Spain | The public sector after the COVID crisis

Spain faces a fiscal adjustment of around 2.5 percentage points of GDP over the next few years. Its debt and public deficit levels make it vulnerable and must be improved through a more efficient set of public policies.

Key points

• Key points:
• The COVID crisis called for an unprecedented peacetime response from the public sector. Spain was no exception. Unlike the structural crisis of the Great Recession, the Spanish economy increased its public spending to 51.2% of GDP in 2020 and its deficit to 9.7%, without this unduly stressing the nation’s finances and risk premium, in the belief that it would be temporary and thanks to the support of the European Commission and the ECB.
• However, the war in Ukraine and the inflationary crisis kept the fiscal expansion going longer than expected, delaying the adjustment process. According to BBVA Research forecasts, Spain will end 2024 with a fiscal deficit of 2.9%, the same as in 2019, but with expenditure (45.0% of GDP) and public revenues (42.1%) four points above the pre-COVID average.
• Empirical studies in the OECD show two channels whereby an increase in public spending can switch from having positive to negative effects. The first relates to the size of the rise in relation to its efficiency.
• The second channel concerns the structure of public revenues and expenditures. The evidence from the OECD shows that growth improves the greater the weight of productive expenditure to social spending, and also of indirect taxation to direct taxation.
• Spain must move toward a more balanced revenue and expenditure structure, attaching greater weight to indirect and environmental taxation and avoiding any tax hikes that might undermine employment or investment. It must reduce the growth of social spending by improving its efficiency. This would leave room to increase the weight and quality of productive spending, such as investment in infrastructure, education, and innovation, all key areas for driving productivity growth and facing the dual energy and digital transition.

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