The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, took part today in the 11th Regional Finance Workshop of the Network of Researchers in Regional Financing and Financial Decentralisation in Spain (RIFDE), held at the IVIE headquarters in Valencia. During her speech, she stressed that the sustainability of public finances must be approached from a holistic perspective, given the interconnections between the regional financing system, extraordinary financing mechanisms and fiscal governance.
The President of AIReF began her speech by reviewing AIReF’s forecasts, which point to a growth of 2% in 2024 and a slowdown in the medium term to converge to potential growth of 1.3%. For its part, the General Government (GG) deficit is estimated at around 3% of GDP in 2024 and stabilises at that level in the medium term, exhausting the margin for reduction. Public debt is also stabilising in the medium term and is beginning an unfavourable path in the long term.
In this context, AIReF notes that there are underlying imbalances in both the Central Government and the Autonomous Regions (ARs). In terms of deficits, following the normalisation of the flows of the Regional Financing System and the withdrawal of measures, the imbalance is widening in the Central Government and persists in the Social Security Funds and the Autonomous Regions. Debt, for its part, is concentrated in the Central Government and exerts pressure on the Social Security Funds, while it is corrected in the ARs, but with great disparity. In the medium term, almost all the ARs reduce their level of debt, however, the differences increase.
Furthermore, in the long term, spending pressures are detected in all sub-sectors associated with items such as pensions, healthcare spending and spending on long-term care. In the case of the Central Government, moreover, various defence commitments come together that will imply an increase of 1% of GDP until 2029, along with other commitments such as the ecological transition.
A comprehensive strategy and adequate distribution by sub-sectors is required
The President of AIReF pointed out that it is thus necessary to develop a comprehensive strategy to guarantee the growth and sustainability of public finances that covers all the sub-sectors. The stabilisation of public debt in the medium term will be insufficient, as the new European framework requires a sustained reduction in debt. In fact, in September, Spain will have to present a four-year structural-fiscal plan (2025-2028) that guarantees debt is sustained on a downward path over that period and the following ten years, and that the deficit stands below 3% of GDP.
The new framework also modifies fiscal supervision, with implications for the management and definition of budgetary policy, since the observable variable becomes the primary expenditure net of revenue measures. In June, the European Commission will provide countries with the adjustment compatible with the new framework. AIReF has already carried out calibration exercises on the possible scope of the magnitude of the adjustment, which it puts at a range of 0.63% of GDP per annum if the adjustment is made over four years and 0.43% of GDP per annum if it is made over seven years. The annual adjustment of 0.43% of GDP implies that the average net expenditure growth of the General Government cannot exceed 2.7%.
This limitation on expenditure, according to Cristina Herrero, is a challenge for the General Government and its sub-sectors. Since 2018, net expenditure growth has stood at more than 4.5%, with the exception of 2021 and, on average, it grew by 5.9% between 2019 and 2023, compared with 3.2% in the previous four-year period. This means that, in the medium term, a smaller adjustment will be necessary than in the previous crisis, albeit one that will be sustained over time.
The President of AIReF reflected on two possible ways of approaching this adjustment: by applying a response in line with current Spanish regulations and practice, with the same rate of growth in expenditure for all General Government sub-sectors, or by exploring other options, such as an approach similar to the new European governance framework that incorporates the initial situation and the specific features of each public authority. In either case, the feasibility of meeting spending commitments is a challenge for all tiers of government and produces asymmetries in the control of the key variables of the new framework: debt and expenditure. Accordingly, the main challenge will be to find institutional balance from a holistic perspective that addresses the sustainability of public finances for all GG authorities from a threefold perspective: the regional financing system, extraordinary financing mechanisms and fiscal governance.
Lastly, Cristina pointed out that the commitment to sustainability and the clarification of the responsibility of each GG authority in the commitments taken on in the structural-fiscal plan to be presented in September is a task that cannot be delayed.