Governor of the Bank of Spain Pablo Hernández de Cos warned this Monday about a planned pension rise of about 8.5% for 2023 and a public salary increase agreed with unions of up to 3.5%. He noted these increases would cost roughly 27,200 million euros in total, a figure that would absorb nearly the entire margin available to Spain in the European Commission’s spending plan for next year and leave little room for other items.
“Following the European Commission’s rule in an environment where pensions grow with inflation means spending must be tightly controlled on other items,” Hernández de Cos told the Congress of Deputies. He also acknowledged uncertainty about how the Commission would interpret its own rule.
The preparation of the 2023 budgets is exempt from the European Union’s stability rules. Yet the Commission has recommended that primary current expenditure — most items except investment and interest payments — should not rise more than the potential growth of the Spanish economy (about 1%) plus inflation.
The government argues its accounts comply with this rule by including an inflation forecast for the coming year in the Budget Plan sent to Brussels last Saturday. The Bank of Spain questions this, noting it cannot tell whether to use the inflation figure or the 2% target pursued by the European Central Bank. In any case, Hernández de Cos warned that with pension and public wage increases alone, current spending could rise by 5.5%, at the upper limit of the most generous scenario.
The warning is significant. In the past, Spain could not consistently follow Brussels’ policy recommendations without facing consequences beyond formal condemnation in public councils. Now, the deployment of European funds hinges on compliance. The European Central Bank has also warned that if difficulties arise, member countries will rely on debt purchases only if the Commission’s recommendations are followed.
Missing Compliance
The Bank of Spain governor led discussions in the Congress as senior officials prepared the 2023 State Budget Law. He stated that the government’s public accounts would allow compliance with the 3.9% deficit target of GDP for 2023. He explained that 2022’s performance was expected to be much better than the government forecast—around 4.3% of GDP with a deficit below 5%—which would give the 2023 accounts a fundamental boost to support higher spending.
Behind this improvement in accounts were better revenues collected in 2021 and 2022. The governor urged prudence and warned against using the higher receipts to fund larger structural spending commitments. He recalled the 2008 financial crisis, which saw a surge in income from the real estate boom that later vanished. Anti-crisis measures should be temporary and targeted at the most vulnerable groups, he said, warning that a reversal would lift inflation and weaken public finances.
Rental Contract
During his appearance, De Cos again stressed the importance of a wage agreement among workers, businesses, and the public sector to help curb inflation. He noted that only the lowest pensions should rise in 2023 relative to this year’s inflation, about 8.5%.
The governor admitted that workers and employers have been working with an implicit flexible arrangement with reasonable fees and margins. He warned this implicit agreement could end as wage guarantee clauses grow in collective agreements and employee incentives become more common. Core inflation indicates a rapid pass-through of energy costs to final prices. About half of the goods and services in the core inflation basket rose more than 4% in September, according to the latest CPI data from the INE, a point the governor highlighted.
Pensions
Speaking to the Congressional Economic Commission, the governor revisited pension system reform to emphasize that measures already adopted by Minister José Luis Escrivá have not fully offset the increased spending from repealing key elements of the 2013 reform. The Bank of Spain argues that high spending tied to aging populations will grow in the future, requiring new actions to address either revenues or costs, or both. This warning echoes the need for ongoing adjustments and vigilance in pension policy.
Interest Rates
The president reaffirmed the ECB’s goal to continue raising rates to anchor inflation expectations at 2%. Yet Hernández de Cos noted the negative effects this would have on some groups and on public accounts. The Bank of Spain projects mortgage rates could rise by up to 14%, worsening pressures for vulnerable families. Higher inflation will add to costs, including an estimated 4,000 million euros in debt service this year for inflation-linked securities, and the rate hikes could push government interest payments on debt from about 2.2% of GDP to roughly 2.7% in 2024.
[Citation: Bank of Spain]