The European Commission this Tuesday gave its approval to Spain's budget project, but has urged the new Government to present an updated plan "as soon as possible", since the current one was submitted in October by the acting Executive - as the case of Slovakia, Luxembourg and the Netherlands-- while warning that the country will face a "very difficult" fiscal situation in 2024 with a deficit above the 3% limit and a "quite high" debt.

The community Executive, which has published the European Semester report, believes that Spain's draft, based on an extension of the previous budget, complies with the recommendations of the Council of July 2023, which called for eliminating the most general support measures to address the energy crisis while protecting the most vulnerable and called on Member States to use the resulting savings to reduce deficits.

However, community sources have warned that the fiscal situation in Spain for next year will be "very difficult" since economic forecasts point to a deficit above the limit of 3% of GDP in both 2024 (3.9%). as in 2025 along with a "quite high" public debt, which is expected to continue exceeding 100% of GDP in 2024, also exceeding the 60% threshold set by the treaties.

The same sources have stressed the need for Spain to establish a "credible" fiscal strategy in the medium term and have pointed out that Brussels will ask to know the "details" of the extension of the VAT reduction on food announced by the President of the Government, Pedro Sánchez, during his speech at the investiture session.

Faced with geopolitical tensions that "cast a shadow of uncertainty on the economic prospects" in a year in which the clause that kept the fiscal rules frozen due to the pandemic will be deactivated, the European Commissioner for the Economy, Paolo Gentiloni, has indicated that it is important that governments remain "agile."

Along the same lines, the economic vice-president of the Commission, Valdis Dombrovskis, has recommended that Member States apply "more prudent" fiscal policies, which "will contribute to reducing inflation, improving debt sustainability and rebuilding reserves after "large-scale public spending during the pandemic and energy crisis."

The Commission considers that this is "consistent" with the need to restore fiscal buffers over time and thus improve the sustainability of public debt in some Member States, while it is "vital" to maintain investments and the absorption of funds of the Recovery and Resilience plans.

ECONOMIC IMBALANCES

In 2024, in-depth reviews will be prepared for Spain and the other ten Member States that in 2023 were experiencing imbalances or excessive imbalances. The Alert Mechanism report presents an overview of the evolution of the key data underlying these imbalances.

In the 2024 comprehensive analyses, which will be published in the first half of next year, an economic assessment will be carried out to determine whether these imbalances are worsening, being corrected or have been corrected, with a view to updating existing assessments and assess possible remaining policy needs.

NEXT STEPS

The Commission will present its proposed recommendation on the euro zone to the EU Economy and Finance Ministers and the Eurogroup at their next meeting in December. The proposal is expected to be debated by the Eurogroup in January, approved by the Council in March 2024 and later formally adopted by Ecofin.

Member States will have to take action based on the recommendation both individually and collectively within the Eurogroup to implement the euro area recommendation in the period 2023-2024.