Fiscal policies must act primarily as countercyclical policies; buffers must be accumulated in good times to ensure enough fiscal space in downturns. The EU institutional framework favours countercyclical fiscal policies, not without challenges, one must recognize. However, the notion of fiscal space has changed under the current inflationary context.
On one hand, tax revenues are increasing fast in the short term, but the underlying elasticities may no longer hold. On the other hand, the impact of inflation on the expenditure will be lagged, including that stemming from the rise in interest rates. Thus, there is a serious risk – or should I say, temptation – of overestimating fiscal space!