The International Monetary Fund has raised concerns about the high level of public debt in the Spanish economy, which stands at about 116% of GDP based on the latest September data. After the combined pressures from the Covid shock and the first energy crisis, the time has come to consider budget adjustments to restore fiscal steadiness.
In its annual assessment of the Spanish economy, released recently, the IMF outlines a path toward a nearly balanced structural fiscal position in the coming years. The aim is to put debt on a steady downward trajectory, targeting a reduction of at least 0.6 percentage points of GDP each year starting in 2024, with a horizon around 2030. Implementing this implies ongoing structural reforms that could total roughly 8 billion euros annually through a mix of spending reductions and revenue measures implemented gradually over time.
Before moving forward, the IMF recommends a measured reduction in the structural primary deficit for 2023. This deficit, calculated excluding interest payments, should be diminished by as much as 15 percent of GDP. If translated into euros, the IMF would call for a structural adjustment in the range of 3.2 to 6.5 billion euros for the upcoming year.
In practice, Kristalina Georgieva, the IMF’s managing director, notes that the government’s 2023 budget already includes a structural deficit reduction of about 0.3 percentage points, roughly 3.9 billion euros. The consolidation pace is generally considered appropriate, though actual results depend on factors like ongoing revenue strength and lower energy-related spending in 2023. The IMF cautions that the planned 2023 structural adjustment is likely to rely more on permanent tax increases rather than temporary measures, and it does not count on the withdrawal of covid-related spending as part of the structural effort.
Provisional taxes and energy measures
The IMF report welcomes the introduction of the new provisional taxes alongside targeted support measures for banks, energy companies, and households vulnerable to the cost of energy during the current crisis. Yet it also suggests that targeting should be sharpened. The IMF advises reassessing the approach of broad tax reliefs for banks and energy firms and stresses that any new tax on financial institutions should avoid constraining credit supply.
The fund uses its assessment to call for a greater focus on aid that reaches the most exposed families and firms amid the energy shock. It endorses measures that directly support electricity and heating affordability, including increases to minimum living standards and direct assistance to businesses. In contrast, it questions broader price reliefs such as general electricity and fuel discounts. It notes that fixed-sum transfers tied to income or household size may be more effective than relying solely on price reductions.
Growth and inflation
On growth, the IMF confirms a slowdown in the Spanish economy that mirrors a global trend. It projects growth around 1.2 percent for 2023, an improvement over expectations from the previous autumn forecast but still modest. The IMF also notes that the economy is unlikely to enter a technical recession, meaning two consecutive quarters of negative growth, according to statements from the mission head on a formal briefing. Growth is expected to remain near zero in coming quarters due to weak external demand and diminished consumer confidence, with a credible path for avoiding renewed declines in GDP below the pre-pandemic level by early 2024.
Inflation is anticipated to ease gradually in 2023. The IMF expresses reasonable confidence that inflation will not spike into double digits. It cautions that both headline and core inflation are likely to stay above the 2 percent target through 2024. Core inflation, which excludes the most volatile energy and food prices, remains elevated, raising concerns about wage dynamics. The report observes that more wages are being indexed to inflation through contracts, and rental costs continue to rise. It also notes that the burden of higher energy prices is being absorbed through temporary reductions in real incomes for households and enterprises.