The Government’s Budget for 2022 aims at taking large steps toward restoring fiscal equilibrium, after two years of strong accommodation due to the Covid-19 pandemic.
Indeed, fiscal support in FY:2021 amounted to nearly €16 bn or c. 9.0% of GDP, provided mainly in H1:2021. However, the strong GDP recovery since Q2:2021, bolstered by the continuation of targeted fiscal stimulus, supported tax revenue, and allowed a gradual unwinding of expansion measures in the second half of the year. In fact, primary expenditure as per cent of GDP decreased, on an annual basis, by 1.2% in FY:2021, and 5.3% in H2:2021.
Tax revenue in FY:2021 increased by a respectable 4.7% y-o-y, due to robust VAT revenue (+11.4% y-o-y) and surprisingly strong proceeds from CIT (+20.5% y-o-y), supported by resilient profitability. These increases have been partially offset by the drop in PIT revenue (-0.7% of GDP or -5.2% y-o-y in FY:2021).
The 2022 Budget envisages a substantial decrease in the primary deficit, by €10.6 bn, to 1.2% of GDP in 2022 from an estimated 7.3% in 2021. Supportive cyclical conditions and the temporary nature of €9.5 bn of fiscal stimulus provided in 2021 will lead the adjustment effort.
Specifically, primary spending (excluding PIB and RRF) is expected to decline by €7.3 bn (or by 5.5% of annual GDP) in 2022, also providing some fiscal space to finance targeted expenditure on active labor market policies (€0.2 bn), military equipment (€0.8 bn) and the setup of a contingency reserve of c. €2 bn.
The remaining part of the fiscal improvement in 2022 reflects an increase in tax revenue of €3.5 bn (equivalent to a change in the revenue share in GDP of 0.5%) – a 7.5% y-o-y increase. Around two thirds will come from higher VAT and consumption tax revenue (+9.6% y-o-y and 7.7% y-o-y respectively) while the remainder is linked to income taxes (+9.3% y-o-y) as CIT and PIT revenue both recover.
Notably, a substantial increase in public investment is planned for 2022 (including expenditure financed by the RRF), with PIB spending up by 23% y-o-y to €11 bn. Thus, the share of public investment in GDP is expected to climb to an 18-year high of nearly 6%, supporting economic growth and giving rise to positive second-round effects on activity, given the high multiplier effect of public investment on GDP.
Overall, the primary deficit is expected to decline from 7.3% to 1.2% of GDP, while the decrease in the cyclically adjusted primary deficit is estimated at 3.8% of GDP between 2022 and 2021.