The Fiscal Authority warns of a debt shot up to 140% if the structural deficit is not reduced

Cristina Herrero, president of Airef.

The institution places its structural deficit forecast at -4% in 2025, well above the -0.4% forecast by the Government in the Stability Program

Clara Dawn

The Independent Authority for Fiscal Responsibility (Airef) reviews the new macroeconomic and fiscal scenario sent a few days ago by the Government to Brussels. The institution sees the scenarios handled as feasible, but warns of severe risks that could ruin the Executive's forecasts. "There are a number of elements that could compromise compliance with macroeconomic forecasts and the fiscal sustainability of public finances," explains Cristina Herrero, president of the institution.

During the presentation of the Report on the Update of the Stability Program 2022-2024, Herrero made it clear that the institution's main concern is the evolution of the structural deficit, which will stand at -4% in 2025, six tenths above levels prior to the pandemic and far from the -0.4% estimated by the Government for the period and also above the -3.4% prior to the crisis.

"The margin to reduce the deficit without adopting additional measures would be exhausted," they warn from the agency. A stagnation that would cause, in turn, the slowdown in the pace of reduction of public debt, which in 2025 would still be at levels close to 109% of GDP, "which places Spain in a very vulnerable situation in the face of a likely tightening of monetary conditions.

From that moment on, and if the structural primary deficit remains constant between 1.5% and 2.5%, the debt "will start an upward path that would take it to 140% in 2040." "Returning the path to sustainable levels would require an effort that is difficult to maintain over time," acknowledges Herrero.

The Airef simulations, in fact, show that reaching public accounts in balance in the next decade “will require a sustained structural fiscal adjustment of between 0.25 and 0.5 points per year”, in order to achieve budget balance as early as 2035 .

The recommendations are clear in this sense and go in the direction of the need for severe adjustments. Specifically, Airef recommends "using revenues that materialize above expectations and those of a temporary nature to reduce the structural deficit, in addition to avoiding increases in spending."

Income, expenses... and central banks

The impact of the foreseeable tightening of monetary policies is key in this process. The Airef already recalled a few weeks ago that the Government had prepared its new Stability Program under the premise that the interest on the ten-year bond (the main reference in the Spanish market) would stand this year, on average, at 0.8% . But it's already over 2%.

"There has already been an increase of 100 basis points and in our central scenario this will imply an increase in the accumulated financial burden by 2025 of around 20,000 million euros compared to the previous forecast," warns Herrero.

Given this context of higher financing rates, the institution warns that "we may have the mistaken idea that there is room to undertake expansionary fiscal policies, a margin that would be fictitious because the levels of debt and deficit place the Spanish economy in a position vulnerable”, above all because of this structural deficit of -4%.

In a scenario of suspension of fiscal rules in Europe - without yet knowing the fiscal framework to which it will return - and in the absence of a medium-term fiscal strategy by the Government, Airef also foresees a reduction in the weight of resources up to 41.3% in 2025. "Revenues are going to grow at a rate lower than nominal GDP but are still two points higher than the level prior to the pandemic," explains Ignacio Fernández-Huertas, director of budget analysis for the agency.

However, from the institution they warn that "we should not be too optimistic with the evolution of income." Nor about expenses. And it is that the positive impact that inflation is causing on the income of some tax figures, can turn against it in the long term by translating into greater spending on factors such as public salaries, hiring, pensions, interest, etc.

In terms of pensions, for example, Airef expects spending to grow around 4-5% in the period, except in 2023, when an increase of 8.8% is expected due to the 2022 CPI.

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