The President of the Independent Authority for Fiscal Responsibility, Cristina Herrero, took part today in the ADEA forum organised by the Association of Managers and Executives of Aragon, where she stressed that the main challenge for public finances is to define a strategy to reduce debt in a sustained manner and guarantee fiscal sustainability.
The President began her speech by explaining the role played by AIReF, an independent institution that, since 2014, has been supervising the consistency of public finances with national and European fiscal rules. AIReF was created under a European impetus in the wake of the financial crisis, when it became clear that the fiscal rules were insufficient to sustain sound public finances and an independent institution was required to ensure sustainability.
AIReF was created as a fiscal supervisor to assess the entire budgetary cycle at all levels of the General Government. However, it recently added the evaluation of public policies to its functions. AIReF expresses its views through the reports it publishes in compliance with the Law in which it issues recommendations to the General Government subject to the principle of “comply or explain”, through studies it carries out at the request of specific public authority and through opinions it publishes on its own initiative or set out in a law.
AIReF published its latest report last October, in the context of a return to fiscal rules in 2024 and of significant institutional uncertainty due to the absence of a General State Budget. The institution may have to revise its latest forecasts given the new information published, the approval of new measures and the approval of the 2024 Budget.
In that report, AIReF estimated a slowdown in the economy in 2024 and compliance with the deficit target of 3% of GDP. Specifically, AIReF revised the growth forecast for 2024 downwards from the 2% forecast in spring to 1.7%, and estimated that the deficit target of 3% of GDP would be met if the measures to mitigate the effects of the energy and price crisis were withdrawn and if the Autonomous Regions and Local Governments controlled the increase in spending. As regards debt, AIReF estimated that it would fall slightly in 2024 to 106.3% of GDP. AIReF once again observed that Spain is one of the EMU countries with the highest levels of debt, behind Greece and Italy and with a similar level to Portugal and France.
Under these premises, AIReF considered it feasible that Spain would comply with the ECOFIN recommendation limiting the increase in nationally-financed primary spending net of revenue measures to 2.6% in 2024. According to AIReF, the fall in Central Government expenditure made it possible to offset the growth above the limit in the rest of the sub-sectors. However, this outlook will need to be revised to incorporate the new information available and the new measures approved, which could complicate compliance with the deficit target and the ECOFIN recommendation.
In the medium term, AIReF’s forecasts at constant policies point to the exhaustion of the capacity to reduce the deficit and debt if no new measures are approved. The deficit would stabilise at slightly above 3% of GDP while debt would stabilise at above 100% of GDP, far from the 60% threshold established in the Stability and Growth Pact. AIReF also estimates that Spain would emerge from the crisis with revenue and expenditure at higher levels than before the pandemic. In the long term, the institution indicates that the pressures of ageing and the interest burden lead to the projection of an unfavourable debt ratio.
A comprehensive fiscal strategy
In this context, Cristina Herrero pointed out that the main challenge for public finances lies in defining a strategy that will bring about a sustained reduction in public debt and guarantee fiscal sustainability. According to AIReF’s calculations in its October report, the fiscal path that would comply with the guidelines contained in the proposal for the new fiscal framework would require measures to be taken over the period 2025-2028 amounting to 0.64 points of GDP per annum, thus meeting the requirement of plausible debt reduction in the most demanding scenario. These calculations will be revised by AIReF in accordance with the reform of the European fiscal framework, when finally approved.
As the President recalled, this strategy requires the involvement of the whole General Government Sector and agents, taking into account national specificities due to the high level of decentralisation and with a comprehensive approach. This implies taking into account the national fiscal framework, which will also have to be reformed, the regional and local financing system and the debt of the Autonomous Regions with the extraordinary financing mechanisms.