The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, took part today in a lunch seminar of the Advisory Board of the Confederation of Galician Business Owners, at which she called for responsibility from all General Government (GG) sub-sectors in the Structural-Fiscal Plan, which is necessary to comply with the new fiscal rules. In her opinion, the plan’s credibility, which will be in force for four years, is essential for Spanish finances and the euro itself, which is introducing a new fiscal policy coordination mechanism.
Cristina Herrero began her speech by explaining the three challenges of this new framework: the national challenge of designing a medium-term strategy to guarantee debt sustainability, the institutional challenge of ensuring that all GG sub-sectors are involved and participate in its design, and the need to make this strategy compatible with economic growth, promoting investment and productivity.
With regard to the first challenge, the President explained the general lines of the new framework, which continues to pursue the ultimate target of reducing public debt to 60%. However, it is based on a more transparent variable under the control of the GG sub-sectors: expenditure, discounting items subject to the economic cycle, expenditure on programmes with EU funding and discretionary revenue measures. Specifically, countries with high debt will have to present spending commitments over four or seven years that must be stable over time, unless objective circumstances justify their modification, such as a change of government.
In order to set this expenditure path, the European Commission has provided Member States with guidelines that will serve as a basis for evaluating the commitments made by each country. AIReF has calibrated the size of the adjustment using the same methodology as the Commission, but with its own assumptions and projections, and places it at 0.43% of GDP per annum over seven years. This adjustment would mean limiting net expenditure by 2.7% on average over the period, which is somewhat demanding given its historical growth. Although AIReF will have to tighten these estimates with new information, Cristina Herrero stressed that, according to its baseline scenario, annual nominal growth of around 3% of GDP will not meet the EU requirements.
On the institutional challenge of involving all the GG sub-sectors in the design of the fiscal strategy, the President acknowledged the difficulties in forging consensus and the participation of all the GG sub-sectors, but recalled that this is fundamental in a country as decentralised as Spain. She also pointed out that expenditure is coming under upward pressure that will affect all sub-sectors, with growing investment needs to transform the economy and the increase in essential items such as pensions and health.
She also stressed that sooner or later, the commitments will have to be shared among the GG sub-sectors. In AIReF’s view, opting for the same rates for all of them, which has been the usual practice to date, would lead to horizontal and vertical imbalances as it would not take into account the starting situation and would not solve the sustainability problems of several Autonomous Regions (ARs). That is why AIReF has, on several occasions, advocated differentiated targets, bounded by a minimum growth rate and the maximum limit set by the expenditure rule. Cristina Herrero also stressed the importance of not leaving aside two other aspects that condition sustainability: the financing system and the return to the market of the ARs.
Growth, the third challenge
Regarding the need to make the fiscal strategy compatible with growth – the third main challenge – the President recalled that reforms that promote a favourable climate for investment, productivity and growth have a place in structural-fiscal plans by facilitating debt reduction. In fact, committing to this type of reform and investment makes it possible to extend the adjustment periods from four to seven years. She also took the opportunity to point out that the Spanish economy is currently recording differentially high growth rates, which has led to a generalised revision of short-term growth expectations. AIReF will also be revising its forecasts in its next statement.
Despite the need to tackle these three challenges, progress has yet to be made in recent months. The GG sub-sectors are already designing their budgets for 2025 with very little information on the Structural-Fiscal Plan and fiscal commitments. Furthermore, reforms continue to be tackled in a fragmented manner. Accordingly, even though time is passing, AIReF continues to consider that it is worth making an effort and calls for responsibility from all GG sub-sectors, from the Central Government as the coordinator of fiscal policy and the ARs and Local Governments due to their jurisdiction over expenditure.
