The Fiscal Authority (Airef) returns to the charge against the Government. It specifically calls for a fiscal consolidation plan once again, but it also puts a strong focus on the problem of public debt. “The Airef projections draw an unfavorable dynamic of the debt ratio in the medium and long term under a constant policy scenario,” says the institution’s latest Debt Observatory. To get the public accounts back on track, it will be necessary to make annual cuts of up to 5,500 million euros.
The Spanish debt-to-GDP ratio stood in the third quarter of 2021 at the 122.1%, which represents an increase of 2.1 points so far this year and 26.6 points compared to the level prior to the pandemic.
In monetary terms, the debt has climbed to all-time highs of 1.43 trillion euros. All this mainly due to the fiscal effort that has been made during this more than a year and a half of pandemic.
«The negative differential of the interest rate over growth will not be enough to keep the debt ratio stabilized if a primary deficit greater than two points of GDP»Adds Airef. Under a scenario with no policy change and a constant structural deficit of 2.5 points, it would be at 140% of GDP in 2050. It also elaborates: “The upward trajectory of the debt increases notably when adding the structural expenditure related to the aging of the population, projecting a debt ratio of 190% of GDP by the middle of the century.”
That is why the institution demands that once the crisis has been overcome “consolidation plans must be designed” that go on the path of reducing public debt to “more prudent” levels. “Reaching balanced public accounts in the next decade will require an annual structural fiscal adjustment of between 0.25 and 0.5 points over a period of between 8 and 16 years. This would allow the debt ratio to be reduced to a range of between 80 and 95 percent of GDP in 2040 ”, states the document presented today. That between 0.25 and 0.5 points means between 2,750 and 5,500 million euros.
In the absence of fiscal consolidation, the path of indebtedness would be increasing, while its stabilization at current levels will require a permanent structural adjustment of between 0.05 and 0.1 points of GDP.
Thus, the Airef calls for “a combination of greater investment in public capital together with the adoption of reforms that increase the potential performance of the economy in the future”, which would result in a decrease in the long-term ratio of around 20 points.
Beyond Airef, Funcas has also published his latest issue of Economic Information Notebooks in which he warns about the risks to public finances of the current path of debt and deficit. “The sustainability of public finances in Spain requires a credible and ambitious path of progressive reduction of the structural deficit,” he points out.
In this sense, the institution maintains that, despite the positive dynamics of the deficit in 2021, “next year the structural deficit will still be 4.5% of GDP.” This is around 50,000 million euros of structural gap in public accounts.