The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, participated today in the 13th annual meeting of the Economic Forum of Galicia and reviewed the new phase opening for Spanish fiscal policy in 2024, with the return to fiscal rules and the entry into force of a new European fiscal framework that will have to be incorporated into the Spanish reality. The Economic Forum of Galicia brings together business people, executives and representatives of different industries in the Autonomous Region.
The President stated that 2024 will be a year full of challenges for public finances. Spain’s debt remains above 100% of GDP and will rise over the medium-term due to the pressure of age-related spending and other factors such as pressure on health and defence spending. This vulnerability is compounded by the challenge of complying with the new European fiscal framework and its transposition to the Spanish reality. This coming September, Spain will have to submit a medium-term fiscal strategy to reduce debt in a sustained manner to the European institutions. Also in September, the General Government (GG) authorities will have to prepare their budgets for 2025.
The President reviewed the main new features of the European reform, including the medium-term fiscal-structural plans that will have to be proposed by Member States with a medium-term commitment to reduce public debt. These are fixed plans for a horizon of at least four years that can only be modified in exceptional circumstances. They therefore require a very different planning exercise from the one that has been carried out up to date. They must contain the fiscal strategy of each country and the planned reforms and investments. Countries with a high level of debt need to place debt on a downward path in the ten years following the plan.
In order to determine the adjustment path, countries will have a technical trajectory proposed by the Commission that they must take as a benchmark and from which they may only depart in certain circumstances. AIReF has been conducting sustainability exercises for some time now based on the Commission’s methodology, which suggest that measures should be taken in the period 2025-2028. The order of magnitude depends, among other factors, on the number of years that the adjustment is allowed and on the baseline projection scenarios for the economic and fiscal variables. AIReF’s most recent scenarios point to an annual adjustment of 0.64 points of GDP each year in the case of a four-year adjustment and 0.36 points of GDP per year in the case of a seven-year adjustment. These exercises will be reviewed with the latest available information and 2023 data.
Furthermore, the reform implies that the commitment of the Member States must be formulated in terms of primary expenditure net of revenue measures. A directly observable control and monitoring variable compared with the structural balance indicator prior to this reform. Accordingly, Spain faces the challenge of having to present a fiscal strategy to reduce debt and assume a multi-year expenditure commitment on which it must report annually.
A new way of making fiscal policy
According to Cristina Herrero, these changes require a new way of making fiscal policy and represent the start of a new stage in which planning and coordination between GG authorities is of key importance. The fiscal plans are intended to be ongoing and therefore should be set with a high degree of political consensus. In addition, the decentralised reality of Spain requires that all GG authorities be taken into account when formulating the Plan, since its implementation and success will depend on all of them.
The President pointed out that there is little time for the necessary reform of the national fiscal framework to be ready in time for the preparation and presentation of the first fiscal-structural plan, which must be coordinated by the Ministry of Finance. This makes it necessary to raise awareness of the implications of the new framework in Spain, to discuss the content and reforms of the plan with all GG authorities, in Parliament, at the Fiscal and Financial Policy Council (CPFF) and at the National Commission for Local Administrations (CNAL), and to ensure the consistency of the annual budgets of all GG authorities.
On the role of AIReF in the new framework, Cristina Herrero said that it will be a key institution since its mandate precisely consists of ensuring the sustainability of public finances. It will therefore monitor fiscal policy ex ante and with a medium-term vision. In other words, once the strategy has been defined, AIReF will analyse the budgets of each authority taking into account the commitments made. In addition, the reform gives it a new role: to analyse the coherence, consistency and effectiveness of the national fiscal framework with the new European fiscal framework.