The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, took part today in the annual festival of the Faculty of Economic and Business Studies of the University of Cantabria and highlighted the major institutional challenge involved in drawing up the fiscal-structural plan that Spain will have to submit in September in order to comply with the new European fiscal framework.
The President began her speech by stating that yesterday AIReF published the Report on the Initial Budgets of the General Government for 2024, in which it updated its macroeconomic and fiscal forecasts and its medium-term scenarios. Specifically, AIReF raised the GDP forecast for 2024 to 2% and maintained the General Government (GG) deficit forecast at 3% of GDP. In the medium term, the institution estimates that GDP will progressively converge to potential growth of 1.3% and that the public deficit will stabilise at above 3%. In this context, debt stabilises in the medium term at around 100% of GDP and in the long term begins an unfavourable path, which will require an adjustment in the fiscal plan to return debt to a downward path and thus comply with the new European framework of rules.
The President stated that with the application of the new framework, countries will have to prepare their medium-term fiscal-structural plans to be submitted to Brussels in September. In these plans, they will have to specify their four-year fiscal commitments in a path of primary expenditure net of revenue measures that cannot be modified during the period of application (2025-2028), except in exceptional cases.
For countries with a high debt level, such as Spain, the plans imply a major fiscal challenge because they require a strategy for reducing debt. According to the exercises carried out by AIReF, the adjustment needed to comply with the new framework would amount to 0.63 points of GDP per annum if undertaken in four years and 0.43 points of GDP if the adjustment is extended to seven years.
The President also stressed that the implementation of this new framework will pose a major institutional challenge given the high level of decentralisation in the country. In this regard, she highlighted the asymmetry that exists in Spain in the control of the key variables of the new framework: debt and primary spending. In Spain, the Central Government accounts for 74% of public debt, while the Autonomous Regions manage 32% of public spending. Coordination will therefore be key.
Little time for a demanding challenge
In addition, Cristina Herrero stated that there is little time for such a demanding challenge given the situation in Spain and it will likely need to be addressed without having adapted the new European fiscal framework to the national framework. This situation will make it necessary to employ a high level of transparency in the methodology and scenarios used to calibrate the adjustment and to take advantage of all the expertise available. Furthermore, appropriate coordination and participation of all tiers of General Government and a broad political consensus will be required to ensure a shared and stable plan over time.
In this regard, in the report published yesterday, AIReF made a recommendation to the Ministry of Finance to initiate dialogue and work with all tiers of General Government as soon as possible in order to draw up such a plan.
Cristina Herrero concluded by highlighting the need to reform the national fiscal framework, which has become totally outdated following the European reform. In her opinion, it is necessary to incorporate a medium-term outlook, focus attention on the growth and quality of public finances, review the system of setting targets and reform the financing system and coordination mechanisms, among other aspects.