In its new World Economic Outlook for October 2021, the International Monetary Fund (IMF) partly coincides with the Spanish government’s own macroeconomic forecast for this year and the next, but disagrees with its long-term deficit projections.
The international organization has reduced Spain’s growth prospects for 2021 to 5.7%, five-tenths of a point lower than what it said in its July update. And in 2022, the IMF is expecting Spain’s economic output to grow 6.4%, which is six-tenths of a point higher than its previous estimate. In September, the Spanish government released its own projections of 6.5% growth for 2021 and 7% for 2022.
The IMF report also shows that Spain is expected to gradually reduce its debt and deficit levels this year and the next, but to make very little progress on these fronts from 2023 onwards, in contrast with the government’s own projections.
In June 2019, Spain was emerging from a decade of austerity following the deep crisis of 2008. Brussels responded to the good news by lifting corrective measures after certifying that the country’s deficit level had returned to below the EU target of 3% of gross domestic product (GDP).
The optimism was short-lived. Less than a year later, the economy had shrunk by a record 10.8% as a result of the Covid-19 pandemic, a figure unseen since the days of the Spanish Civil War in the 1930s. And the government was forced to roll out its fiscal artillery to deal with the crisis, including a job-retention scheme and deferred tax payments. The combination immediately pushed up the national deficit to 10.9% of GDP for 2020.
Although Spain recently entered the coronavirus low-risk scenario through a drop in infections driven by high vaccination rates, the economic fallout remains considerable, and the Spanish Cabinet last week approved the blueprint for the 2022 budget, which it described as the largest public spending effort in Spain’s history.
Debt and deficit
The Spanish government – a center-left coalition of the Socialist Party (PSOE) and Unidas Podemos – is expecting to end 2021 with a budget deficit of 8,4%. After that, the goal is to bring the figure down to 5% in 2022, 4% in 2023 and 3.2% in 2024.
The IMF agrees with the first part of this diagnosis, but believes that between 2023 and 2026 the deficit will remain above 4% of GDP. More specifically, it is expected to be 4.4% in 2023 and 4.2% thereafter.
This means that for at least the next five years Spain would be in violation of the EU’s Stability and Growth Pact, which sets a ceiling of 3% for the deficit and 60% for debt. However, the Pact was suspended until 2023 due to the Covid-19 pandemic, and the EU Commission is expected to launch a review of its budget rules on October 19, news agency Reuters reported.
As for government debt, the IMF also disagrees with the Spanish executive’s forecast. The latter said it plans to bring the figure down from 120% of GDP in 2020 to 119.5% in 2021 and 115.1% in 2022. The international organization thinks instead that it will be 120.2% in 2020, and that it will not experience any significant reduction until 2022. At that point, the figure would likely hover around 116% or 117% for several years.