The Independent Financial Responsibility Authority, AIReF, maintains its projection for Spain’s GDP growth this year at 1.6%, while nudging up the 2023 public deficit forecast to 4.2% of GDP due to measures intended to ease the energy crisis impact.
In the Public Administrations Initial Budgets 2023 report, AIReF, led by Cristina Herrero, updates its macroeconomic and financial outlook. The forecast accounts for recent government actions and extended measures designed to cushion the economic fallout from the war in Ukraine and rising prices.
AIReF presented a refreshed macroeconomic scenario that leaves real GDP growth at 1.6% for 2023, down from 5.5% in 2022, with nominal growth set at 6.5%, compared with 10% last year.
At a press conference unveiling the new report, Esther Gordo, head of the Economic Analysis Division, stated that Spain’s economic activity shows strength, arguably stronger than expected in autumn. This improvement is attributed to a robust labor market, favorable foreign trade dynamics, and easing energy commodity prices on global markets.
Early indicators for 2023 suggest more momentum in overall economic activity. The MIPred model, developed by AIReF to summarize indicators tied to economic performance, indicates a 0.7% rise in GDP in the first quarter of 2023.
Yet the institution cautions that tighter financing conditions following higher interest rates may dampen the real economy in the latter half of the year. Accordingly, AIReF maintains its 1.6% growth projection despite these opposing forces.
underlying, above the general
On the inflation front, AIReF expects a 4% rise in the Consumer Price Index for 2023, two tenths lower than prior forecasts, while core inflation is anticipated around 5.4% and 4.8% for the GDP deflator. Energy and food price dynamics, paired with a slow reversal of past cost increases, continue to shape price movements.
Wage growth remains moderate but is forecast to outpace inflation on average in 2023, with only partial recovery of lost purchasing power from the previous year.
Unemployment is seen edging up slightly, with wages rising by about 4.7%, a decrease of 1.1 percentage points from the prior projection, signaling a soft but persistent labor market improvement.
14,000 million anti-crisis measures
From a fiscal stance, AIReF expects a 2023 public administration deficit of 4.2% of GDP, about three-tenths higher than the government’s target for the year. The update reflects new measures and extensions intended to mitigate energy costs and rising prices and marks a nine-tenths point increase from the October outlook that did not include the expanded measures.
AIReF estimates that the newly adopted and extended anti-crisis policies will incur substantial costs, totaling around 14 billion euros. Revenue is projected to rise 6.4% to reach 42.5% of GDP, or 44% including revenues from the Recovery Plan, a level roughly one percentage point below the previous forecast. Excluding the Recovery Plan, expenditure would stand at 46.7% of GDP in 2023; with the Plan, it would rise to 48.3% of GDP.
Autonomies with higher deficit than specified
The deficit widening is distributed across the central government, autonomous communities, and local entities. The central government is projected to run a deficit of 3.5% of GDP in 2023, up 0.5 percentage points from earlier estimates. The main driver is the approved and partially extended measures; changes in the macroeconomic scenario and improved tax receipts compress the gap by about 0.3 percentage points.
Autonomous communities are forecast to record a higher deficit by 0.2 percentage points to 0.3% of GDP, while local entities see a smaller deficit reduction, ending the year with a surplus of 0.2% of GDP. The balance deterioration for these entities largely reflects higher spending carried over from 2022 and a cautious 2023 start, according to AIReF.
Ignacio Fernández-Huertas, director of the Budget Analysis Division, notes that only four autonomous regions are expected to finish 2023 with a deficit exceeding 0.3%, namely Catalonia, the Community of Valencia, the Region of Murcia, and Castilla-La Mancha. Five other communities will come close to the 0.3% reference, including Extremadura, Madrid, La Rioja, Aragon, and Cantabria, while others are projected to balance or run a small surplus. The autonomous regions will publish individual reports next Thursday, April 13.
Additionally, AIReF reduces the estimated Social Security Funds deficit by a tenth to 0.6% of GDP. On the debt front, AIReF forecasts a 2.6 percentage point drop in the debt-to-GDP ratio in 2023, bringing it to 110.6% by year-end, after a period of initial stability followed by a downward trend in the medium term.
Debt forecast rose to 110.6%
After ending 2022 at 113.2% of GDP, AIReF’s macro-financial outlook anticipates a further 2.6 percentage point reduction in the debt-to-GDP ratio in 2023, reaching 110.6% by year-end. The agency highlights that debt had peaked at 125.7% in the first quarter of 2021 and has trended downward since, a path likely to continue this year.
AIReF’s estimate improves the government’s own 2023 Budget Plan projection of 112.4% and aligns with recent IMF and European Commission assessments. AIReF also cautions that rising pension, health, and long-term care costs driven by aging demographics, a rapid tightening of financing conditions, and a new monetary cycle will add pressure to the fiscal balance in the medium term. The agency emphasizes the sensitivity of the situation and the need to monitor developments closely. Attribution: AIReF report and official summaries.