It foresees an adjustment of about 9,000 million annually for four years to comply with the European spending rule
The Independent Authority for Fiscal Responsibility (AIReF) has raised its growth forecast for the Spanish Gross Domestic Product (GDP) from 1.7% to 2% in 2024, while maintaining its projection for the public deficit this year in the 3% of GDP, in line with Government estimates.
However, in the medium term, the independent body warns that growth will progressively converge to the potential figure of around 1.3%, that the deficit will stabilize at around 3.2% and that public debt will remain above of 100%.
The president of AIReF, Cristina Herrero, presented this Thursday at a press conference the ‘Report on the Initial Budgets of Public Administrations 2024’. It warns that, given this medium-term scenario, adjustments will be necessary to comply with the new European fiscal framework, which is reactivated this year.
In this sense, the institution predicts that this year Spain will fail to comply with the specific European recommendation that limits the spending of all Public Administrations. Specifically, AIReF estimates a total increase in primary spending net of Public Administration income measures of 4%, higher than the 2.6% required by Brussels.
In addition, AIReF has warned about the risk of non-compliance with the spending rule, in this case national, by the Central Administration, all the autonomous communities and ten town councils.
Beyond the legal consequences that could arise from formal non-compliance with the current national fiscal framework or the specific European recommendation, AIReF has warned that a high growth in eligible spending in 2024 implies a deterioration in public finances in the medium term in a context of high debt that would also increase the adjustment required by the new European fiscal framework.
ADJUSTMENT OF 0.63% ANNUAL FOR FOUR YEARS
In any case, the institution is “certain” that Spain will have to make “an adjustment,” as Herrero has warned. Specifically, AIReF obtains an adjustment range of 0.63% per year in four years, around 9,000 million per year, and 0.43% per year, around 6,000 million per year, if the adjustment period extends to seven years. .
The AIReF report reflects that the Spanish economy will maintain notable growth of 2% in 2024, supported by the dynamism of private consumption and an expansion of investment conditional on the deployment of investments associated with the Recovery, Transformation and Resilience Plan . As a consequence of this, AIReF has revised nominal GDP growth slightly upwards to 5.2%.
Starting in 2024, AIReF proposes a scenario of gradual convergence towards long-term potential growth, which is still estimated at around 1.3%. Specifically, it estimates that the Spanish economy will grow by 1.5% in 2028.
DEBT AT 105.8% THIS YEAR, BETTER THAN THE GOVERNMENT FORECAST
In this sense, the institution projects a decrease in public debt this year of 1.8 points, placing it at 105.8%, a reduction supported by the aforementioned growth in nominal GDP.
This forecast slightly improves the forecast proposed by the Government in the draft Budget Plan for 2024 (106.3%) and is in the range of the latest forecasts of the IMF (104.7%) and the European Commission (106.5% ).
But beyond 2024, when the notable contribution of nominal growth disappears, AIReF projects a slowdown in the rate of reduction of the debt ratio, with a stabilization that is around 105% of GDP.
The same thing happens with the deficit. The institution’s estimates suggest that Public Administrations will close 2024 with a deficit of 3%. In 2025, it will improve by an additional tenth (2.9%), although it will worsen by a few tenths, after the withdrawal of temporary anti-crisis measures, until stabilizing around 3.2%.
AIReF estimates the cost of anti-crisis measures in 2024 at 4,286 million euros, 0.3% of GDP. This impact is divided between a reduction in income (2,400 million) and an increase in expenses (2,000 million).
6.2% GROWTH IN INCOME
AIReF predicts that income will grow by 6.2% in 2024, reaching 42.5% of GDP, 43.9% including PRTR income. This level would be two tenths of GDP lower than expected in the previous report. In the medium term, it estimates a progressive increase in income until reaching 43% of GDP in 2028, a level one tenth lower than estimated in the previous report.
The evolution of tax revenues is linked to the impact of the measures approved for the projection period. In the case of taxes on production and imports (indirect taxes), in 2024 a GDP weight of 11.6% is estimated, two tenths above the previous year due to the gradual withdrawal of the tax reductions established to alleviate the increase. prices, and an increase of an additional tenth after its complete withdrawal in 2025.
In 2026, it is reduced by two tenths due to the extinction of the temporary tax on energy companies, then maintaining a downward path due to the evolution of Special Taxes until reaching 11.4% of GDP at the end of the projective period. In any case, the Government has transferred its intention to make the tax on energy and banking permanent, although with modifications, so it will have to be re-evaluated.
For income-type taxes (direct taxes), a weight of 12.9% of GDP is estimated in 2024, with growth that slows down until 2026 due to the extinction of the temporary tax on financial companies and the effect of the temporary limitation on the compensation of losses from Corporate Tax, and which accelerates from 2027 to reach 13.5% of GDP in 2028.
For its part, expenses will be at 45.4% in 2024, not including the PRTR, also two tenths below what was forecast in the previous report. In the medium term, expenses will increase their weight on GDP until reaching 46.2% in 2028, just over a tenth less than the previous report.
WORSE PROSPECTS FOR THE CCAA DEFICIT
By subsectors, AIReF estimates for the Central Administration a deficit of 2.7% of GDP in 2024, which represents a reduction of four tenths compared to the previous forecast.
For the autonomous communities, AIReF worsens the deficit forecast for 2024 by three tenths, up to 0.1% of GDP. However, the figure will represent an improvement over the end of 2023, which is fundamentally due to the extraordinary income from the liquidation of the financing system.
In the case of town councils, AIReF worsens the surplus forecast for 2024 by one tenth, now standing at 0.1% of GDP. This figure, however, represents an improvement compared to the end of 2023 due to the liquidation of the financing system, which will be extraordinarily high in 2024.
CPI of 3.1% in 2024 AND UNEMPLOYMENT WILL CONTINUE ABOVE 10% IN 2028
In the area of ??prices, the organization has revised downwards its estimates of the growth of the Consumer Price Index (CPI) expected for 2024 at a rate of 3.1%. On the other hand, it maintains the expected growth of the GDP deflator at 3.2%, since this indicator reflects domestic price pressures to a greater extent. For the following years, a gradual convergence to 2%, the monetary policy reference rate, is expected.
In turn, the unemployment rate is expected to decrease to 11.6% in 2024, compared to 12.1% in 2023, with progressive containment projected to 10.3% in 2028.
