Towards a new fiscal policy
Álvaro Martín // 26 April 2021
In February, the Bank of Spain published its statistics on the Spanish public debt, indicating that state liabilities reached 117.08% of GDP at the end of 2020. In the beginning of January, the Minister of Finance, María Jesús Montero, announced that Spain ended 2020 with a deficit of 11.3% of GDP. In light of the shift in public spending during the last few quarters, these numbers are not surprising. Moreover, numerous analysts predicted the public debt at the end of 2020 to be higher than it turned out to be. The Spanish economy greatly suffered from the 2008 crisis and is undoubtedly one of the countries suffering the most from the current recession triggered by the pandemic – at least in terms of GDP, which fell between 9-11%. Additionally, employment decreased by 2.9-3.1% (depending on the calculation method).
Despite the obvious tragedy that these numbers represent, this is an opportunity to rethink the Spanish approach to tax policy. Analysts pinpointed Spain’s lack of fiscal capability as the cause of the timid state response in terms of direct subsidies to the affected sectors. The Independent Authority for Spanish Fiscal Responsibility confirmed that around 50% of the public deficit for 2020 is due to discretionary increases of spending in policies supporting companies and families, such as the benefits of the ERTE lay-off scheme, the benefits for independents ceasing their activities, and so on. We should also remember that the extraordinary financing programmes of the Spanish Official Credit Institute (ICO) are supported by a state endorsement of 85 billion EUR to be used in case a company defaulted. Nevertheless, the IMF’s Fiscal Monitor of October 2020 which analysed countries’ reactions to the recession, named Spain as one of the developed countries with the lowest financial assistance to citizens and businesses during the pandemic. As economic recovery becomes the central theme of 2021, fiscal policies will have to be adjusted accordingly.
Several proposals formulated in March and April 2020 envisaged financing through deficit as the fiscal support needed to recover the maximum amount of activity and employment once the economy “unfroze”. This strategy has been followed by most countries with general success. Household revenue rose by 4.3% in 2020 across OECD countries, by 6.5% in the US, and around 2.3% in Germany. However, this did not happen in Spain, where households’ income fell by 1.1% in 2020, mainly due to the structure of the country’s economic activity and lack of fiscal capacity.
What are Spain’s options to escape this quagmire? The solution should revolve around reinforcing the benefits to the most vulnerable and concentrating the available public funds into programmes that possess a high return on investment and can become self-financing. An example in this ”frozen” economy is the massive COVID-19 vaccination programme. Its cost, although quite high, is trivial compared to the economic benefits of a fast vaccination rollout. Indeed, it would prepone economic recovery (especially in the hospitality, tourism, and leisure sectors). This will create a greater recovery not only in terms of economic growth but also in tax revenues. The programme will pay for itself, as it permits the recovery of two thirds of activities in the most affected sectors. The next fiscal year will witness the most direct effects of the crisis on the population, and will further highlight the need for reforms. It will also show the importance of fostering automatic stabilisers, which would avoid the expansion of discretionary spending programmes, therefore bringing more security and stability to the population and to the Spanish economy as a whole.
Furthermore, the Next Generation EU (NGEU) funds, if well managed, will trigger a revolution for the Spanish fiscal policy and could become the springboard for the long overdue reforms in the country (in training, technological investment, modernisation of public administrations, work regulations of the 21st century). The amount of NGEU funds for Spain are more than enough for the reforms, but the real issue lies in their implementation. Sustainable growth of the Spanish economy must go hand-in-hand with a fiscal expansion in order to support private investment and to create new opportunities in the country. But the new fiscal policy must not stop there.
Once the Spanish economy is on the path to sustainable growth, a medium to long-term plan on budgetary controls and public deficit restraint is needed. However, the prospects are not looking good, with the European Commission expecting the structural deficit to reach 7.2%, in 2021, as well as in 2022. The contributory pensions system and the natural evolution of its costs in the coming years will not help lower the pressures on the public accounts.
Spain reported a public debt of 117% of its GDP by the end of 2020, even though the interest expenditure in real terms was less than 2% of GDP. This is positive, as it does not put too much pressure on the public accounts and pushes away the ghosts of default which have previously lurked above the economy. Nonetheless, they cannot afford to let the debt continue to create a primary deficit of more than 3% of the GDP annually through 2025 (as predicted by various projections).
The situation around Spanish public accounts remains complicated, however is nothing compared to the Euro crisis. The ECB’s monetary policy is greatly contributing to a decrease in the interest of the debt, thus alleviating the burden on Member States. Countries like Spain should make the best out of every opportunity presented to them, such as the extraordinary financing conditions or the NGEU funds, to undertake a series of long overdue reforms whose relevance has become even more evident in light of the pandemic.
The article was originally published in Spanish on Civismo’s website.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).