The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, took part today in the new edition of PwC’s ‘Legal Forum’ and reviewed the main new features of the new European fiscal framework which, in her opinion, provides an opportunity to overcome the limitations of the previous model. To achieve this, she considered it crucial that the first Structural-Fiscal Plan, which will be presented in the coming days, fulfils what is expected, to become a genuine medium-term planning tool, a country commitment that involves the whole General Government (GG) sector, even if it is a posteriori.
Cristina Herrero began by reviewing the new features of the new framework, which seeks to reinforce national ownership and the commitment to medium-term sustainability. The Structural-Fiscal Plans, which become the main element of fiscal commitment, will be proposed by the Member States and must ensure a sustained reduction in debt. They cannot be modified, except in exceptional circumstances, and must include commitments in terms of expenditure net of revenue measures to ensure a reduction in debt, which simplifies supervision. They may also include incentives to boost growth.
According to the President of AIReF, the success and credibility of the new framework will depend on the national will and the credibility of the national plans themselves. And, for the time being, the signs are not very positive because, on the one hand, there is very little information on the economic challenge that this new framework implies for Spanish public finances and, on the other hand, the Autonomous Regions (ARs) and Local Governments (LGs) are drawing up their budgets without being familiar with the Plan or the fiscal targets that they must adhere to.
On the first point, Cristina Herrero pointed out that the guidelines on fiscal commitments that the Commission has sent to the countries, which should serve as a reference for drawing up fiscal plans, have yet to be made public. These figures give an idea of the effort to be made and, unlike other countries such as Italy, Spain has chosen not to publish this information. Although it is not a legal obligation, the President considered it ‘desirable’ to opt for greater transparency. AIReF has been making its own calculations for some time and estimates that the average annual adjustment in Spain will be slightly more than 0.4% of GDP over a seven-year adjustment period. This means that net expenditure will not be able to grow on average by more than around 3%, well below its historical performance.
On the second point, the President stressed that true national ownership, which gives credibility to the commitments taken on, requires the participation of all GG authorities. However, the ARs and LGs are drawing up their budgets without being familiar with the Plan or the fiscal targets that they must adhere to, even though they are responsible for 50% of expenditure. Although the difficulties in promoting a consensus and the participation of all GG authorities must be addressed, sooner or later, the commitments made will have to be shared.
A step backwards in medium-term budgeting
Furthermore, Cristina Herrero regretted that the change of focus towards the medium and long term has yet to be assimilated. The macroeconomic scenario drawn up by the Government that underpins the General State Budget (GSB) for 2025 and the Fiscal Plan only covers two years – 2025-2026 – and needs more information on the measures and reforms that are to be included in the Plan. In her opinion, this way of proceeding represents a step backwards in the medium-term budgeting strategy, as the old Stability Programmes incorporated a longer time horizon. AIReF thus recommended to the Government in its Report on the endorsement of these macroeconomic forecasts that it should draw up forecast scenarios for at least four years and provide more information or even consider carrying out the endorsement process in two stages: the baseline scenario and the scenario after discovering the breakdown of the measures.
As regards the Report, Cristina Herrero recalled that AIReF endorsed the Government’s macroeconomic forecasts. However, it will complete its report when it has more extensive information on the Plan and the measures. She also recalled the upward revision of AIReF’s growth forecasts to estimate growth of 2.8% in 2024, 2.3% in 2025 and 2% in 2026. However, AIReF’s scenario does not incorporate the structural adjustment that the Government will almost certainly have to implement from 2025 onwards, which is currently unknown. AIReF calculates that the implementation of a potential structural adjustment programme of 0.43% a year, over a seven-year horizon, would reduce GDP growth in 2025 by 0.3 percentage points and in 2026 by 0.2 percentage points.
AIReF’s role
To conclude, the President highlighted the role that Independent Fiscal Institutions such as AIReF can play in this new framework to help ensure its success and credibility. Specifically, she recalled that AIReF has the knowledge and resources to analyse and provide independent and rigorous monitoring of the Plan, that it has been commissioned with the new function of assessing the consistency, coherence and effectiveness of the national framework and can become a link between the national and European frameworks, and that its evaluation function is ultimately aimed at improving the quality of public finances, something that the new framework calls for as a lever for improving fiscal sustainability.
