The Independent Authority for Fiscal Responsibility, Airef, confirms the path of reduction of the public deficit initiated by the Government of Spain in recent months, a requirement that will become more relevant from 2024, when the fiscal rules of the European Union. However, the public auditor questions the optimism of the Executive and foresees an imbalance in public finances somewhat greater than the official one, of up to half a percentage point.
The Government, as recently transferred to Brussels in the Stability Program, projects a public deficit of 3% of GDP in 2024 that would gradually decrease to 2.7% in 2025 and 2.5% in 2026. Airef, in its valuation made public this Thursday, foresees that the indicator will stagnate at exactly 3% during the entire period analyzed. Once economic growth begins to be lower and the anti-crisis measures deployed are still on the table, “the ability to reduce the deficit disappears and it stagnates,” explained the president of Airef, Cristina Herrero, in summary.
Although the growth of GDP in the short term “continues to surprise on the rise”, driven by the relaxation of pressures on bottlenecks, the lower intensity of inflationary pressure on energy and the anti-crisis measures deployed by the Executive, growth It will lose strength year by year. As a whole, Airef projects a GDP increase of 1.9% in 2023 and 2% in 2024, a few tenths below what was expected by the Government. From here, the increase in GDP will fall to around 1.7% in 2025 and 2026, which would mean a jug of cold water on the expectations of a correction in the public balance.
With regard to public debt, Airef projects a decrease of 5.9 points in the next four years, relatively even to that of the Government, which would place the indicator at 107.3% of GDP in 2026. “We consider it feasible the projection of debt reduction”, said Herrero. However, they clarify, in the long term a growing ratio is expected after a period of stabilization, mainly explained by the expenditure associated with the aging of the population. For this reason, the fiscal authority demands an adjustment per year of 0.46 percentage points of GDP, something that would allow public debt to enter a “clearly downward” path even in the most unfavorable scenario.
This adjustment, explains the organization, would mean 1.84 points accumulated over four years, about 25,000 million euros according to current national wealth. This would allow a debt reduction of 24 points of GDP in the next 15 years, “putting it on a clearly downward trend.” The Government, according to the Airef simulations applied to the official fiscal scenario, has planned a correction of only 0.16 points per year, that is, 0.3 points less than what the fiscal authority considers necessary.
“We know that 2023 is the last year in which we will be without fiscal rules. The escape clause will be deactivated and we will return to the Stability Pact ”, he detailed. Although the new framework is not yet closed, the Commission presented a proposal in March that continues to place the limits on public deficit and debt at 3% and 60% of GDP, although it allows partners with greater imbalances a period of truce to initiate a credible and gradual debt reduction and reduce the deficit by half a point each year. On theory, Herrero pointed out, “the Stability Program meets the objective of reducing the deficit below 3% and reducing the debt ratio.” The problem, he added, is that the presented update does not have very different characteristics from those of previous years, “so we do not see it as a true planning document.”
Among the main deficiencies that Airef has identified is the lack of detail on the impact that the Recovery Plan will have, as well as the lack of information in the section on fiscal risks. In addition, shortly after the plan was sent to Brussels, the Government has implemented a series of measures that entail more public spending and that “we understand should have been included in the document.”
Less tax revenue
The differences between the projections of the Government and those of the fiscal authority come mainly from the revenue side, since in the part of public spending the two move in a similar way. Airef, in particular, estimates a clear deviation in the income estimate marked mainly by lower expectations regarding income from social contributions and taxes such as personal income tax or companies.
The Update of the Stability Program sent to Brussels by the Executive foresees resources over GDP close to 43.5% for the period 2023-2026. Airef, on the other hand, estimates them at 42.9%. The weight of taxes, for example, would stand at 26.5% of GDP in 2026 according to the path drawn by the Government, a figure that falls by one percentage point in the x-ray presented this Thursday
The two forecasts also show differences in terms of the evolution of prices or the labor market. Airef expects the GDP deflator, which measures the evolution of the country’s production prices, to grow by 4.8% on average this year, compared to the 4% forecast by the Executive. For its part, employment measured in full-time jobs will grow by 1.4% in 2023 according to Airef, seven tenths less than what the Government estimates. The unemployment rate, which the Executive trusts to drop below 10% in 2026, will be close to 11% in three years.
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