One of lime and another of sand. The Fiscal Authority (Airef), the independent body in charge of overseeing public accounts, has improved Spain's growth forecasts for this year, from 1.7% to 2%. The dynamism shown by activity at the start of the year and the strength of domestic consumption are some of the ingredients that explain the upward revision. The deficit will also drop to 3% of GDP, an objective committed to Brussels, but the margin to reduce it will be reduced if additional measures are not taken. Starting in 2026, it will remain above this threshold, the maximum set by the EU, and an adjustment of 9 billion a year will be necessary to reduce the high volume of debt. The Administrations will also skip this year the European recommendation on the increase in primary spending net of income measures: according to the institution's calculations, the increase will be 4%, compared to the 2.6% suggested.
All of this will also take place in a “unique context”, in the words of Cristina Herrero, president of Airef. The Government has given up preparing the Budget for the year, the deficit and debt objectives have not been approved by the Senate, and the European fiscal rules are now back in force although many details remain "to be clarified", the economist this Thursday in the presentation of the
Report on the Initial Budgets of Public Administrations
for 2024. In fact, he recalled that there is a possibility that the European Commission will open an excessive deficit procedure for Spain based on the 2023 budget closure, which showed a gap between income and expenses of 3.7% of GDP.
It is also not clear whether the update of the Stability Plan will have to be sent to Brussels in April. Spain will have to send in September a four or seven-year structural fiscal plan required by the new European fiscal framework. The Airef estimates that an adjustment of 0.63 points of GDP per year or 9,000 million euros - 2.52 points in four years - will be necessary for the debt, currently at 107.7% of GDP, to be at downward path and its ratio to GDP will drop by 25 points in the next 15 years. If the plan that was finally agreed upon with Brussels were for seven years, a possibility that the Commission has already accepted as valid by accepting the reforms of the recovery plans, the reduction would be 0.43 points per year, about 6,000 million per year. European regulation allows this extension to seven years as long as reforms and investments are carried out that increase growth and underpin the sustainability of the accounts.
The better-than-expected GDP growth is based on a buoyant labor market that has pushed domestic consumption in 2023 above expectations. Public consumption has also advanced at a faster rate than predicted, a positive behavior that adds to the good performance of exports, especially in the services sector and tourism. The other side of the coin is the weakness of investment, despite the injection of European funds, and stagnation in productivity. The deployment of the Recovery Plan will be crucial to meet the GDP growth forecasts for the year. In the medium term, the progress of activity will converge towards potential growth and will stand at 1.5% in 2028.
For this year, a slowdown is expected compared to the previous year - in which GDP increased by 2.5% - due to a slowdown in the foreign sector and public consumption. “There may be a recovery of the investment, but it depends on the impact of the Recovery Plan,” said Esther Gordo, director of the institution's Economic Analysis Division.
Increase in spending
Although the organization expects that the deficit objective of 3% of GDP for all Administrations will be met this year, its composition will be different from that estimated in the previous projections, for the month of October. Firstly, the 2023 budget closing has been two tenths better than expected - 3.7% instead of the estimated 3.9% - and for this year only part of the anti-crisis measures have been extended, which which in itself represents a saving of seven tenths of GDP. The inertial evolution of the rest of expenses and income will reduce the gap by an additional tenth, but that is canceled by the increase in expenses linked to judicial rulings, in particular the Constitutional ruling that overthrows the corporate tax reform of Cristóbal Montoro and the which dictated the refund of overpaid personal income tax to mutual society retirees. The Airef estimates that in 2025 the deficit will drop to 2.9%, but that it will rise again to 3.1% the following year and reach 3.2% in 2027 and 2028 if additional measures are not taken.
Where there will be non-compliance, although it does not entail any sanction from Brussels, is the specific recommendation for the growth of primary spending net of income measures of 2.6%. If this threshold were respected, the deficit would drop to 2.4%. The organization also warns about the national spending rule: it believes that neither the central Administration, nor the communities nor 10 of the large cities it monitors will respect the limit. “Beyond the legal consequences that could arise from formal non-compliance with the current national fiscal framework or the specific recommendation, high growth in eligible spending in 2024 implies a deterioration in public finances in the medium term in a context of high public debt. which, in addition, would increase the adjustment required by the new European fiscal framework,” he warns in his report.
Public debt has fallen sharply since the pandemic highs, when it exceeded 125% of GDP, the highest ratio in peacetime, but it remains elevated at all and compared to European neighbors, only behind Greece and Italy. Airef expects the liability rate to be reduced this year to 105.8% of GDP, almost two percentage points less than at the end of 2023 and somewhat better than the Government's latest estimate (106.3%). Later, given a lower contribution from nominal growth and higher interests, the rate of reduction will slow until it is exhausted in 2028, when it will reach 104.3% of GDP, according to the entity's calculations.