Recent analysis by Central Bank staff shows that further stimulating economic activity with additional permanent current spending would risk creating excess demand and in the process would add to already high inflation.
As the ECB’s Governing Council said last week, “fiscal support measures to cushion the impact of higher energy prices should be temporary and targeted at the most vulnerable households and firms to limit the risk of fuelling inflationary pressures, to enhance the efficiency of public spending and to preserve debt sustainability.” Increases in permanent core expenditure should be funded by permanent revenue-raising measures to avoid introducing a vulnerability in the public finances as well as reducing the risk of creating imbalances in the economy as a result of excess demand.