Sánchez designs an unprecedented deficit adjustment

by Deborah Cater
Budget deficit to be rectified

The Government intends to take advantage of the favourable economic climate to reduce the budget hole in the coming years. This way it hopes to avoid painful cuts like those undertaken by the government of Mariano Rajoy during the Great Recession.

The Minister of Finance, María Jesús Montero, trusts the predicted positive cycle will help public accounts adjust almost automatically. And this has been reflected in the draft General State Budgets for 2022. The document contains a vertiginous path of reduction of the public deficit. They are aiming to move from 10.95% of GDP in 2020, almost the largest gap in history, to 3.4% at the end of 2024. If it is fulfilled, it would be the largest and fastest budgetary adjustment in recent history; and, without a doubt, less painful than the previous crisis.

Economy into uncharted territory

The recession unleashed by the pandemic pushed the Spanish economy into uncharted territory. Last year’s disruption was unmatched in this century, and neither will next year’s recovery. The Executive will present to the European Commission next week the budget plan for Spain, which will include some additional detail on the fiscal consolidation roadmap.

Meanwhile, the 2022 Budgets do not include any adjustment measures to help address the imbalance in public accounts, in which expenditures far exceed income. This lag will contribute to raising public debt to 11.5% of GDP at the end of this year, one of the highest debt rates in the EU, after Greece, Italy or France.

Historically high public deficit

Although the public deficit will close this year at historically high figures (at 8.4%), the debt-to-GDP ratio will decline thanks to the robust push from economic activity.

nederlandse orthopeed

Spain will also benefit from the political climate in Brussels. A decade ago, bureaucrats prescribed austerity for any cold. The excess of cuts gripped even more the battered Spanish economy, which suffered to get out of the crisis.

Now, with the covid, there is a suspension of fiscal rules. The Commission turns a blind eye to the imbalances. But as of 2023 it will restore the rigid budgetary framework. However, the change of government in Germany, where the Social Democrat Olaf Scholz is aiming for a new chancellor, and the experience of the past financial crisis may serve to relax the demands within the EU.

Budget adjustments – then and now

In 2009, the hardest year of the recession triggered by financial abuse, the public deficit climbed to 11.28% of GDP. The PP government needed eight years to redress the imbalance. Those were times of cuts in essential items for the welfare state, in which health, education and investment suffered. Years in which public accounts were frozen in the middle of the year to avoid fattening the red numbers.

Now, Sánchez plans to go down that road in half the time. He expects, according to the Budgets project, the fiscal imbalance will go from 10.95% registered in 2020, the year of the virus, to 3.4% in 2024. And that without resorting to the dreaded cuts or large increases in taxes.

Time will tell whether Sánchez achieves his aim. Of course, he has to hope no new obstacles rise before him.

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