The diagnosis has not changed compared to the one issued a year ago. The high level of public and private debtas well as the high unemployment ratecontinue to place Spain in the group of Eurozone countries – along with Germany, the Netherlands, France, Portugal, Romania and Sweden– that they experience “macroeconomic imbalances”. Therefore, the recommendation to Government of Pedro Sanchez remains the same as last year: maintain a budget policy “prudent in 2023”what limit current spending financed at national level below potential growth in the medium term. With two novelties: take into account the temporary and selective support to households and businesses more vulnerable due to the rise in energy prices and the situation caused by the ukrainian refugees.
For the period beyond 2023, Spain and countries with high levels of debt -such as Italy or Greece- “must apply a fiscal policy aimed at achieving prudent fiscal positions in the medium term and guarantee a credible and gradual reduction of the debt and the fiscal sustainability in the medium term, through gradual consolidation, investments and reforms”, indicates the European Commission within the framework of the European semester procedure, the annual exercise aimed at offering economic and fiscal policy guidelines to the countries of the Eurozone as well as recommendations based on the national reform and investment programs sent by the countries to Brussels at the end of April.
In the case of Spain, the analysis identifies “gaps regarding the challenges that are not addressed or are only partially addressed in the recovery and resilience plan, as well as new and emerging challenges, including those arising from the Russian invasion of Ukraine” . It also notes that Spain is one of the 17 countries that fail to comply with the deficit and public debt limits set by the stability and growth pact -3% and 60% respectively- although given that the rules are suspended -and that they propose to keep suspended until 2024 – for the moment they will not open procedures for excessive deficit and will reassess the situation in the fall of this year.
“Realistic” stability program
In any case, the community experts consider that the macroeconomic scenario on which the budget projections for the Stability Program 2022 is “realistic & rdquor; although they recognize that there is a slight difference between the Government’s forecasts, which forecast growth of 5% in 2022 and 3.9% in 2023, and the Commission’s spring figures, with 4% and 3.4% respectively . “The decrease in 2022 mainly reflects the strong growth in economic activity, the increase in tax revenue and the elimination of most emergency measures & rdquor ;, explains the Commission, stressing that both parties agree on the projection of the deficit and on a similar public debt ratio.
Even so, the European Commission asks Spain to be prepared to “adjust current spending & rdquor; depending on the evolution of the situation but at the same time scale up public investments for the green and digital transition and to strengthen energy security, including by making use of European funds and the financing of the program Next Generation EU. The new fiscal policy recommendations also urge Spain to fully implement recovery and resilience plans, promote a circular economy, increase tax rates recycling and promoting the reuse of water as well as reduce the general dependence on fossil fuels and accelerate the deployment of renewable energies.
To do this, Spain should focus on decentralized installations and more self-consumption, speeding up authorization procedures and improving access to the network. In this field, Brussels also urges the government to support investments to improve storagethe network infrastructurethe electrification of buildings and transportas well as promote the renewable hydrogen. The recommendations also do not forget the importance of accelerating energy interconnectionsand to increase the availability of social and energy-affordable housing, including through its renovation.
macroeconomic imbalances
Regarding macroeconomic imbalances, the report published this Monday also points to the persistence of a high external debt, both public and private. “Private debt remains higher than before the covid-19 crisis, and continues to exceed prudent levels, while the high ratio of public debt to GDP remains well above its pre-pandemic level & rdquor ;, Community technicians warn, admitting that although non-performing loans continued to decline, some risks still exist, especially in energy-intensive sectors and in those that were previously severely affected by the coronavirus crisis.
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In addition, and although the unemployment rate began to decrease again in 2021, “the segmentation of the labor market and youth unemployment remain high”, although according to the community diagnosis, the recent and past reforms and the application of the recovery plan will help to address Spain’s remaining vulnerabilities.
pension reform
Another of Spain’s pending issues refers to the pension reform although published documents they do not enter into controversies and limit themselves to echoing the government’s plans. “A reform of the pension system aims to improve its adequacy, while limiting the impact of demographics on fiscal sustainability. By linking pensions to consumer prices, the reform is expected to support purchasing power & rdquor ;, explains the Commission, which also points to other measures in the approval process such as “measures to increase the effective retirement age, link contributions more and rights, reduce the gender gap in pensions, change tax incentives, modify the contribution system for self-employed workers, extend the reference period for calculating pensions and an intergenerational equity mechanism”.