High inflation trims the purchasing power of families and businesses alike. It also pushes up the cost of government borrowing when inflation drives up the consumer price index. As a result, parts of the public debt linked to inflation incur higher interest payments when prices climb.
Independent authorities have quantified this impact. Airef reports that total interest expenses across public administrations rose by 5.55 billion euros in 2022, reaching 31.595 billion euros, or about 2.3% of GDP. The Airef newsletter Debt Observatory notes that much of this fiscal burden in 2022 came from revaluing the debt portfolio in response to inflation, adding more than 8.0 billion euros. If inflation had remained unchanged from 2021 to 2022, the financial burden would have declined in 2022 by roughly 163 million euros, according to Airef.
Inflation-linked securities, known as connectors, account for just over 5% of the total debt stock (about 1.558 trillion euros in July), roughly 80 billion euros. When inflation performs better than expected, these instruments save the government money; when outcomes are worse, extra costs surface in interest payments, a pattern seen in 2021 and 2022. Airef highlights that the 2022 extra cost, around 8 billion euros, exceeds several major budget categories for that year, including health, education, and reforms. Housing policies and defense also see substantial outlays that year.
Public debt below 109% of GDP in 2023
Airef’s September update reflects a revised debt outlook after the National Statistics Institute raised the GDP figure by about 23 billion euros to 1.346 trillion and after recent monetary policy decisions. When GDP is recalculated, Airef projects Spain’s debt at roughly 111.2% of GDP in the second quarter of 2023, about 1.84 percentage points lower than the level implied by the pre-review GDP data.
Prior to the GDP revision, Airef had forecast a 2023 debt ratio of 110.1%, indicating a 3.1 percentage point drop from 2022. Following the revision, the government’s forecast, alongside IMF and European Commission projections, points toward a value in the 108% to 109% band by year-end, with the Tax Agency maintaining a similar optimistic stance.
Average cost of new debt at the highest level since 2011
The second-quarter debt level of 111.2% of GDP marks a drop of 14 percentage points from the 125.2% peak in the first quarter of 2021. Spain remains among the euro area’s higher debt ratios, trailing only a few peers such as Greece and Italy and comparable to Portugal and France. In 2019, Spain already had a high debt ratio, and the pandemic reinforced that trend, Airef emphasizes.
Recent rate hikes have pushed up the cost of new public debt. After hitting a low in 2021, the average cost of new Treasury issues rose from negative 0.04% to 3.33% by August 2023, a level not seen since the 2011 debt crisis. This uptick also pushed up the overall average cost of the debt portfolio from its historic trough of 1.64% to about 2.02%.
Forecasts from Airef indicate that 2023’s average issue rate will end just over 3%, with a path to about 3.4% in the coming years. Issuance dynamics are expected to lift the average share of debt held by the portfolio to around 2.8%, and interest expenses to roughly 2.9% of GDP by 2026, compared with 2.3% of GDP in 2022 and 2.02% in 2022 for the emission rate. These projections reflect how debt composition and financing costs shape Spain’s fiscal trajectory, as analyzed by Airef and cited in its Debt Observatory notes [Airef].