The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, participated today in the “Looking at the Future” cycle of sessions organised by EY and reviewed the challenges facing public finances as a result of the return to fiscal rules this year. According to the President, the public deficit and debt will stabilise at figures above the demands of the new fiscal framework. The main challenge is therefore to define a comprehensive strategy to reduce debt on a sustained basis.
Cristina Herrero explained that this strategy is necessary to reduce the vulnerability of public finances, since growth does not seem sufficient to continue reducing the deficit and debt on a sustained basis. In addition, the new fiscal framework requires such a strategy, as Spain must submit a four-year fiscal-structural plan (2025-2028) in September that will guarantee the reduction of the debt in the following ten years (up to 2038). According to the President, this is a challenge that requires responsibility from all tiers of the General Government.
The President reviewed the institution’s economic and fiscal outlook and stated that AIReF will update it in its next report, scheduled for April if the General State Budget for 2024 is not approved before then. This update will incorporate the performance of the economy in 2023, which recorded growth of 2.5%, despite the worsening of the external environment and financial conditions, which has been reflected in the evolution of exports and weak investment. In fiscal matters, with no year-end data for 2023, AIReF maintains the forecasts of the last Report (October), which placed the public deficit at 4.1% of GDP. With regard to debt, the institution maintains that economic dynamism allowed a reduction of almost 4 points in 2023.
In October, AIReF estimated an economic slowdown for 2024, with a real growth rate of 1.7%. In addition, it considered the deficit target of 3% of GDP feasible under certain conditions and estimated that the reduction in debt would continue, albeit at a slower pace and with a notable contribution from the GDP deflator. These forecasts are to be revised in an environment that also includes new fiscal rules. At any event, Cristina Herrero stressed that the possible revision will not affect AIReF’s medium-term diagnosis of the public accounts. According to this scenario, if no new measures are approved, medium-term growth will converge to potential growth (1.3% in 2028) and the capacity to reduce the deficit and debt will be exhausted. Debt would then stabilise at figures far from those required by the new European fiscal framework.
The new fiscal framework
In fact, AIReF’s President outlined the new fiscal framework, which requires Member States to produce medium-term fiscal-structural plans that must be submitted in September. These plans will be the main element of the reform and will include a path of primary expenditure net of revenue measures capable of containing debt. In AIReF’s Debt Monitor, published this February, the institution updated the calculation to illustrate the size of the adjustment, which it estimates at 0.64% of GDP per year over the period 2025-2028. The adjustment would be smaller if the period is extended to seven years with the commitment to reforms and investments that support growth and sustainability.
According to Cristina Herrero, the implementation of this new framework will not be easy either technically or institutionally, since the calibration of the adjustments relies on complex methodologies for which the available expertise should be used. Furthermore, the time and size of the challenge require a high degree of institutional commitment, especially taking into account the decentralisation of the country and the need to adapt the national fiscal framework to the new European framework. In this regard, the President set out the elements of the national fiscal framework that need to be revised, such as the incorporation of the medium-term vision of the new European framework, the focus on growth, the system of setting targets, the revision of the coordination mechanisms, the revision of the regional financing system and the improvement of the budgetary procedure, among others.
She also reviewed the role to be played by Independent Fiscal Institutions (IFIs), which will act as a link between the European and national framework, contributing to improving transparency and debate with their analyses. AIReF, in particular, can contribute its knowledge and access to all tiers of the General Government, which are necessary for setting differentiated paths and targets for each public authority. Furthermore, it can contribute with its independent, impartial and technically rigorous analysis and its expertise in medium- and long-term forecasting.