MNI INTERVIEW: Right-Wing Spanish Gov't To Cut Spending, Debt

A new conservative Spanish government would seek to restore budget balance through cuts to public spending and sales of state holdings in non-strategic companies, and also take measures to boost investment in energy and data centres, the People’s Party economic chief told MNI.

A return to budget balance would allow Spain to reduce its debt without relying heavily on flexibility available under EU fiscal rules and also attract more capital and investment, Juan Bravo, economic spokesman for the PP, which polls suggest is set to emerge leading a coalition government after elections on Nov 29, said in an interview

 “The country that is more credible is the one that attracts all the investment,” he said, adding that Spain has margin to continue to reduce its spread with German bunds, at a time when German government spending is rising. “Our objective is to return to budget balance.” (See MN POLICY: EU To Get Tough On Fiscal Rules After Bond Rout)

Bravo wants to save EUR1.5 billion per year by reducing the number of ministries from 22 to 14, and another EUR1.3 billion by improving the management of state-owned companies and political hires. More savings would come from trimming overlapping responsibilities between central, regional and local administrations, as well as from trimming subsidies.

New technologies and AI should also allow reductions in civil service staffing, with around 40% of public employees expected to retire over the next eight years, Bravo said.

He declined to provide targets for the deficit or debt, pointing to what he said was past experience of deception by the governing Socialists with regards to the state of the public finances.

CAIXABANK

A PP-led government would seek to sell state holdings in companies “where public ownership is not strategically necessary,” with an 18% stake in CaixaBank and 10% of Telefonica prime examples. 

“What we do want to convey is that we will not be in places where state participation does not make sense,” Bravo said, though he added that the stake sales would be timed to maximise returns and in consultation with the companies’ management teams.

DATA CENTRES

Legislation will also allow Spain’s autonomous regions to speed up construction of data centres, Bravo said, noting the country’s access to international data cables and potential for cheap energy. The government would also promote EUR300 billion of investment needed in infrastructure including energy over 15 years, almost twice the current annual rate, from both public and private capital, he said, claiming that more than EUR1 billion in renewable electricity generation is currently wasted per year because of insufficient demand and storage capacity.

A new right-leaning government would raise personal income tax brackets to reflect inflation and update family tax allowances frozen for 11 years, Bravo said. The PP wants a broader tax reform, including changes to personal income tax and the tax administration, as well as measures to encourage investment through corporation tax, he added.

DEFENCE

In contrast to the reluctance of current Socialist Prime Minister Pedro Sanchez to boost defence spending, the PP would push for an increase to 3.5% of GDP in the medium-term, in line with other European countries, Bravo said. Increased spending would boost pay for military personnel and include investment in dual military-civilian infrastructure such as ports. At least 60% of the money spent should remain in Spain, with procurement supporting national industry, he said.

Spain should also take a role in reviving the project to build a new generation fighter aircraft under Europe’s Future Combat Air System, working with Germany and seeking alternative partners including possibly Sweden, Denmark, the UK or Turkey if France does not cooperate, said Bravo.

Spain has currently taken EUR1 billion from the EU’s SAFE defence-funding facility, and Bravo said that any increase in that amount would depend on financing costs.

Under the PP, Spain will also align its position on China with that of the broader EU, in a significant departure from Sanchez’s policy of seeking warmer ties with Beijing.

“If we are partners of the EU, we take the decision together and are not going on our own,” Bravo said.

Bravo played down the prospect of major economic disagreements with Vox, the right-wing party whose support the PP is likely to need in order to form a government. Drawing on his experience negotiating budgets as Andalusia's regional economy minister, he said the two parties were “on a similar page” on economic policy and that the main difficulties in reaching agreements would lie in other areas. (See MNI SOURCES: Bond Selloff, France, Clouds ECB Dec Rate Call)

MNI INTERVIEW: BOJ To Harden Policy Stance - Sakurai

The Bank of Japan is likely to harden its language around its pre-emptive approach to monetary policy to more align with global central banking norms to stabilise underlying CPI inflation at about 2%, as it grapples with inflationary government spending and a persistently weaker yen, former BOJ board member Makoto Sakurai told MNI. 

While Prime Minister Sanae Takaichi's government has likely accepted the 1.25% policy rate will need to rise further, it has not limited its often contradictory fiscal policies, he said, pointing to the recent passing of a consumption tax cut bill. The government's fiscal expansion will continue to weaken the yen, with further BOJ rate hikes only slowing its decline, Sakurai argued. The BOJ is likely to reiterate its position in future that it will act pre-emptively, or in an emergency, based on the outlook for the economy and price developments, Sakurai said, noting that several peer central banks had recently used similar language.

He maintained his view that the BOJ would raise its policy rate to 1.5% in December and continue hiking at roughly three-month intervals until it reaches his estimated terminal rate of 2%. (See MNI INTERVIEW: Ex-BOJ Sakurai Sees Dec Hike, 2% Terminal Rate) The Board is likely to take a wait-and-see attitude in or after mid-2027 after raising the rate to 2%, depending on price moves. “Should the inflation rate accelerate, raising the policy rate above 2% would be necessary, but such a rate hike may be resisted by the government or public,” he continued, adding the government would likely accept a 2% rate. 

Markets see the policy rate peaking at 1.8% by September 2027, with a 75% chance of a hike priced in for the December meeting.   

FUTURE INFLATION

FINANCIAL CONDITIONS

Sakurai said financial conditions varied between large and smaller firms, making it difficult for the BOJ to assess the overall degree of monetary accommodation. 

While financial conditions remained accommodative at the macro level, the BOJ must gather information at the micro level and assess whether tighter conditions were weighing on economic growth, he added.

Pointing to falling property prices, he warned some real-estate firms were struggling with high borrowing costs on "revolving" rates rather than fixed-rate loans, prompting some to sell properties to repay debt. Real-estate firms accounted for around 30-40% of total lending by small financial institutions, exposing those lenders to potential unrealised losses and rising credit risks that could undermine financial system stability, he warned.

The BOJ was paying closer attention to the effects of higher borrowing costs on businesses and the financial system. If the Bank was slow to respond, it would increase the risk of a bubble bursting, Sakurai concluded.

MNI: RBA's 4.85% Cash Rate Likely At Peak - Economists

The Reserve Bank of Australia has likely reached the peak of its tightening cycle, although how long the cash rate remains at 4.85% will depend on the impact of higher borrowing costs on the real economy and whether further supply shocks emerge, prominent economists told MNI.

The current level of the rate is highly restrictive and will increasingly weigh on the economy over the next 12 months, particularly as unemployment rises, said former RBA economist Martin Eftimoski.

Eftimoski, who worked at the RBA from 2017 to 2021, believed the Bank should have held at 4.6% last week. The RBA's communication has become too focused on academic and market commentary rather than explaining the pressures facing Australian households and businesses, he added, noting the Bank had based its decision too much on models and not enough on the real economy. (See MNI RBA WATCH: Bullock Points To Dual Mandate Following Hike)

“There's a lot of people in their ears about monetary policy, and they've pivoted so hard away from the anecdotal world,” Eftimoski added. “In the process they've actually gone too hard into that world of abstract theoretical construction, and I think they're missing the high-dimensional complexity of their task. These models that they build, they're just approximations." 

He questioned how the RBA would respond if the federal government adopted a more expansionary fiscal stance ahead of the 2028 election, arguing that political pressure for stimulus could complicate the Bank's efforts to contain inflation, while its ability to hike further to counter higher government spending will be limited due to the already restrictive level of the cash rate. 

Eftimoski also cautioned against assuming a particular path for interest rates, given the uncertainty surrounding global bond yields, oil prices and developments in the Persian Gulf, pointing to Governor Michele Bullock's comments last week that the direction of the cash rate was unknown and would rely on data. While he sees little chance of a further hike, inflation has now been above the Bank's target for about six years and an additional supply shock that pushes price rises higher could leave the bank with little choice but to act to maintain its creditability and contain inflation expectations, he added. 

PEAK RATE

James Morley, professor of macroeconomics at the University of Sydney, agreed with the RBA's decision to raise rates but doubted further tightening would be necessary under current circumstances.

Morley said the Bank was right to prioritise the risk of entrenched inflation expectations, given that inflation was running higher in Australia than in some other countries and reflected, in part, domestic pressures. However, rising unemployment, falling house prices and the delayed effects of previous rate increases could provide sufficient restraint on demand to bring inflation lower without further tightening.

Morley said it would take a significant upside inflation surprise in the new year to convince him that the RBA needed to raise rates again. He also noted that the RBA had acknowledged the possibility that its tightening cycle could lead to a recession, although this was not necessarily its central expectation.

"There's a sense that these policy moves will have an impact on the real economy. The question is how much. The long and variable lags of monetary policy are always a bit uncertain and it interacts with other developments like those in the global economy. We've already seen big drops in house prices and that traditionally will have an affect via the wealth channel on spending." 

Unemployment is likely to rise further, he said, pointing to the RBA's 5.1% unemployment projection by Dec 2028, although whether growth slows fast enough to push unemployment sharply higher would depend on other developments, including global conditions and consumer spending strength. 

Morley pushed back against the notion that the RBA had become too dependent on its models, noting it appeared to be placing greater emphasis on actual inflation outcomes rather than relying as heavily on forecasts, reflecting the recent deterioration in both headline and underlying price measures. The shift also reflected the Bank's desire to demonstrate its commitment to bringing inflation back within its 2-3% target range and keeping longer-term expectations anchored, he concluded.

MN POLICY: EU To Get Tough On Fiscal Rules After Bond Rout

European Economy Commissioner Valdis Dombrovskis signalled to euro area finance ministers on Monday that he is ready to get tough on enforcing the EU's fiscal rules as bond markets turn volatile, MNI understands.

The commissioner told the ministers that he will be sending out letters to some countries as they prepare their 2027 draft budget plans warning they are at risk of non-compliance with the spending paths to which they are committed in their medium-term fiscal structural plans. He did not name the states in question. 

The comments reflect growing concern among EU officials over recent bond market volatility as well as the persistently high level of level of public debt in some countries. 

Dombrovskis also noted during the meeting that some countries might face steps under the Excessive Deficit Procedure for failure to comply with their 2026 budget commitments.

The Commission is due to issue its Autumn Package, a key annual milestone in its surveillance of states' fiscal policies, on Nov 24 following next week's autumn economic forecasts. The commissioner hinted today that there will be a slight upward revision to 2026 euro area growth in the estimates.

Earlier on Monday EU finance ministers approved the National Escape Clause for Italy allowing it flexibility under the fiscal rules for defence spending and energy measures up to 0.6% of GDP. Rome believes that granting the NEC is a nod to the country’s compromise of closing its 2026 deficit below 3% of GDP, allowing an exit of the Excessive Deficit Procedure while activating the NEC. (See MNI: Meloni Tax Cuts Depend On EU Flexibility -Sources )

MNI INTERVIEW: BOC Hiking In December, Again By March-Lapointe

Canada's central bank will raise interest rates for a second meeting next month and again by March, with official comments about moving cautiously aimed at preventing market over reactions rather than being motivated by any risk that inflation quickly settles down, a former finance department official told MNI.

“They aren’t put in a box, but they’ve set themselves pretty clearly on a path to do it in December, otherwise there’s something that’s not consistent in his thinking,” said Dominique Lapointe, now director of macro strategy at Manulife in Montreal. “They mentioned being cautious because they didn’t want markets to integrate so many rate hikes.”

Investors earlier this year priced in three rate hikes for 2026 and speculation has been volatile since Governor Tiff Macklem hiked the policy rate for the first time in more than three years. Macklem also boosted the 2027 inflation forecast to 3.1% from 2% and said the Iran war means more Canadian firms will start passing on cost increases. 

That's a medium-term view and will remain in place even if the next inflation report Nov 16 is weak, Lapointe said. “They are thinking inflation is going to stay higher for longer-- 3% next year, that’s a strong forecast. And I think crucially they don’t see an end to the conflict.”

The main question as to whether another hike will come in January or March is whether Mark Carney and Donald Trump resolve the tariffs dispute, Lapointe said. “They are going to raise rates in December and then they are going to do it in January if we have a deal with the U.S. If we don’t then they are going to do it in March.”

OIL WINDFALL

The Governor told MNI earlier this year his focus is inflation even if there's a trade-off against growth. He told lawmakers last week growth was still set to coming in around 2% annualized in the third quarter after flash GDP figures showed it closer to 1%. (See: MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)

The Bank sees growth rebounding to 2% next year and points to domestic energy producers benefitting from higher prices, exporters’ resilience in the face of tariffs and more government spending to spur investment. “Their thinking is that higher oil is good for Canada,” Lapointe said. 

Carney is also seeing an energy windfall, and his budget Thursday focused on corporate tax cuts that will squeeze federal finances if there's another global shock before big projects pay off, he said.

“There isn’t a lot of room to maneuver in a very uncertain global economic picture,” Lapointe says. Downside risks include tariffs, problems in the AI industry, and tighter global financial conditions including bond yields, he said.

WEAK FISCAL ANCHORS

“The deficit could easily go back to a hundred billion in a dire economic situation. That is not our base case, but it could happen, and we’re in a global bond market,” he said. (See MNI INTERVIEW: Canada Heading Back To 1990s Debt Wall- Ragan)

Thursday's budget showed the deficit for the fiscal year ending in March at CAD62.3 billion or 1.8% of GDP. It also indicated no progress in lowering debt as a percentage of GDP until the middle of the next decade.

“It used to be the goal, the anchor, was that it’s declining, let alone balancing the budget. Now it’s not,” Lapointe said.

That weakens arguments from ministers about strength relative to G7 peers on measures like net debt, Lapointe said, while more foreign buying of Canadian bonds in recent years amplifies risk.

MNI INTERVIEW: US Labor Market In 'Quiet Steady State' - Sahin

A stronger-than-expected October U.S. payrolls report remains consistent with a “quiet steady state” labor market that's not heating up in a manner that threatens to add to the Federal Reserve's inflation problem, Princeton University economist Aysegul Sahin, an adviser to the Federal Reserve Banks of Dallas and New York and the Congressional Budget Office, told MNI. 

She characterized October's 165,000 payroll gain, against Wall Street expectations for 65,000, and dip in the unemployment rate by a tenth to 4.1% as normal month-to-month volatility rather than signs the market is tightening. Over the past 12 months, job gains averaged roughly 74,000 a month, which closely aligns with her estimated breakeven pace of 40,000 to 80,000. 

"The labor market is in a quiet steady state. It’s quiet in the sense that there’s not too much movement around. My estimate of the secular trend of unemployment is and has been for a while 4.1%. This is what’s implied by structural factors and demographics, thinking of a neutral labor market -- and we are there." 

Layoffs and initial claims for jobless benefits remain very low, despite higher borrowing costs as the Fed raises interest rates, she said. 

"The expectation of tightening is not big enough to push the labor market into a visibly weaker stance." 

WAGE GROWTH

The low-hire, low-fire pattern is to be expected following a post-Covid reallocation boom that has run its course, Sahin said. After putting upward pressure on inflation during that time, wage growth has cooled and is now unlikely to be an inflation risk.  

"This disconnect between inflation and the labor market is, in a way, good," she said. "It gives some room to the Fed to do this more-or-less symbolic tightening." 

Symbolic, she said, because the rate hikes do not appear to be materially tightening financial conditions, while the Fed, having "been burned with the transitory stuff," is reluctant to call the oil and tariff shocks temporary and keen to show it will act to bring inflation back to target. 

Wage growth may actually be a bit stronger than headline figures suggest, she said. In a strengthening labor market, composition effects drag down top line averages as lower-wage workers enter the job market and high-wage baby boomers retire. Average hourly earnings rose 3.1% in the 12 months through ​October after increasing 3.2% in September. 

"Wage growth is not that weak, but it’s not strong enough to create this idea that wage pressures will make the firms increase prices," she said.  

AI

AI is the biggest source of uncertainty for the labor market over the medium term, Sahin said. Part of the hiring reluctance reflects heavy AI investment, with firms holding wage bills flat because labor costs are the most visible margin to control. 

That weak hiring falls more on fresh graduates and other new entrants, who now face longer unemployment spells, though Sahin said their small labor force share limits the impact on how policymakers think about full employment.

The key question for Fed Chairman Kevin Warsh’s AI productivity task force, which holds a Bay Area field hearing later this month, is how quickly productivity gains arrive. The technology has not yet fundamentally changed the way goods and services are produced across the broader economy, but bottlenecks in IT equipment, electricity and water supply in the data center build-out are creating price pressures from the demand side and may warrant higher rates. (See MNI INTERVIEW: Hot Economy To Keep Fed Hiking - Andolfatto)

"That’s the difficulty for the Fed to understand: there's this huge investment boom, there's a lot of leverage in the economy, but if the productivity gains are not coming soon, how should we think about this?" 

A collapse is possible from overvalued markets, an investment pullback or financial strains, but “it’s not going to start in the labor market,” according to Sahin.

MNI INTERVIEW: China Fiscal Policy Key Should Exports Slow

Beijing should address fiscal bottlenecks that have limited policy effectiveness this year, while accelerating expenditure and channelling more support to households to bolster the economy in 2027 as export growth is expected to moderate, an economic expert told MNI.

Authorities could modestly increase the deficit to about CNY6.2 trillion next year from CNY5.89 trillion in 2026, while raising the local government special-purpose bond quota by about CNY100 billion to CNY4.5 trillion to support the economy, said Ding Yifan, former deputy director of the institute of world development, under the development research centre of the State Council.

However, the effectiveness of additional fiscal support would depend more on faster deployment of funds, easing constraints on local government spending and directing more resources towards households than on the headline size of the deficit, he argued. (See MNI EM INTERVIEW: China's Trade Competitiveness To Hold In 2027)

"The problem this year has been less about the size of the fiscal envelope than about where and how fast the money is spent," Ding said.

Sharing his own personal views with MNI, Ding noted in the first five months of 2026 general public budget expenditure rose just 0.8% year-on-year, while government fund budget spending fell 4.3%, compared with annual budgeted growth of 4.4% and 5.1%, respectively. The shortfall relative to budgeted growth was the largest for the corresponding period in five years, he said.

Ding, who is also vice president of the China Society of World Economics, attributed the weakness chiefly to local-level execution rather than revenue shortages, noting tax receipts had grown faster than budgeted early in the year. Local officials had become more cautious about approving projects partly because of a lifetime accountability system for government investment decisions introduced in 2026 and a shift away from investment-led performance assessments, he said.

Requirements linking special-purpose bond funding to eligible projects also slowed expenditure as project pipelines developed in the first year of the 15th Five-Year Plan, he added.

Ding suggested Beijing allocate more of next year's bond quotas and fiscal transfers early, establish quarterly spending benchmarks and clarify accountability rules to protect officials whose officially approved projects subsequently underperform. "The 2026 experience shows that a headline fiscal stance can be undermined by slow disbursement," he added.

HOUSEHOLD SUPPORT

Ding expects Beijing to introduce a more concrete household income-growth plan next year, shift incremental fiscal resources towards transfers and social spending, and continue targeted investment in transport, energy and other infrastructure networks.

Those projects could generate about CNY1 trillion in additional investment, or roughly 0.7% of GDP, but would not offset weakness in property and local government investment on their own, he said.

A larger programme of direct household transfers involving around CNY2 trillion in additional fiscal expansion remained possible, but would likely require a sharper deterioration in external demand and the labour market, Ding added. The central government had more fiscal capacity than local authorities and could increase transfers to fund household support, he added.

Authorities should prioritise fiscal transfers to low- and middle-income households, stronger social security and services consumption over broad infrastructure stimulus and consumer goods trade-in subsidies, Ding said, noting trade-in programmes had already brought forward demand and would create a high comparison base in 2027. 

The ratio of per-capita consumption to disposable income fell to 67.1% in the third quarter of 2026 from 68.7% in mid-2024 and around 70% before the pandemic, reflecting weak incomes and precautionary saving, Ding noted.

EXPORTS

The need for more effective fiscal support could become more pressing as China's export growth moderates in 2027, Ding said. (See: MNI EM: Yuan To Strengthen Further Despite PBOC Warning Shot)

Global demand for AI-related infrastructure, including servers, semiconductors and data-centre equipment, has supported Chinese exports this year, but its contribution could weaken as the global investment cycle matures, he noted.

"For 2027, I would expect the contribution from AI-related demand to moderate, but not necessarily to collapse," he said. 

Exports of green technologies, intermediate goods and consumer products, along with shipments to emerging markets, could cushion the slowdown but might not fully replace AI-related demand if it fell sharply.

"Overall, I see export growth as likely to remain positive but to become more dependent on non-AI sectors and more exposed to external demand and trade-policy risks," Ding said.