The President of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, today closed the 3rd EsadeEcPol Taxation Forum, which focused on the sustainability of public debt. She stressed that the reform of the Stability and Growth Pact (SGP) represents an opportunity to tackle debt reduction from a comprehensive perspective and with a view to the medium and long term, in a new economic and institutional context that must begin to be internalised.
As AIReF’s president pointed out, the European Commission’s recent forecasts point to a widespread recovery in the euro area in 2024 and 2025, somewhat more dynamic in Spain, with debt stabilising at levels of 90% of GDP and above 100% in the case of Spain.
For its part, the new institutional context is characterised by the return to fiscal rules and the entry into force of the SGP reform that seeks to guarantee sustainability. Specifically, she highlighted two differentiating elements of the new framework: the new responsibility that countries need to take on by defining and agreeing on their fiscal strategies with EU institutions in order to lower debt in a sustained manner, and the new way of formulating fiscal commitments, focused on the expenditure variable net of revenue measures as opposed to the structural deficit.
This new observable variable, according to Cristina Herrero, makes the monitoring of commitments easier and more transparent, although the methodology to be followed to determine that this path effectively guarantees a continued debt reduction is not straightforward. Accordingly, it will be important to be transparent in the methodologies. Moreover, the new variable does not imply any limitation to the level of expenditure nor does it deny the role of tax revenue, such that changes in the level of expenditure will be possible provided they are accompanied by stable financing.
As regards the strategy to be submitted by Spain in a few months to reduce debt, Cristina Herrero considered it desirable to receive a broad consensus, that it should be debated in Parliament and that it should be designed with the participation and involvement of all the General Government (GG) authorities on which its rollout will depend. In this regard, she pointed out that in Spain almost 50% of expenditure is in the hands of the Territorial Administrations and that the pressures exerted by an ageing population will affect all General Government (GG) authorities. In her opinion, sustainability must be a common responsibility of all these authorities.
AIReF’s inertial outlook
Lastly, the President referred to the evolution of public revenue since the pandemic, which has been unique due to the type of shocks suffered and the fiscal measures adopted. This led AIReF to analyse and publish a Technical Document on tax revenue variability in June 2023, which will be updated shortly with the year-end data.
We have emerged from the crisis with a larger public sector and AIReF’s forecasts for total public resources point to a ratio of 43% of GDP in 2028, while spending would stand at 46.2% of GDP. In this scenario, the public deficit would stabilize at around 3% of GDP, so the margin for reducing public debt without additional measures would be exhausted.
In conclusion, Cristina Herrero stated that the reform of the SGP is an opportunity to tackle the reduction of public debt from a comprehensive perspective and with a view to the medium and long term. It is also a requirement for policymakers. “The institutional and economic framework has already changed, which is something we should begin to internalise,” she stated.