Spain has advanced to 2024 the reduction of the public deficit to 3%, taking advantage of economic growth, job creation and the impact of the Recovery Plan

News - 2023.4.28

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The submission is made in compliance with the obligation of all Member States to submit their National Reform Programmes and Stability Programmes to the European Commission each year in April, in the framework of the European Semester for economic policy coordination.

Both documents set out the government's reforms and measures that are facilitating a structural improvement of the Spanish economy, including the positive impact of the deployment of the Recovery, Transformation and Resilience Plan and the macroeconomic and fiscal outlook for the period 2023-2026. This new macroeconomic framework has been endorsed by the Independent Authority for Fiscal Responsibility (AIReF).

The legislative reforms undertaken and the implementation of the Recovery Plan are facilitating a process of modernisation and structural change in the economy, reflected in the increase in potential growth, which from 2024 will stand at 1.6%, and the reduction in structural unemployment, which will stand at around 9%.

Spain has maintained solid economic growth since the end of the pandemic despite the complex international situation, and will lead growth among the main Eurozone countries in 2023 for the third consecutive year, driven by the dynamism of employment, domestic demand, the boost to investment and the growth of exports.

The measures taken will enable the gradual return of inflation to its medium-term level, which together with the dynamism of the external sector will allow the current account surplus to be maintained and the net international investment position to further improve.

The Stability Programme also includes the fiscal outlook for the period 2023-2026. The public deficit will be reduced to 3% in 2024, a year earlier than planned, due to economic growth, control of public spending, higher revenues and a dynamic labour market. The public deficit closed 2022 at 4.8% of GDP, after a 50% reduction in two years. It is projected to continue on a downward path this year, standing at 3.9% of GDP.

Debt will also continue on its downward path after a five-point reduction last year to absorb the impact of the pandemic as fast as possible, to below 110% in 2024, a year ahead of schedule.

This new path can be placed in a context of uncertainty resulting from the Russian invasion of Ukraine, requiring prudent and realistic budgetary policies in the pursuit of social justice and economic efficiency. To this effect, it combines the necessary fiscal consolidation that will allow Spain to comply with the Stability Pact as early as next year, with more robust, innovative and sustainable economic growth, which will strengthen the Welfare State and protect the country's social majority.

In the medium term, the combination of reforms, the strengthening public revenue and expenditure control will ensure the sustainability of public finances.

Stability Programme 2023-2026

The Stability Programme, supported by the latest available data, includes the projected macroeconomic scenario for the period 2023-2026 in an international scenario marked by a rapid tightening of monetary policies, episodes of financial stress and geopolitical and energy uncertainty.

Given this context, a cautious forecast has been chosen, following the strong economic growth that occurred in 2021 and 2022 and that continues in the first quarter of the year. The Spanish economy will maintain positive growth throughout the forecast period.

Specifically, in 2023 Spain will lead growth among the main economies of the euro area for the third consecutive year, with a forecast growth in GDP of 2.1%, increasing to 2.4% in 2024.

In this context, the new macroeconomic framework foresees domestic demand as the main engine of growth this year, and especially private consumption, with an estimated growth forecast of 2.1%, which will be sustained mainly by the evolution of employment.

The measures adopted, and in particular the 'Iberian solution', have placed Spain's inflation among the lowest in the EU, which has improved business competitiveness, reflected in gains in export market share.

For the period 2023-2026, the consolidation of job creation will continue to be the engine of economic growth, adding 1.1 million new jobs by 2026, on top of the 1 million created after the pandemic, and leading to record employment levels. The unemployment rate is also set to continue to fall from 12.9% in 2022 to below 10% in 2026, accompanied by an increase in the labour force and an improvement in the quality of employment.

The external sector will keep up a slightly positive contribution over the forecast period. The strength and competitiveness of Spanish exports will be maintained this year, in line with the good performance in 2022, with an increase in exports of goods, coupled with a positive evolution of the tourism sector.

Economic momentum, strong job creation and higher growth will allow progress to be made on the fiscal consolidation path started in 2018 and interrupted by the pandemic. The reduction in the debt-to-GDP ratio will be sustained in the coming years and will allow the ratio to fall below 110% in 2024.

Structural changes in the Spanish economy

The legislative reforms undertaken since 2018 and the implementation of the Recovery Plan are enabling a process of modernisation and structural change in the economy, boosting potential growth to 1.6% from 2024, double the figure recorded in 2018.

In this regard, the labour reform is facilitating a reduction in temporary employment and its convergence with the European level, as well as a decrease in structural unemployment of more than two points, to 9% at the end of the projection period.

Investments in the dual green and digital transition are enabling Spain to lead Europe in broadband connection and the deployment of renewable energies, with a five-fold increase in energy production through self-consumption.

An improvement in human capital can also be observed, achieved through investment in training and digital skills, with an increase of more than 20% in the number of VET students.

Last, income support measures and other measures to support the most vulnerable groups have reduced inequality to pre-financial crisis levels. According to the Living Conditions Survey 2022, the population at risk of poverty and social exclusion fell last year to the lowest level in the historical series.

Deficit reduction and a horizon of primary surplus

One of the main developments in the area of European fiscal policy is that in 2024 the fiscal rules, which were suspended by the European Commission in 2020 when it activated the safeguard clause due to the impact of the COVID-19 pandemic, will be back in force and are currently under review. This suspension was later extended due to rising energy prices as a result of the war in Ukraine.

Despite this suspension of fiscal rules over the last few years, the Government of Spain has maintained its commitment to budgetary stability. In fact, in just two years Spain has more than halved the deficit from 10.1% in 2020 to 4.8% in 2022, a decrease of more than 5 percentage points of GDP. This is the largest reduction in the series in the period excluding financial assistance, making Spain the seventh EU country to have most reduced its deficit in terms of GDP since 2020. This is a global decrease of €49.5 billion since 2020.

Spain has also complied with the reference rates reported to Brussels since 2020, recording lower-than-expected deficits. In this regard, it closed at 10.1% in 2020 (below the 10.3% forecast in the April 2020 Stability Programme); 6.9% in 2021 (below the 7.7% forecast in the expenditure ceiling of the 2021 SGP); and 4.8% in 2022 (below the 5% forecast in the expenditure ceiling of the 2022 SGP).

The 2023-2026 update of the Stability Programme includes a medium-term fiscal consolidation path that will allow for a gradual but decisive reduction of the deficit below 3% of GDP. Specifically, the deficit is projected to be 3.9% in 2023, 3% in 2024, 2.7% in 2025, and 2.5% in 2026.

Moreover, these projections predict good results in terms of the primary deficit: excluding interest, the deficit will be reduced to 0.4% next year and the projection horizon will close with a primary surplus of 0.4%. These results are similar to those observed prior to the pandemic, which is further evidence that Spanish public finances have regained their pre-COVID dynamics.

More revenue from growth and employment

The reduction in the government deficit under the new fiscal path is mainly due to strong economic growth and the positive performance of employment, which is now at a record high. In fact, these two factors already contributed to an increase in tax revenues in 2022 of 14.4% in cash terms. The impact of inflation on revenues contributed just 5 points to this increase in resources.

In this respect, the forecast is that revenue from the fight against fraud, the uncovering of the underground economy and taxes will increase over the coming years above the inflation forecasts, another indication that the improvement in public resources is sustained by the strength of the economy and the dynamism of employment.

Nonetheless, the government has allocated more resources to measures to mitigate the effects of rising inflation on the country's social majority. In this regard, the tax reductions, direct aid, bonuses and subsidies approved had an impact of over €22.2 billion in 2022, benefiting the middle and working classes, and the most vulnerable groups.

In fact, of the 4.8% deficit in 2022, 1.7 percentage points of GDP corresponded to the measures taken by the government to alleviate the inflationary crisis resulting from the war. This means that had it not been for the energy crisis, Spain would have closed 2022 with a deficit similar to pre-pandemic levels.

Measures to combat inflation

The government's commitment to budgetary stability and fiscal responsibility is therefore compatible with a social protection policy to mitigate the effects of rising prices on the country's social majority, especially the most vulnerable groups and the most affected sectors.

The government has approved up to six packages of extraordinary measures to combat the impact of high inflation. Taken together, the measures adopted exceed €35 billion, which represents almost 3% of GDP. To this must be added the €10 billion in guarantees made available to the most affected companies.

Included in the €35 billion total are fiscal measures, including an energy tax rebate with an estimated impact of almost €18 billion since its implementation in June 2021. In 2022 alone, these tax cuts saved citizens €8 billion.

The government has also adopted other measures focused on the most vulnerable groups, such as a reduction in personal income tax for incomes of up to €21,000, a 200-euro allowance for incomes of up to €27,000, a 0% reduction in VAT on basic foodstuffs in the shopping basket, and a 15% increase in the Minimum Basic Income and non-contributory pensions.

Other measures adopted for the economic sectors most affected by the price rises include direct aid for hauliers, farmers, livestock farmers and the gas-intensive sector.

In this difficult context, the government has also called for a greater effort from the sectors that are making extraordinary profits due to the rise in energy prices and interest rates. In this regard, a special tax for banks and energy companies has been approved, and a temporary Solidarity Tax for the Very Rich.

More fiscal space for autonomous communities and local authorities

Looking at the deficit forecast by sub-sector, the central government will close 2023 with a more demanding deficit gap of 3.1% if we compare this figure with the 3.4% forecast in the previous Stability Programme The deficit of this sub-sector at the end of the series will stand at 2.8%.

For their part, the autonomous communities have a deficit target of 0.3% this year, which is a relaxation of the 0.1% forecast in the previous Stability Programme. A greater fiscal margin than in the previous path has thereby been given to the regional governments not only for this year but also for 2024, as a budget balance target of 0% is now indicated for next year compared to the surplus of 0.2% foreseen in the previous Stability Programme. In other words, another two tenths of a percentage point more.

Local authorities will return to a balanced budget as early as 2023, after having recorded a slight cyclical deficit in 2022 due to technical issues when calculating the compensation from the state for the negative settlement in 2020. The target for local authorities for next year will therefore be 0%, as opposed to the 0.2% surplus foreseen in the previous path. Their forecasts have thereby once again been made more flexible to give this sub-sector more room to manoeuvre

Last, the Social Security Funds maintain their target of closing 2023 with a deficit of 0.5% and will gradually reduce this gap until a balanced budget is achieved in 2026.

Promoting the recovery plan

The funds from the Recovery and Resilience Mechanism have a neutral impact on the deficit computation. However, they are a fundamental lever for boosting economic growth and the transformation of the production model by focusing on ecological transition, digitalisation, social and territorial cohesion and equality.

Spain is the most advanced country in the EU in terms of implementing the Recovery, Transformation and Resilience Plan, which has already allowed it to receive a total of €37.04 billion of these funds, equivalent to 53% of the total €69.53 billion in non-refundable transfers from this mechanism. Specifically, Spain has already received three disbursements after the European Commission's verification of the fulfilment of 121 milestones and objectives, which represents 30% of the total committed to Brussels.

The policy of co-governance defended by the executive, which is also included in the Stability Programme, means that the autonomous region already received a total of €19.47 billion between 2021 and 2022.

National Reform Programme

The National Reform Programme, also submitted to the European Commission, sets out the main structural reforms to increase the economy's growth potential to meet current and future challenges. It also incorporates the main investments that complement these reforms, which together constitute the government's economic policy roadmap.

This year includes measures from the Recovery, Transformation and Resilience Plan and additional initiatives. The measures are aligned with specific EU recommendations in the context of the European Semester, the European Pillar of Social Rights and the 2030 Agenda for Sustainable Development.

Non official translation