Spain | COVID-19 scars in regional government accounts

Summary

Over the past two years, our lives have been constrained by the outbreak of a virus that caused one of the biggest health crises in recent decades. The challenge of facing this unprecedented situation has left its mark on everyone, as well as scars in government finance.

Key points

• Key points:
• After the sharp rise in the government deficit seen in 2020, the most recent data show that Spanish public authorities have reduced their fiscal imbalance to below 7% of GDP during 2021, more than three points lower than in the previous year.
• Throughout the health crisis, the central government bore most of the cost of the pandemic, transferring funds to regional and local authorities and Social Security for an amount equivalent to 3.5 pp of GDP in 2020 and 1.5 pp in 2021 to face the increase in spending on health, education and social benefits.
• Regional governments faced the pandemic in the midst of a difficult financial landscape, with high levels of debt, and had to resort to the special financing mechanisms arranged by the central government, since the financial markets were practically closed to them.
• COVID spending—equivalent to approximately two percentage points of GDP accumulated in 2020 and 2021—was covered with injections of funds from the central government. This is being corrected rapidly as the pandemic ebbs away.
• In any case, as shown by the projections of regional accounts made in December by BBVA Research, dispersion between regions is wide, and the effects of tighter spending control would enable most regions to quickly return to balance.

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