Going Around In Circles With Budgetary Stability

The ratio of corporate debt in Q2 was 94.9% of GDP, and that of households 60.8%The ratio of corporate debt in Q2 was 94.9% of GDP, and that of households 60.8%

For a long time, Spain has had a “debt pending” in terms of budgetary stability. And, for the time being, the current scenario leads us to think that balancing the public finances is a difficult objective to achieve in the medium-term. Added to that problem is the high level of government debt.

According to figures from the Bank of Spain and the AIReF, the former increased by 65 percentage points between 2008 and 2014 and, in that last year, reached maximum levels of 100.4% of GDP. This rise in public debt was distributed in the following way: +38 pp were the result of the cycle’s prolonged weakness against a backdrop of low inflation, +21 pp derived from structural budgetary factors and +6 pp were due to dynamic effects of the debt. Those derived from budgetary factors bring a very important question to light. Namely that the accumulation of primary deficits on a continued basis and their consequent financing explains an important part of the State’s high level of debt. Focusing on the accumulation of negative public balances and turning to the European Commission’s Spring Forecasts, we can see how the estimates for structural deficits for our country show figures which exceed 3% of GDP for this year and the next, while the projections for the EMU as a whole stand at -0.8% and -1.1% respectively.

So it is expected that in a structural way, public spending will continue to amply exceed revenues in the short-term. This indicates the important financial imbalance generated in our country in light of the bad handling of economic policies, and without taking into account the cyclical factors of activity or extraordinaries.

Given all the above, the main task the government has ahead of it in terms of the budget is to implement reforms which support greater balance in the public finances in the medium-term. In this way, the serious problem of Spain’s public debt could be solved. Also in line with the Commission’s forecasts and in gross terms, this will reach levels of 97.6% this year and 95.9% in 2019. These figures are still very high, particularly if we take into account the ECB’s ultra-expansionary measures and the way in which these have relaxed our country’s interest expenditures.

At the same time, looking ahead to a more distant future, the AIReF considers a scenario in which, under the assumption of a primary structural balance, public debt would stabilise at 83.3% in the year 2033. In parallel, considering the State would have a primary structural surplus of 2%, the estimated path for public debt would be a decreasing one, falling to 58.4% within 15 years. Both projections would be accomplished under the following hypotheses: inflation of 1.8%, potential growth of 1.5%, implicit interest rate of 2.9% and the consideration that GDP will fulfill its growth potential in 2019. On the basis of the previous projections, one can appreciate that the future of Spain’s public finances is complex, given the rigidity of the underlying assumptions. Thus, if there are no important reforms undertaken to alter our country’s budgetary outlook, and in light of a potential reduction in the ECB’s generosity in the medium-term, what is certain is that Spain will continue to be on Brussels’ radar as far as public debt is concerned.

 

 

 

About the Author

Francisco Vidal
Francisco Vidal is Chief Economist at Intermoney. Since 2006, his professional career has been focused on elaborating economic analysis for the group, which has become a reference for financial intermediation in Spain. This is a situation which has allowed him to specialise in the interrelationship between the real and the financial economy, as well as the study of monetary policy.