The new fiscal rules that the European Union has designed will mean that Spain will have to tighten its belt, although it will not be the only country that will have to do so. Months ago, the European partners approved the new roadmap on fiscal discipline, to contain the deficit below 3% and ensure that public debt does not exceed 60%.

A return to the recipes of austerity that includes common obligations, although with asterisks depending on the financial situation of each State. Those where the public deficit exceeds 3% of the Gross Domestic Product (GDP) – Spain closed 2023 with 3.7% – must reduce it by 0.5 percentage points per year. And the debt, when it exceeds 90% of GDP, has to be cut by at least 1% annually. In the Spanish case, this debt reached 107.7% at the end of 2023. Of course, there is a margin of four years to achieve the objectives, which can be extended to seven, in case there are structural reforms; and the Commission will design a country-specific debt sustainability analysis.

Given this perspective, the Bank of Spain not only recognizes this belt-tightening, but also that the dynamism of the economy is going to suffer. “The activation of the new European fiscal rules will require the design and implementation of a medium-term fiscal consolidation plan that allows the correction of the structural public deficit and, therefore, the reduction of public debt” and “although the impact economic of said adjustment plan is uncertain – since it will depend critically on how it is designed – its implementation would predictably generate a lower degree of dynamism in activity in the short term,” the supervisor breaks down in its Annual Report.

Given this lack of specificity, he points out that everything will depend on the fine print. “If this plan were accompanied by a composition of public spending and income more favorable to growth and the necessary reforms to improve the dynamics of productivity and the increase in the employment rate, its positive effect on the potential growth of the economy “It would reinforce the sustainability of Spanish public accounts.” In this way, he admits, “the probability of adverse scenarios materializing with negative consequences on economic growth and the well-being of citizens would be significantly reduced.”

With these bases, the institution headed by Pablo Hernández de Cos affirms that it has developed a debt sustainability analysis tool, which “aims to replicate the methodology used by the European Commission for the implementation of fiscal adjustments under the new framework.” With it, “it estimates that the most indebted countries in the EU would have to undertake, assuming seven-year consolidation plans, an average annual improvement in their primary structural balance of between 0.4 and 0.7 percentage points of GDP.” An annual adjustment that is equivalent to between 5,000 and 10,000 million euros annually and that would be similar for States such as France, Italy or Belgium.

Less blow than in the crisis of a decade ago

From there, the Bank of Spain compares this adjustment with the one that these four countries had to make in two periods. The first, with the austericide carried out between 2010 and 2013. The second, with the subsequent years, between 2014 and 2019.

If compared to the latter, “it represents a considerable effort,” indicates the supervisor. However, “in the case of Spain and Italy, the adjustment that they would have to implement in the future would be lower than what they undertook, on average, between 2010 and 2013 during the sovereign debt crisis,” he acknowledges, because in that case it was reached to 2.5% of GDP. That is, the Bank of Spain believes that, if compared to just over a decade ago, the cut would be manageable.

Hernández de Cos, in that same report, states that “strict compliance with European rules is essential to reduce this vulnerability of the Spanish economy.” However, “the impact of said adjustment plan would foreseeably entail a lower degree of dynamism in activity than expected. An effect that could be cushioned with a composition of the adjustment that favors the potential growth of the economy and its accompaniment with a package of ambitious structural reforms and the investments necessary to improve the capacity for growth.

He also emphasizes that “strict application of fiscal rules at all levels of government is essential. In this sense, an eventual forgiveness of part of the debt that the autonomous communities have accumulated in recent decades could have negative effects on the incentives for disciplined fiscal behavior on their part in the future.

At the same time, the Spanish supervisor believes that, with the new fiscal framework, the European partners have lost, with this new fiscal corset, “the opportunity to advance in some key aspects of the governance of the Economic and Monetary Union, such as coordination more effective implementation of national budgetary policies and the introduction of a permanent common fiscal capacity.

“A central fiscal capacity could implement appropriate fiscal guidance at the aggregate level” for euro countries and ensure optimal coordination of monetary and fiscal policy. “This capacity should be of adequate size and have sufficient and stable financing, which would be crucial to create an effective macroeconomic stabilization instrument.” There he gives as an example the programs that were launched with the pandemic.

“It would be important to introduce a permanent common financing instrument that would give continuity, for example, to the temporary program”, in reference to European funds, “that would allow financing large-scale projects that provide public goods at European level, while avoiding, at the same time , an excessive or unequal impact of the same on national public finances and a deterioration of the single market,” he concludes.

Review the tax system

At the state level, he sees room to increase VAT and indirect taxes, such as environmental taxes, in a rethinking where he sees room to compensate with a downward revision of direct taxation, of personal income tax. “Both VAT and the rest of indirect taxes – which include special taxes – have been more contained in recent years, maintaining their weight in GDP around pre-pandemic levels – 11.5% of GDP –. In this way, the weight of indirect taxation in total revenue in our country has been reduced from 32.6% in 2019 to 30.1% in 2023,” he summarizes.

Specifically, it considers that “a comprehensive review of the Spanish tax system that evaluates whether, as a whole, the various tax figures in our country achieve their objectives effectively and efficiently.”

“To achieve greater efficiency in our tax system, the relative weight of taxation on consumption in our country could be increased, which is relatively low compared to that of other European economies and which generally generates fewer distortions on factor and product markets,” he argues in the annual report. “The potential negative distributional effects that are sometimes associated with taxation on consumption could be avoided by dedicating part of the revenue to compensatory transfers to vulnerable groups that are harmed,” he clarifies.

Compensatory measures that also fit into environmental taxation, he quotes, because “our country has committed to achieving, over the coming decades, very ambitious climate objectives” that require “among other measures, improving and increasing environmental taxation, an area in which Spain has been collecting less than other European economies over the last decades” and hence sees room for growth.


Leave a Reply

Your email address will not be published. Required fields are marked *