Securing fiscal stability in the context of uncertainty
Fecha: septiembre 2022
Santiago Lago Peñas
Decisive policy actions in response to the pandemic at the EU and Spanish level have been more effective than those taken to tackle the Great Recession. However, those same decisions have also clouded the outlook for fiscal stability. Transitory relief is drawing to an end at a time when interest rates are increasing, and the adverse effects of uncertainty will weigh on GDP growth and its trajectory back to pre-pandemic levels. In the first half of the year, the overall deficit has come down sharply to already below the target of 5% for 2022, compared to 6.8% in 2021, although the forecasts for this year are not entirely aligned. The positive and unexpected dynamics of tax collection are the reason why the increase in public spending is not having a significantly adverse impact on the deficit. Assuming no change in policy, the government expects the deficit to gradually trend down towards around 3% in 2025, shaped by a structural deficit which, despite a slight improvement, would remain above 3%. Moreover, while the government is forecasting a very slow but steady reduction in the debt ratio, the Bank of Spain sees no prospect for improvement. Within this context, it is not enough to hope for correction via the economic situation, which looks likely to be more complex in 2023 than was anticipated a few months ago. To ensure compliance with the incoming European fiscal rules and the eligibility criteria for the new Transmission Protection Instrument, limit the country’s debt service burden in the medium-term and win back space for discretionary fiscal policy, now is the time to define reforms and targets to realign public revenue with expenditure.