The and is installed for the first time above 50% of the Gross Domestic Product (GDP). The country thus accumulates two consecutive years -2020 and 2021- in which the average disbursement reaches 51.5%, after exceeding all historical spending milestones. However, the income figures do not accompany the expenses and deepen the public deficit. In 2021, with a record of fiscal pressure and State collection, revenues have not managed to exceed 43.7% of GDP.
This is shown by the data from the General Intervention of the State Administration. In 2020, liabilities reached 52.4% of GDP and in 2021, 50.6%. Since 2007, Spain has not had a surplus, although the deficit between 2017 and 2019 was moderate.
The mismatch accelerated from 2020 as a result of the pandemic. In the years prior to 2019, spending was around 42% of GDP, almost ten points below current figures. In the year 2021, Spain closed the deficit at 6.76% of GDP after signing 10.08% the previous year.
Despite the slight correction last year, spending in 2021 was 15.8% higher than in 2019, with notable dynamism in components not linked to Covid-19 (6.9% compared to 2020). At the same time, , falling 1.6 points compared to 2020. The latest projections from the Bank of Spain (BdE), published on April 5, anticipate a continuation in the improvement of the Administration balance. However, the BdE calculates that it will remain at high levels throughout the projection horizon.
The structural deficit is at its highest in Spain and remains around 4%
According to a report published yesterday by the BdE, these projections -which do not include consolidation measures, as there is still no approved plan in this regard- place the deficit of public administrations in 2024 clearly above its pre-pandemic level, in in line with the Spanish structural deficit.
Precisely, the structural deficit -which does not depend on economic fluctuations but on fixed expenses- is at its highest in Spain. The IMF calculates that Spain has emerged from the pandemic with a negative structural balance of up to 4%.
The figure will be difficult to correct in the short term. According to estimates by the Bank of Spain, in 2024 it will still be above 3%. In this sense, the invasion of Ukraine has meant not only a more negative macroeconomic scenario in the short term, but also greater pressure on public spending. This has resulted, for the time being, in the approval by the Government, at the end of March, of a Shock Plan that would raise the deficit by 0.5 points of GDP, although its validity is temporary. Despite this, the public debt will register a certain decrease, reaching somewhat above 110% of GDP, as a result of nominal GDP growth, which would more than offset the effect of the negative balances expected in these coming years.
“In the absence of a consolidation plan and given the foreseeable increase in expenses linked to the aging of the population, the public debt will tend to remain the same or increase in subsequent years, which represents a clear risk for the Spanish economy and for its agents” , points out the BdE in the report published yesterday. “Strengthening the sustainability of the Spanish public accounts will require the rigorous implementation of a multi-year fiscal consolidation plan,” he adds. “This plan should place special emphasis on the composition of the adjustment between income and expenses, insofar as this is decisive in minimizing the adverse effects of fiscal consolidation on economic growth,” he concludes.
rate hike
The structural deficit of recent years was offset by interest rates below the potential growth of the economy. However, the rise in inflation in most emerging economies led central banks to speed up the cycle of official interest rate hikes from mid-2021. This gave rise to a sharp rise in long-term interest rates in local currency, exacerbated in some cases by social and political tensions.
“In this way, this favorable differential may disappear in the coming years,” warns the Bank of Spain (BdE). “For this reason, the longer it takes to announce measures that counteract the current structural deficit and the growing expenses due to the aging of the population, the more likely it will be that the agents will begin to distrust the effective application of said measures or the more likely it will be that of a new negative economic disturbance, which our economy would face with limited room for manoeuvre”, he adds.
The low levels of interest rates recorded in recent years led to a continued decline in the interest burden as a percentage of GDP, while the lengthening of the average term of the debt limits the short-term impact of increases in the costs of issue. In a base scenario consistent with the latest projections for the Spanish economy in which market interest rates rise in accordance with agents’ expectations, the financial burden of the debt would cease to decline, as a percentage of GDP, in the coming years, according to the Supervisor.
On the other hand, the Russian invasion of Ukraine will also put pressure on public spending in the short and medium term. “Specifically, the reduction of Europe’s external energy dependency could mean an acceleration of the transition process towards a more environmentally friendly productive apparatus”, highlights the Bank of Spain in its latest report on the financial stability of the Spanish accounts .