The institution estimates its structural deficit forecast at -4% in 2025, well above the -0.4% foreseen by the government in the stability program
The Independent Authority for Fiscal Responsibility (AIREF) is reviewing the new macroeconomic and fiscal scenario sent to Brussels by the government a few days ago. The institution considers the scenarios used to be feasible, but warns of serious risks that could ruin the Executive’s forecasts. “There are a number of elements that could jeopardize 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 2022-2024 stability program update, Herrero made it clear that the main concern of the institution is the evolution of the structural deficit, which will reach -4% in 2025, six tenths above the pre-pandemic level. and far from the -0.4% estimated by the government for the period and also above the -3.4% pre-crisis level.
“The margin to reduce the deficit without taking additional measures would be exhausted,” they warn the agency. A stagnation that would in turn lead to a slowdown in the pace of public debt reduction, which would still be close to 109% of GDP in 2025, “leaving Spain in a very vulnerable situation in the face of a likely tightening of monetary conditions.
From then on, and if the structural primary deficit remains constant between 1.5% and 2.5%, the debt will “start an upward path that should reach 140% by 2040.” “Bringing the path back to a sustainable level would require an effort that is difficult to sustain over time,” acknowledges Herrero.
Indeed, the Airef simulations show that achieving a balanced government account over the next decade “requires a sustainable structural fiscal adjustment of between 0.25 and 0.5 points per year”, to reach a balanced budget as early as 2035.
In that sense, the recommendations are clear and point in the direction of the need for major adjustments. In particular, Airef recommends “using revenues that exceed expectations and those of a temporary nature to reduce the structural deficit, in addition to avoiding spending increases.”
The impact of the foreseeable tightening of monetary policy is crucial in this process. A few weeks ago, Airef recalled that the government had prepared its new stability program on the assumption that the yield on the 10-year bond (the main benchmark in the Spanish market) would average 0.8% this year. But it’s already over 2%.
“There is already an increase of 100 basis points and in our central scenario this means an increase in the accumulated financial burden in 2025 of about 20,000 million euros compared to the previous forecast,” warns Herrero.
Given this context of higher funding rates, the institution warns that “we may be mistaken that there is scope to conduct an expansionary fiscal policy, a margin that would be fictitious as the levels of debt and deficits leave the Spanish economy in a vulnerable position.” places.” ”, mainly because of this structural deficit of -4%.
In a scenario of suspension of fiscal rules in Europe – without yet knowing to which fiscal framework 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 funds to 41, 3% in 2025. “Revenues will grow below nominal GDP, but are still two points above pre-pandemic levels,” explains Ignacio Fernández-Huertas, the agency’s director of budget analysis.
However, they warn from within the institution that ‘we should not be too optimistic about the evolution of income’. Not even about expenses. And it is that the positive impact that inflation has on the revenues of some tax figures can backfire in the long run by translating into greater spending on factors such as government salaries, hiring, pensions, interest, etc.
For example, in the field of pensions, Airef expects spending to grow by about 4-5% over the period, except in 2023 when an 8.8% increase is expected due to the 2022 CPI.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
