds it has set by for subsidizing power hikes from €150 million to €200 million.

However, if growth is based on permanent features such as exports and investments, then the government might consider measures to burden next year’s budget: Ministry estimates say this is true to some extent based on January-June 2021 data: Exports increased year-on-year from €13.9 billion to €16.4 in the first half and investments rose from €8.5 billion to €10 billion. This means an extra €4 billion in the GDP in H1, and if this trend continues in H2, this will be a vital fuel for growth in the coming years.

Still, there are concerns in the ministry whether that should turn into permanent tax breaks, considering that as of next year a huge fiscal adjustment will be necessary, and the abolition of the pandemic’s extraordinary measures may not suffice.

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