Recently, I was reading about how governments try to protect their citizens' purchasing power during times of inflation, and I came across a concept that really affects our investment decisions: fiscal deflation.

Basically, when we talk about the meaning of deflator in economics, we refer to an adjustment that removes the effect of price changes to see real growth. But the interesting part comes when governments apply it to taxes. In Spain, for example, there is constant debate about deflating the personal income tax (IRPF) so that taxpayers do not lose purchasing power when their wages increase but inflation also rises.

Here is the key point: if your salary increases by 5% but inflation is 6%, you technically earned less. Without deflation, you end up paying more taxes on an income that, in real terms, did not improve. Countries like the United States, France, and the Nordic countries already do this annually, while Spain stopped doing it nationally in 2008. Some regional governments have recently started implementing it.

Now, how does this impact your portfolio? If the IRPF is deflated, you would have more money available to invest. It seems simple, but the actual effect is modest; we’re talking about hundreds of euros for the average person. Still, that extra liquidity could be directed toward assets that historically perform well during inflation: energy or basic goods stocks, gold as a safe haven, or even diversification into forex.

What we learned in 2022 was tough: high inflation and interest rates hit different sectors differently. Tech stocks plummeted while energy hit record highs. If you plan to invest in stocks during a recession, there are opportunities if you have liquidity and a long-term horizon, even if it’s volatile.

The debate about deflating taxes also reveals a tension: on one hand, it protects purchasing power; on the other, some argue that recovering purchasing power can increase demand and push prices higher. Additionally, if it is only applied regionally in Spain, the impact is significantly reduced.

The underlying lesson is that understanding how these fiscal adjustments and the meaning of the deflator work helps you anticipate changes in available liquidity and, consequently, market movements. It’s not magic, but it is information many investors overlook.