The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, took part today in the first Socioeconomic Forum organised by the Economic and Social Committee (CES) of Valencia, where she reviewed the macroeconomic and fiscal situation in the country, characterised by economic and institutional uncertainty, the economic slowdown and the vulnerable state of public finances.
Cristina Herrero explained that, despite the greater resilience shown by the Spanish economy, the outlook suggests an economic slowdown. In fact, AIReF, in its latest report (published on October 26th), revised projected growth for 2024 downwards to 1.7%. It also completed the analysis with a medium-term scenario up to 2028, when GDP would grow by 1.4%, gradually converging to its potential (1.3%). In this scenario, inflation will remain close to 4% in 2024. Furthermore, in the longer term, as long as risks associated with a potential extension of measures or energy prices do not materialise, the outlook remains anchored around figures close to the European Central Bank’s (ECB) medium-term target of 2%.
As regards fiscal matters, the President explained that public finances are in a vulnerable position after years of successive crises. Although AIReF estimates that the deficit will drop to 3% in 2024 if the measures to combat inflation are withdrawn, in the medium term, there is a perception of the end of the reduction process with the public deficit stabilising above 3% of GDP and that public debt will remain above 100% of GDP. In the long term, debt would start on an upward path contrary to the demands of the future fiscal framework, which would require measures to be taken between 2025 and 2028 for a value of 0.64 points per year.
As regards the effect of inflation on the public accounts, the President of AIReF explained that in the very short term, this has generated a positive and automatic effect of increasing tax revenue, thus improving the deficit. However, this reduction dissipates over time and is gradually nullified as inflation also affects expenditure items such as pensions and the payment of inflation-linked bonds.
Valencia
Cristina Herrero also referred to the specific situation of Valencia, which presented its draft budget on October 30th, once AIReF’s Report on the Main Lines of the Budgets for 2024 was published (October 26th).
AIReF endorsed the macroeconomic forecasts of Valencia on Monday, indicating that the region’s macroeconomic outlook aligns well with the estimate made by the institution. In 2023, the region estimates GDP growth in volume terms of 2%, an estimate identical to that of AIReF’s. For 2024, it expects growth of 1.9%, in line with the institution’s expectations. In the medium term, AIReF estimates growth for the region in line with the national average.
In terms of the deficit, in the report published before the budget was known, AIReF worsened the region’s balance for 2023 by 0.5 points to 1.9% of GDP, and projected a deficit of 1.3% of GDP for 2024. With the draft budget presented, the deficit for 2024 would increase by 0.1 points to 1.4% of GDP, due to the new fiscal measures announced. These new measures would also worsen the initially proposed medium-term scenario for the region by 0.2 points, with a deficit of 2.2% of GDP from the year 2026.