The Spanish economy is doing better than the rest of the euro area, inflation is the lowest in the EU and the labor market remains strong, despite the slowdown in job creation in June. But on the budget side there are more leftovers than lights: the debt far exceeds 100% of GDP and the deficit will continue, at least during this year, above the 3% established by the community fiscal rules, which after four years suspended will be activated again in 2024. With these wickerwork comes a new wake-up call from the Independent Authority for Fiscal Responsibility (Airef) to managers of public accounts: the agency urges them to monitor that the increase in primary spending —nationally financed disbursements and net of interest— Do not exceed the 2.6% limit imposed by the EU discipline in its latest personalized recommendation for Spain. In that document, published in May, the European Commission also advanced that it will propose to open an excessive deficit procedure in Madrid next spring, based on the Red numbers to register the accounts in 2023.
All the forecasts indicate that Spain will not be able to reduce the gap in public accounts this year below the 3% of GDP that the community framework sets. The Government predicts 3.9% -even so, it is almost one point less compared to the 4.8% at the end of 2022-, the Bank of Spain 3.8%. Airef maintains the estimate at 4.1% in its Report on budget execution, public debt and spending rule 2023 that it publishes this Thursday, although it foresees deviations with respect to its previous forecast. He explains that the anti-crisis measures raise the deficit by one tenth, but that this greater lag will be offset by a better performance of the economy, which will grow 2.3% compared to the 1.9% estimated in spring.
The advance of the GDP, however, will not be enough to put the accounts back on track. For this reason, the institution “recommends to the Ministry of Finance that, with a view to preparing budgets”, it proposes to all levels of Administrations reference rates for the increase in primary spending, taking into account the temporary or structural nature of income and disbursements. that will be produced in 2024. The objective is “to be consistent with compliance with the country-specific recommendation issued” by the EU.
According to the institution led by Cristina Herrero, Spain has ballots to comply with the spending limit “as long as the temporary income and spending measures adopted to alleviate” inflation are withdrawn. But he warns that the return to the European fiscal framework occurs in a scenario of institutional uncertainty, both internal and international. On the one hand, because the community budgetary rules are undergoing a reform that has not yet been completed. On the other, because the recommendation that Brussels has sent to Spain asks to contain spending. And, finally, because the electoral call has been brought forward without the objectives of budgetary stability and the spending ceiling being approved.
The only budgetary reference that the Administrations have is the projected balance in the Stability Program published in spring. In the case of communities and local corporations, the document estimates the budget balance and a surplus of 0.2%, respectively. Taking into account the income forecast that Airef contemplates for the two subsectors, these percentages would match a growth in regional and municipal spending of 7% and 6%. “hardly compatible with compliance with the country-specific recommendation” made by the EU. For the Administrations as a whole, the increase would be 3.6%.
The imbalance is also likely because the communities under the common regime —the foral regimes of the Basque Country and Navarra are not included— and the municipalities will receive in 2024 the liquidation of the 2022 financing system, which was a very positive exercise that will provide temporary income that they should not finance increases in spending or reductions in structural revenues. The risk, insists Airef, is that they prepare their accounts “with the only limitation of budget balance and without taking into account that part of the income they will have in 2024 is temporary, especially in a context in which there is no a reference rate for the formally approved spending rule”.
The uncertainty is not only institutional. It also surrounds the macroeconomic scenario. The main risks materialize in inflation, the tougher financing conditions due to the ECB’s restrictive monetary policy, the resistance of geopolitical tensions and the possibility that the pace of execution of the Recovery Plan will be slower than expected. “All these elements continue to be key in the evolution of certain variables such as employment, wages, private consumption or the gross operating surplus”, lists Airef. And they will have an impact on the budget balance for the year.
Airef also detects risks due to the lack of information about certain policies. Among them, the amounts of investments in defense modernization programs. “Although the growth in spending, deficit and debt does not entail any corrective measure, it must be borne in mind that the return to fiscal discipline is scheduled for 2024 with the reactivation of fiscal rules,” the organization concludes.
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