The Independent Authority for Fiscal Responsibility (Airef) has warned this Thursday of the consequences for Spain of not implementing a “credible and realistic” medium-term fiscal strategy. The entity warns that the significant increase in stock of public debt derived from the pandemic crisis, coupled with an already high starting point, places public administrations and autonomous communities “in a position of great vulnerability”. Airef recognizes that the long period of low interest rates provided by the European Central Bank, which has reduced interest payments, offers room for maneuver to return to a balanced budget without damaging growth, but for this it repeats that it is necessary to design as soon as possible “a medium-term consolidation strategy”.
As much as the power of the recovery, boosted by fiscal and monetary injections, is vigorous, Cristina Herrero, president of Airef, believes that the financial situation will be weaker. “We are clear that our position at the end of the crisis will be more vulnerable than before it occurred,” he said during the presentation of his Report on Budget Execution, Public Debt and Expenditure Rule 2021 of Public Administrations. According to their forecasts, the deficit will close at 7.9% of GDP, one tenth more than expected in their previous estimates due to the worse absorption of European funds and the lower collection due to the reduction in electricity taxation, although still below the 8.4% expected by the Executive.
This year, the debt has already reached a peak of 125.3% in the first quarter, the worst figure in 140 years, although that enormous amount of liabilities will be reduced. In 2024 its predictions indicate that the public debt will be at 112.4%, mainly due to the effect of GDP growth. “The high level of debt and the foreseeable deterioration of the fiscal balance in the coming years also place the sustainability of the autonomous communities. in a position of greater vulnerability ”, says the text. The Valencian Community, the Balearic Islands and Murcia will be the territories that will see their debt grow the most in 2021 in relation to 2019, but no community will comply with the reference limit of 13%, with the Canary Islands, the Community of Madrid and the Basque Country as the best located .
The horizon does not look much better: Airef believes that there is a risk that the public debt ratio will stabilize significantly above 100% if the structural deficit is not lowered. “A gradual and sustained reduction of the public deficit towards structural equilibrium is required to redirect debt back to pre-pandemic levels over the next decade,” he recommends.
The body in charge of ensuring the stability of public accounts perceives mixed signals for the economy: on the one hand, it highlights that the advance of vaccination in Spain and its partners, as well as the lesser restrictions, have allowed an “intense” reactivation that it is clearly noticeable in a good number of indicators; from business and consumer confidence, to industrial production, world trade, exports or services. However, remember that international tourism is still at much lower levels than before the crisis, a fact that may be accentuated with the increase in infections in recent days. And he doubts that the impact of the European recovery plan will finally reach the 1.5% of GDP that he estimated for this year. Faced with this dilemma of light and dark, Airef has chosen not to make a move and has kept its growth forecast for Spain this year unchanged at 6.6%, at least until September, when it will undertake a new review of these data with more information.
The Tax Authority admits that the large international organizations, such as the European Commission, the IMF and the OECD, have been unanimous in revising their growth figures for Spain upwards in recent months, but believes that normalization is still a long way off. And he cites three examples that there are many indicators that are still weak compared to 2019: the number of total contracts signed, overnight stays by foreigners and car registrations. In addition to 449,414 people in ERTE (temporary employment regulation file) as of June 30, most sectors where social interaction is essential.
To the concerns about the high debt, the rebound in contagions and the delay in European funds, there is a fourth factor that increasingly unleashes more concern at the global level: inflation. Central banks insist on its temporary nature, but Airef sees potential for harm. “Although a transitory nature of the shock, a permanent upward trend in raw material prices could have negative effects on production costs and on economic activity, weighing down the speed of the recovery ”, the report indicates.