That advanced economies face a mountain of public debt, as the International Monetary Fund (IMF) warns in its latest forecasts, is nothing new. What is relevant is that the true dimension of this debt is beginning to emerge as a consequence of disinflation. The inflationary outbreak has been disastrous for consumers' pockets, but it has also brought relief to public coffers. In 2023, the Spanish debt increased by 71 billion and, however, its weight in the economy was notably lightened: the ratio of liabilities to GDP fell by 4.4 percentage points, to 105.1%. The improvement is mainly due to the effect of inflation, a factor that revalued the GDP in nominal terms, in addition to increasing collection (the non-deflation of the personal income tax brackets tends to increase the income received by the Administrations). The growth of the economy has also helped, although its effect has been quantitatively less than that of inflation: this is explained by the rise in prices, an increase of 6.2% in terms of the GDP deflator, more than double than the growth of the economy in real terms (2.7%). The impact of inflation has been even more relevant in the other large European economies, gripped by recession. Without the relief provided by inflation, the debt-to-GDP ratio would have increased in all the countries considered, as a consequence of the budget hole. Therefore, now that prices are moderating, the dynamics of the debt will depend on the capacity to correct this hole, the intensity of the economy's growth and the relationship between both factors. Despite the high level of liabilities , Spain is in a less uncomfortable situation compared to other countries around us, thanks to the strength of the economy, contrasting with the Central European stagnation. Taking into account the cut in interest rates, an adjustment of 8 billion euros would be enough to contain deficits and put the debt on a downward path. The effort would be acceptable: divided between spending and collection measures, its magnitude would be similar to the adjustment that was made during the expansionary stage prior to the pandemic. Conversely, inaction would place us in a vulnerable situation and without the ability to react to possible shocks.
It is also advisable to take into account the impact of budgetary measures in the expansionary cycle. It is not about sacrificing investment, as happened in the past, or wasting it. The case of housing, whose shortage threatens to constrain growth in the medium term in addition to being a serious social problem, is paradigmatic in this regard. The social housing stock is one of the smallest in Europe and, despite this, our debt is one of the highest. The lack of housing options for disadvantaged households is not due to spending policy: since 1991, more than 1.4 million public housing units have been built. However, at least two out of every three of these homes would have been reclassified, based on official estimates of the social stock currently available. The forecasts coincide in a favorable scenario for the Spanish economy, while the public deficit is not corrected. Under the hypothesis of constant policies, the public deficit would stagnate at around 3%, resulting in non-compliance with European fiscal rules. It is time to adopt containment measures, but designing them in a way that can sustain the expansionary cycle. Now, the window of opportunity has an expiration date: IMF experts warn that markets cannot remain immune to geopolitical, environmental and financial risks. Its awakening could be painful for countries that have not organized their public coffers or laid the foundations for growth.
Public administrations
The budget extension has had an uneven impact between the different administrations. Until July, State consumption spending increased by 2.7%, compared to 6.2% in the Autonomous Communities. This has been possible because these administrations have received from the State, as a final settlement for 2022, 16.6 billion euros, double what they received in 2023 for the final settlement of 2021. Thanks to these resources, the Communities have been able increase spending without failing to meet its deficit target, set at 1.1% for the entire year. Raymond Torres is the director of Economic Affairs at Funcas. In X: @RaymondTorres_