Brussels approves Spain's budget plan, but warns of a "very difficult" fiscal situation in 2024

The European Commission has given its approval to the draft of the Spanish budget plan for 2024, a document in which the Government summarizes the fundamental lines of the budgets of all administrations for 2024. Of course, the approval comes with nuances and asterisks and a clear warning: next year will be “very difficult” in fiscal matters for Spain.

This Tuesday, Brussels presented its evaluation of the budget plans of the twenty-seven member states that make up the EU. In the case of Spain, since the processing of the General State Budgets for 2024 has not yet begun, the Commission's assessment remains incomplete and waiting for the Executive to present something more tangible.

For now, the European Commission believes that Spain has responded to the recommendations it made last spring.. The Spanish budget plan complies with the maximum limit on the increase in spending of 2.4% established for Spain and also with the request to eliminate all energy support measures.

However, as the Government already explained in October when it sent the document to Brussels, the scenario was one of constant policies given the interim situation in which it found itself.. Now, with an Executive already formed, the situation changes. It must be taken into account that the social agenda that Pedro Sánchez outlined during his inauguration will have a cost.

Although Sánchez's promises would not have, in principle, a particularly high impact in budgetary terms, they do add extra spending that was not planned until now.. Above all, the extension of the VAT reduction on certain basic foods until mid-2024 or the promised free public transport for minors, young people and the unemployed. Likewise, although Sánchez did not mention anything about the anti-crisis energy support package during his investiture speech, he has not confirmed that these are going to disappear completely.

“Very difficult” tax situation

Although Brussels has given its approval to the Spanish budget plan, something it has only done with six other countries, the fiscal horizon is far from being clear.. Community sources warn that Spain faces the return of European fiscal rules in a “very difficult” fiscal situation. Consequently, Brussels calls for a credible medium-term fiscal strategy. That is, an adjustment plan in which the Government details how it will ensure that the debt and deficit are on a downward path in the coming years.

The Government has committed to reducing the imbalance in public accounts to 3.9% of GDP in 2023 and to 3% in 2024. For its part, public debt would be reduced from 108.1% of GDP in 2023 to 106% in 2024. The forecasts published last week by the European Commission give some credibility to this scenario, although they place the deficit at 3.2% of GDP next year.

Spain's problem is that it has practically zero margin to balance the accounts without applying fiscal adjustments. That is, without raising taxes or cutting spending, two decisions that are often equally unpopular.. The high public debt that the country has been accumulating since the great recession and which skyrocketed even more during the pandemic has triggered the interest expense that the State has to face.

So much so that, if the interest expense is discounted, the Spanish public accounts would be practically in balance next year. The primary deficit would barely reach 0.4% of GDP in 2024 if the forecasts are met. The problem is that the State will have to face an interest burden equivalent to 2.5% of GDP next year. An unavoidable expense that will increase little by little in the coming years due to the increase in interest rates.

It plays in the Government's favor that, in general, the public finances of the rest of the EU countries are in a delicate situation. The European Commission believes that there are four countries at risk of not complying with the recommendations made by Brussels last spring. These are France, Belgium, Finland and Croatia. In addition, Brussels points out that there are nine other States – Germany, Italy, Austria, Luxembourg, Latvia, Malta, Portugal, Netherlands, Slovakia – that are not completely in line with the Commission's recommendations.