The Independent Authority for Fiscal Responsibility (AIReF) has revised upwards its growth forecast for the Spanish economy to 1.9% for 2023, two tenths less than what the Government forecasts, while for 2024 it projects an increase in GDP of 2%, four tenths lower than that of the Executive, due to the impact of the rise in interest rates, which will be especially appreciated from the second half of this year.

According to the Report on the Update of the Stability Program 2023-2026 presented this Thursday, the Authority is more pessimistic than the Government regarding the evolution of all macroeconomic indicators: it expects less growth, less job creation, more inflation and a smaller reduction in the deficit.

Specifically, he believes that employment measured in full-time jobs will grow this year by 1.4% and not 2.1% as the Executive expects, a mismatch that is also observed in the forecasts for the coming years: the Employment will increase 1.7% in 2024, 1.5% in 2025 and 1.1% in 2026, according to AIReF, while the Executive projects an employment growth path of 2.3%, 1.6 % and 1.5%, respectively.

This less favorable evolution of the labor market would place the unemployment rate at 12.5% this year -compared to the 12.2% expected by the Executive-, while at the end of the projection horizon, in 2026, it would drop to 11 % -far from the 9.8% projected by the Government for 2026-.

There are also discrepancies in the inflation forecast, since AIReF expects the GDP deflator – an indicator that measures the evolution of the country's production prices, internal prices – to rise by 4.8% on average this year, compared to the 4% planned by the Executive. For the CPI -which only measures consumer prices- it estimates an average increase of 4% this year.

Insufficient deficit reduction

AIReF has highlighted important differences in the expected evolution of the public deficit (the difference between public revenue and expenditure). According to the Government, the budget gap will gradually reduce, going from the 3.9% forecast for this year to 3% in 2024 and falling below that level in the following two years: to 2.7% in 2025 and 2.5 % in 2026. It must be taken into account that the current fiscal rules -although they are now deactivated- stipulate that the public deficit must be less than 3%.

However, the institution chaired by Cristina Herrero does not share this optimism and believes that the deficit will become entrenched in the coming years. In 2023, it stands at 4.1% of GDP – two tenths above the official forecast – and he does agree that it will drop to 3% next year, but he believes that it will stagnate at that level in the following two years.

This entrenchment of the deficit “is insufficient to place the debt on a downward trajectory and reduce the vulnerability” of public finances, the institution has warned, which believes that in the absence of measures the debt will rise again from 2030. In his opinion, the public debt will drop 5.9 points between now and 2026 to stand at 107.3% of GDP, a decrease lower than that predicted by the Executive (of 6.4 points).

However, this decline could be compromised by future interest rate hikes, which would make financing costs and state interest spending more expensive.. In particular, if the average debt issuance rates rise 100 basis points, the State's interest expense would rise to 3.3% and the debt ratio would increase another 0.5 points.

Why does AIReF believe that the deficit will stagnate? Mainly because he believes that State revenue will not grow as much as less will be collected from taxes and contributions than expected, both due to less dynamic consumption and the more timid behavior of employment. He believes, however, that the State will spend less than expected, despite the higher spending on paying public pensions and the higher disbursement derived from interest on the debt.

In particular, he believes that public revenue will represent 42.6% of GDP this year, 43% in 2024 and 2025 and 43.2% in 2026, compared to the government path of: 43.4%, 43.3% , 43.7% and 43.8%. As for expenses, they estimate that they will represent 46.7% of GDP this year, 46% the next two and 46.2% in 2026; while the Executive places them at 47.3% this year and 46.3% in the next three.

30,000 million adjustment

The body calculates that the orientation of the European Commission to place public debt on a continuously decreasing path could require Spain to make a fiscal adjustment of up to 30,000 million in four years, according to what Herrero has specified..

In his opinion, the Commission's guidelines suggest that the stability programs must place the public deficit below 3% of GDP and the debt “on a continuously decreasing path” in the medium term “with a sufficient degree of plausibility”.