In the second half of the year, a moderation in growth is expected due to the transmission of interest rate increases to the real economy

MADRID, 6 Jul. (EUROPA PRESS) -

The Independent Authority for Fiscal Responsibility (AIReF) has raised its growth forecast for the Spanish Gross Domestic Product (GDP) by four tenths in 2023 to 2.3% and has maintained its estimates for the public deficit this year at 4.1 %.

This is clear from the report on budget execution, public debt and the 2023 spending rule, in which the body chaired by Cristina Herrero updates its macroeconomic and fiscal forecasts after incorporating the latest available data and the new measures adopted by the governments --central and autonomous--.

The improvement in the estimated growth forecast for 2023 is due to the incorporation of the new estimates from the Quarterly Accounting of the National Statistics Institute (INE), which suggest that the economy maintained a higher growth rate than initially estimated in the second half of 2022 and in the first quarter of 2023.

Likewise, the information available for the second quarter points to the maintenance of real growth somewhat below that of the previous quarter, but above that of the euro area as a whole.

According to AIReF, the Spanish economy has weathered the energy crisis better in the last three quarters than the euro area as a whole. However, a moderation in growth is expected in the second half of the year due to the transmission of interest rate increases to the real economy, which is expected to fully materialize in the second half of 2023 and in 2024.

"In addition, the persistence of high inflation rates in the euro area as a whole could result in a more restrictive tone of monetary policy for a longer period," the agency warned.

In terms of prices, AIReF notes a notable containment of inflation due to the base effects associated with the energy component and the moderation of gas and oil prices in international markets. However, underlying inflation maintains high rates.

As a whole, the Independent Authority expects growth in the Consumer Price Index (CPI) of 3.7% in 2023, somewhat lower than what was projected in spring, while the increase in the GDP deflator amounts to 4.8%.

For its part, AIReF maintains a deficit forecast for Public Administrations (AAPP) of 4.1% of GDP in 2023, two tenths above the reference rate set by the Government.

As they have argued, the extension of the measures to deal with the rise in energy prices and the effects of the war in Ukraine suppose an increase in the deficit of two tenths of GDP, which is offset by the effect of the revision of the macroeconomic picture on public accounts and the latest collection data.

Consequently, AIReF estimates that the reduction in the deficit in 2023 would be seven tenths of GDP from 4.8% in 2022. The measures adopted to alleviate the effects of the war and the energy crisis represent 1.1% of GDP in 2023, three tenths less than in 2022.

Additionally, it considers that the rest of the income measures incorporated in the 2023 Budgets and in the laws that were approved in parallel, contribute to reducing the deficit by two tenths. On the other hand, the decrease in spending associated with Covid still contributes a tenth reduction.

Lastly, they suggest that the revaluation of pensions offsets the growth in income above the inertial evolution of the rest of the expenses.

All in all, AIReF estimates that revenues will reach 42.7% of GDP in 2023, not including the Recovery, Transformation and Resilience Plan, almost one tenth more than the level forecast in the previous report. This represents a growth of 7.5% compared to the end of 2022.

As detailed, the extension of the reduction in VAT rates represents a reduction in collection of just over 500 million, assuming that underlying inflation will be below 5.5% in September according to the macroeconomic scenario of the AIReF.

Conversely, the review of the macroeconomic scenario and the latest known collection data imply an increase in collection forecasts of almost two tenths of a percentage point in social security contributions, Corporation Tax and Personal Income Tax. However, this increase in the level forecast is almost fully offset in terms of weight over GDP by the increase in the nominal GDP estimate for 2023.

On its side, expenses, also without the Recovery Plan, will stand at 46.8% of GDP, less than one tenth above the level forecast in the previous report. On the one hand, the extension of the measures, including the reduction in the prices of public transport and fuel for professionals, represent one tenth of GDP.

Additionally, the latest execution data lead to a slight upward revision of public consumption and social transfers. Overall, AIReF raises the forecast for job growth to 5.9% compared to the level reached in 2022.

By subsectors and with respect to the previous report, the deficit forecast for the Central Administration (CA) worsens by less than one tenth, remaining at 3.4% when assuming the cost of the extension of measures. On the contrary, the Social Security Funds improve their forecast by one tenth, up to a deficit of 0.5% of GDP; the Autonomous Communities (CCAA) worsened almost one tenth, reaching a deficit of 0.4%; and the Local Corporations (CCLL) maintain the forecast in the surplus of 0.2%.

Regarding debt, AIReF projects a decrease in the ratio to GDP this 2023 of 3.1 points over the level registered in 2022, up to 110.1%.

As they explain, this reduction would be supported mainly by nominal GDP growth, with a high contribution from the deflator.

However, the organization has warned that in the medium term, the new monetary cycle together with the high level of existing debt, greater than 100% of GDP, places the sustainability of public finances in a situation of vulnerability, since in the In the coming years, the Administrations will have to finance large amounts of debt, around 20% of GDP, at significantly higher interest rates, in a context in which the demand for debt securities by the ECB disappears and in which there are many countries that maintain high debt levels and refinancing needs.

In this context, AIReF has issued a new recommendation addressed to the Ministry of Finance to propose reference rates of growth of primary spending net of income measures for the different administrations, considering the temporary or structural nature of the income and expenses of each subsector by 2024, and consistent with compliance with the European recommendation to Spain.

On the other hand, AIReF recalls that, before the call for general elections, the rest of the administrations will have to start preparing their budgets before the formal approval of the budget stability objectives and the establishment of the reference rate of the spending rule. In any case, in accordance with current legislation, the reference rate of the national spending rule would be around 3% by 2024.