Inflation debate: interest rates, public spending and taxes

The battle to control inflation: rates, public spending and taxes

Much of the debate assumes that raising interest rates is the path that has worked against runaway inflation. So far, agreement. The problem is timing: the ECB is tightening the credit tap while voices demanding cuts in public spending and tax changes grow louder, and that is where consensus breaks down. Some argue that the monetary squeeze must be maintained until the money in circulation really shrinks; others call for trimming spending, public salaries and taxes; and a third way warns that without cheap energy, no monetary policy will work. The discussion is not about the diagnosis, but about who pays for the adjustment.

Why are cuts to civil servants' pay being demanded to curb inflation?

Because every euro that leaves the public coffers and ends up in a paycheck is money that circulates and pressures prices. That is the reasoning behind calls for cutting the public payroll and, by the way, fiscal tightening. The calculation circulating along those lines is blunt: a 25% cut in civil servants' salaries and maximum pensions would be the shortcut to cool domestic demand without waiting for the ECB to keep raising rates. The full breakdown, item by item, between public salaries, benefits and current spending, gives a sum that surprises whoever does it for the first time.

The rebuttal comes quickly. With salaries of 1,800 euros for a doctor and 1,200 for a police officer, the room for cuts has consequences: it is argued that public healthcare already depends on professionals trained abroad and that touching pay would only accelerate the exodus. The example put on the table is uncomfortable: if the alternative to working is a social benefit plus an occupied home, the incentive breaks down at the bottom, not at the top. And a question remains unanswered: if the State cuts but the printing press keeps running, what is the point of the sacrifice?

1970s stagflation and the temptation to ease too early

Recession plus inflation has had a name for half a century: stagflation. And it also has a manual. The precedent cited over and over is that of the 1970s: high interest rates until inflation truly subsided, plus a warning about what happens when the effort is relaxed before the disinflationary process ends. The reading drawn is that easing in the final phase makes the picture worse, not softer.

The parallel has a catch, because the shock then was energy-related and the current one also carries that burden. It is argued that monetary policy managers will stumble on the same stone: cutting rates for antiestéticar of recession before inflation is tamed, and ending up with the worst of both worlds. History does not repeat itself, but it rhymes.

Denmark as an uncomfortable mirror: 100% car registration tax and free university

The Nordic country appears as a counterexample when taxes are discussed. The car registration tax there is 100% of the vehicle's value, previously 130%, and public universities charge no fees to EU citizens. The self-employed contribution, it is argued, would be 0 euros: you only pay when you earn. With that framework, the fine print is that the car becomes a luxury and the bicycle the default transport, while high salaries absorb the blow.

The counteroffer comes from the comparative side. In Spain, university credit costs between 12 and 24 euros depending on the autonomous community, which is not free but is not market price either, and the motorway and high-estimulante ilegal rail network exceeds Denmark's in kilometres. The comparison of tax models gets tangled when the size and demography of each country are considered: the warning issued is that measuring two states as if they were twins leads to false conclusions in both directions. It is also noted that there, labour inspections are more frequent and penalties for irregular employment are much higher.

The tax that rises without anyone voting for it

There is a part of the problem that does not make the evening news: taxation that rises silently. Raising VAT or income tax angers because it shows on the payslip; creating new figures, adjusting bases or freezing brackets is less noticeable. The feeling described is that of the frog in slowly heating water: by the time the taxpayer reacts, the rate has been rising for years. Each government adds its layer and the result is a fiscal effort that grows without public discourse announcing it.

Hence much of the anger is directed less at a specific tax than at the direction of fiscal policy. Cutting taxes has been presented as an outstanding test for decades, and the official response is usually the same: there is no room. Those who doubt it recall that revenue from consumption and income hits records every time inflation pushes prices up without wages keeping pace.

Gas, devalued euro and energy: the path that bypasses Brussels

The other reading places the origin outside interest rates. There is talk of a geopolitical conflict that made energy more expensive and of a euro losing value against the dollar, with gas bought at crisis prices and oil resold by intermediaries. Without cheap energy, it is argued, no industrial economy holds up and there is no real way to control prices, because the problem is not domestic demand but the energy bill.

In that version, raising rates only makes financing more expensive for families and companies while the origin of the problem remains intact. And the ECB tightening, with governments indebted and no room for manoeuvre. Europe produces little, depends on a currency without productive backing and has left monetary policy without ammunition where it hurts most, according to this current.

With these ingredients, the forecast is uncomfortable: if inflation is slow to subside, the temptation to cut spending, public salaries and taxes will return in every budget. If the ECB eases too early, the 1970s manual suggests the problem will drag on. And if no one touches energy or the fiscal structure, the problem will stop being a cyclical note and settle into the permanent data column. Although no one signs that forecast.