Spain | The adjustment to come?

The public deficit appears to be inconsistent with the cyclical position of the Spanish economy. It is contributing to inflation remaining high, in an environment where the unemployment rate is at a 15-year low.

Key points

• Key points:
• The last time the unemployment rate was at levels similar to today's (12.9% on average in 2022) and the economy was not in recession (as in 2008) was at the turn of the century. Then, the public accounts showed a primary surplus (excluding interest payments) of 2% of GDP and general government debt stood at 57% of GDP.
• Today there is a primary deficit of 2% of GDP and public debt is at 113% of GDP. Another benchmark to consider is 2019, when the deficit was 2.9% of GDP and the unemployment rate was 14%. All the deterioration in the public accounts since then is due to the increase in spending, which rose by 5.5 pp of GDP.
• Among the fastest growing expenditure components are social benefits, which have risen from 15.8% of GDP to 17.2% in just three years. Employee remuneration has risen by almost one percentage point of GDP since 2019. In turn, the sum of public investment and intermediate consumption would be 1.5% of the GDP higher.
• With the announcement of the new fiscal rules by the European Commission (EC), it will be necessary to think about how to make the adjustment over the next few years. The EC will require, as a minimum, measures equivalent to an effort of 0.5% of GDP per year.
• To minimize the impact on the economy, in an environment where interest rates are likely to remain high, it would be advisable to start as soon as possible part of the adjustment, mainly by eliminating general measures and not targeting vulnerable groups.

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