- The Independent Authority for Fiscal Responsibility presents its first Monitoring Report on the Medium-Term Structural-Fiscal Plan, in which it analyses the Progress Report presented by the Government and updates its medium-term macroeconomic and fiscal forecasts
- The Government’s Progress Report complies with the Commission’s guidelines, but lacks ambition to provide genuine medium-term guidance
- AIReF revises its growth forecasts for 2025 and 2026 downwards due to uncertainty and estimates that GDP will grow by 2.3% this year and 1.7% in 2026. In the medium term, AIReF projects a gradual slowdown to 1.5% by 2029
- The budgetary forecasts for 2025-2029 under a no-policy change scenario remain largely unchanged, with the deficit breaking its downward trend in 2026 but remaining below 3% until 2029. Debt reduction slows and the ratio stabilises slightly below 100% by 2029
- AIReF estimates average growth in net primary expenditure, excluding revenue measures, of 4.1% between 2025 and 2028, compared with 3.4% in the MTP, and stresses that the margin generated in 2024 will make it unnecessary to take measures until 2027
- AIReF and the Government forecast annual growth in net expenditure in 2025 to be higher than that committed to in the ECOFIN, although within the annual threshold of the control account (0.3 points of GDP) and respecting the cumulative limit. AIReF forecasts a greater deviation in expenditure than the Government, at close to the threshold limit
- AIReF simulates a scenario in which the net expenditure forecast by the Government in 2025 and the commitments set in the MTP are met and emphasises that additional measures will be necessary to meet the forecast in 2027 and 2028. This forecast would leave the deficit at 1.7% of GDP in 2028 and debt at 75.6% in 2041
- Compliance with the national expenditure rule would allow the expenditure rates committed to in the European rule to be met in 2025 and 2026, but not in 2027
- AIReF recommends expanding the content of the Progress Report with a complete fiscal scenario, initiating the transposition of the European fiscal framework, integrating fiscal rules and requesting endorsement or establishing technical dialogue on the macroeconomic scenario accompanying the Progress Report
The Independent Authority for Fiscal Responsibility (AIReF) published today its first report assessing the Annual Progress Report on the Medium-Term Structural-Fiscal Plan (MTP), which replaces the Stability Programme Update in the new European fiscal governance framework. AIReF stresses that the Report complies with the European Commission’s guidelines, but only updates the fiscal forecasts until 2025 and the macroeconomic forecasts until 2028. This lack of ambition in the content reduces the medium-term orientation of fiscal policy and makes it difficult to identify ex ante the risks of deviations from the commitments and forecasts contained in the MTP.
For its part, in order to provide a medium-term perspective for monitoring the MTP, AIReF has updated its macroeconomic and fiscal forecasts up to 2029. AIReF has revised its growth forecasts for 2025 and 2026 downwards, but has not substantially modified its budgetary forecasts for 2025-2029. It also analyses the growth rates of net primary expenditure excluding revenue measures, the new key variable other than fiscal governance reform, and concludes that the margin created in 2024 means that no measures need to be taken until 2027, when it will be necessary to act through expenditure or revenue to meet the commitments agreed with Brussels.
Analysis of the European expenditure rule
In its forecasts, AIReF includes estimates of net primary expenditure growth, excluding revenue measures, a key variable following the reform of fiscal rules, for the entire period. After closing 2024 with net expenditure growth of 4.1%, AIReF forecasts growth of 4.5% for 2025, above the 3.7% commitment in the MTP. The deviation from the commitment would be 0.3 points of GDP, just within the limit allowed by the regulations in the annual control account. For its part, the Government forecasts net expenditure growth of 4.1% for 2025, also above the reference level but within the limit of the annual control account. In cumulative terms in 2024 and 2025, AIReF forecasts growth of 8.8%, compared with 8.4% in the Progress Report and still below the 9.2% in the MTP. Accordingly, the positive margin derived from the 2024 year-end forecast would not be exhausted below the MTP forecast.
The Progress Report does not provide any estimates for the remainder of the MTP period, until 2028,. However, under a no-policy change scenario, AIReF forecasts average net expenditure growth of 3.9% between 2026 and 2028, compared with 3.2% in the MTP. These annual rates imply cumulative growth between 2024 and 2028 of 22.5% compared with 20.1% in the MTP, representing a cumulative deviation of 0.7 points of GDP in 2028, above the cumulative control account margin.
Simulation of compliance with the MTP
AIReF’s forecasts have been prepared under a no-policy change scenario and therefore do not incorporate the adjustment path committed to in the MTP due to the lack of details on its implementation. Assuming compliance with the forecasts in the Progress Report on net expenditure in 2025 and compliance with the MTP path for the other years, the deficit would stand at 1.7% of GDP in 2028, 1 percentage point of GDP below the no-policy change scenario, and debt would be reduced to 96.6% by 2028. No additional measures would be necessary in 2026 to comply with the MTP path, but they would be necessary in 2027 and 2028. These additional measures could be taken on both the revenue and expenditure sides.
In this regard, AIReF asserts that the lack of definition in the national fiscal framework persists, as the budgetary stability targets have still not been approved and work has not begun to adapt the national fiscal framework to the reality of the new European framework. In this context of institutional uncertainty, the only fiscal rule active in practice at the national level is the expenditure rule with a reference rate of 3.2% for 2025, 3.3% for 2026 and 3.4% for 2027. As the national and European expenditure rules differ in several respects, AIReF analyses the implications of applying the current national framework on the European fiscal framework. Under these assumptions, compliance with the national expenditure rule leads to compliance with the European expenditure rule in 2025 and 2026, but not in 2027.
Macroeconomic scenario
In the Annual Progress Report, the Government presents a macroeconomic scenario for the next four years (2025-2028). AIReF considers it striking that the Government has included a complete medium-term macroeconomic scenario in this report, when in the presentation of the MTP it only presented a scenario up to 2026. However, the current extension complies with AIReF’s best practice guidelines. It considers that, in the current context of uncertainty, it would have been advisable to seek endorsement of the macroeconomic scenario published or, at least, to establish technical dialogue prior to its publication, given that the Government’s forecasts may be used throughout the budgetary procedure by the various GG sub-sectors.
AIReF considers that the Government’s macroeconomic scenario is optimistic in the current geopolitical context and given the recent downward revision of global growth forecasts by the International Monetary Fund. According to AIReF, it is difficult to expect, as the Government does, that stronger domestic demand will be sufficient to offset the intensity of external shocks. In this regard, it points to the current high levels of uncertainty and the Spanish economy’s high degree of openness, as well as the high integration of some productive sectors affected by tariffs, such as the automotive industry, in value chains.
Consequently, AIReF points out that the revision of the INE’s previous Quarterly Accounts figures and, above all, the downgrade in global growth and trade prospects in the IMF’s most recent forecasts translate into a downward revision of GDP growth expected for 2025 and 2026 to 2.3% and 1.7%, respectively. This revision represents a reduction of 0.2 and 0.3 points compared with the previous forecasts. Public consumption estimates are revised upwards to reflect the Government’s commitment to reach the 2% of GDP threshold for defence expenditure by 2025. The Government, for its part, maintains its estimate at 2.6% and 2.2%, respectively.
AIReF also points out that the Government’s greater optimism extends to 2028, as it projects GDP growth rates of 2.1% in 2027 and 2028, compared with the growth rates of around 1.7% projected by AIReF. In terms of prices, the Government’s projections also consider higher growth rates for deflators, wages and unit labour costs than those of AIReF throughout the projection horizon.
Fiscal scenario
AIReF estimates that the GG deficit will fall to 2.3% of GDP in 2026 and then rise due to ageing-related expenditure, interest payments and defence expenditure, reaching 2.9% of GDP in 2029. Revenue, excluding the Recovery, Transformation and Resilience Plan (RTRP), will reach 42.2% of GDP in 2029, after closing 2024 at 41.5%. Expenditure, excluding the RTRP, will continue to reduce its weight to 44.4% of GDP in 2026, before starting to rise again to reach 45.1% of GDP in 2029. The weight of social transfers will continue to grow throughout the period due to the increasing impact of ageing. In addition, progressive growth in the weight of gross capital formation and intermediate consumption driven by defence expenditure is also expected, as well as an increase in the weight of interest expenditure.
AIReF analyses compliance with the national expenditure rule in all sub-sectors and stresses that the Central Government (CG) and the Autonomous Regions (ARs) will exceed the reference rate between 2025 and 2027. In the case of Local Governments (LGs), however, it will be exceeded in 2025 but will be met in the following two years. AIReF also includes forecasts for the European reference – net primary expenditure excluding revenue measures – for all GG sub-sectors.
As for the fiscal balance of the sub-sectors, the CG will reduce its deficit to 2.2% in 2025 and then resume its upward path, reaching 2.9% by 2029. The Social Security deficit will stabilise at 0.2% of GDP throughout the projection horizon, after closing 2025 at 0.4%. The deficit of the ARs will rise again in 2025, to 0.4% of GDP, to then subsequently improve, reaching a deficit of 0.1% in 2028 and 2029. Finally, AIReF estimates that the LGs will stabilise in the medium term with a surplus of 0.2%.
In terms of debt, AIReF forecasts a slight reduction in the ratio in 2025, placing it at 0.2 points below the 2024 level, in line with the 0.1-point decrease estimated by the Government. In the medium term, it anticipates a gradual slowdown in the pace of fiscal consolidation, such that the reduction in the ratio would be exhausted towards the end of the decade, stabilising at a level slightly below 100% of GDP. In the longer term and in the baseline scenario, the debt ratio would resume its upward forecast as from the next decade, increasing by 5.4 percentage points to reach 107.2% of GDP by 2041.
Recommendations
In this context, AIReF recommends expanding the content of the Annual Progress Report with a comprehensive medium-term fiscal scenario that allows for the adequate identification of risks to compliance with the commitments set out in the MTP. AIReF also recommends that work begin as soon as possible on transposing the European fiscal framework into national legislation with the participation of all agents concerned, such as the other GG sub-sectors and AIReF itself. AIReF also recommends that the transposition of European directives into the national framework should integrate the national and European expenditure rules, including the pension expenditure rule.
