The Heavy Mortgage of Spain’s Increasing Debt: A Look at the Government’s Extraordinary Spending

Some 170 million euros to subsidize trains and buses for young people, 17 million for unions, an extraordinary 14 million for the public company Tragsatec in order to unblock European funds, 3.3 million as a credit supplement for the CIS, 10 million to subsidize the cinema for those over 65 years of age… Without forgetting larger items such as 830 million for hydraulic works and 622 million for financing the affordable rental program. Thus up to 3,962.1 million euros. This is the figure by which the Government has increased spending extraordinarily during the first five months of this yearbeyond what was committed in the accounts that entered into force on January 1.

To this amount, equivalent to the money provisioned as the Contingency Fund in the General State Budget for 2023 (3,964 million), we must add another 4,000 million in ICO guarantees for the promotion of social housing, one of the latest star measures announced in full electoral race. Total, almost 8,000 million in just five months, two weeks before the municipal and regional elections and seven months before the more than likely date of the general elections10th of December.

If this amount may seem large, keep in mind that it is not the main problem. Beyond very likely having more spending announcements between now and the general elections and in the midst of the current Spanish presidency of the European Union (EU), the coalition government of PSOE and Podemos headed by Pedro Sánchez and his economic vice president, Nadia Calviño, will leave a heavy mortgage for 2024.

The debt slab

The year in which the Stability and Growth Pact will be recovered, which translates into the obligation to undertake adjustments, the current Executive will leave a heavy tax burden on the Government that will follow for an amount of some 377,000 million euros. This bulky figure comes from the net increase in debt (359,000 million) computed by Brussels since June 2018 (shortly before Sánchez came to power). until February 2023 (latest data published by the Bank of Spain), to which are added the almost 8,000 million of unbudgeted spending that is going for now this year and almost 10,000 million per year in the form of additional debt interest both for the increase in debt since 2018 as well as the rise in interest rates.

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With these data, you have to wonder. Are we mortgaging the future of Spain with these levels of debt? XTB’s chief economist and strategist, Pablo Gil, is emphatic in his statement: “Yes, we are mortgaging the future of future generations, because the debt is nothing more than bringing future well-being to the present. In other words, we mortgage the future of our children and grandchildren in order to maintain our level of well-being in the present.”

According to the latest data from the Bank of Spain, the debt of the Public Administrations is already 1.5 trillion euros, with an interannual increase of 5.6%, which represents 113% of GDP. “We are very far from the measure of the eurozone, of 91.5%”Gil highlights. “We are only surpassed by Greece, Italy and Portugal, our traveling companions from the last great peripheral crisis experienced in 2011,” he underlines.

For the economist José Carlos Díez, “what is worrying is that both the Government and the autonomous communities continue to use the key to increase the deficit and there is no debate on the public debt.” Díez, who qualifies that the subsidies “announced as the cinema for the elderly and the Interrail for young people have a minimal impact”insists that the most worrying thing “is the increase in debt and the structural deficit, which is similar to what Mariano Rajoy already had.”

If we look only at the increases in debt per legislature, it is discovered that the Sánchez-Calviño tandem is about to be the one that has increased debt the most in the recent stage. If the two legislatures of José María Aznar registered moderate increases in debt (69,000 million more in the first stage and 26,000 million more in the second), the second legislature of José Luis Rodríguez Zapatero, between 2008 and 2011, hit by the real estate crisis and financial, signed an increase of 343,000 million. Those were the years of the bursting of a real estate bubble inflated with easy and very cheap credit, which ended up leading to a banking crisis that was about to overwhelm the Spanish financial system and which claimed the savings banks and later the Banco Popular as the main victims. It was also the crisis of the countries of the southern Mediterranean arc. Greece, Portugal and Ireland ended up being bailed out and had to apply a harsh adjustment recipe that unleashed major social tensions.

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But the record for increases, until now, was set by Mariano Rajoy in his first legislature, from 2011 to 2015. The inheritance from Zapatero’s last forced the Executive of the PP to a harsh adjustment plan imposed from Brussels by the famous men in black. The plan, which saved 65,000 million and was approved by Parliament, contemplated an increase in VAT to 21%, the suppression of a pay for civil servants and cuts in spending and personnel in the local administration and in the Government itself, to which there are must add the increase in personal income tax decreed in its first Council of Ministers, on December 30, 2011. Despite this, the debt suffered a net increase of 390,000 million.

The current increase of the Sánchez legislature is also driven by external factors but also by deliberate decisions of a pro-public spending economic policy. The two main external shocks – the coronavirus pandemic that broke out in 2020 and, later, the war started by Russia against Ukraine a little over a year ago – have caused a short circuit in the world economies from which Spain has not yet fully emerged. “We have spent more than two decades supporting our economic model on increasing debt and maintaining negative real interest rates”Gil analyzes. “Until now, the combination has not generated more economic growth, quite the contrary, something that we have been observing in Japan for half a century”, and he adds: “Spain, like the rest of the world, must stop and think about where We headed”.

These debt growth figures would have been much worse had it not been for an extraordinary collection dividend in 2022 (it will also occur in 2023) thanks to inflation. These extraordinary incomes, of about 30,000 million, generated by the criticized refusal of the Government to deflate taxes, have helped to curb the rise in debt. But they are not recurring. For this reason and others related to the type of fiscal policy that is being carried out, it is for this reason that the European Commission, the AiREF and other independent organizations warn that the next Executive will have a very difficult time meeting the 3% target promised by the current Government before Brussels in the recent Update of the Stability Program, and even less if the thread of announcements continues as it has been doing to date. “You have to be much more prudent with spending and raise taxes as requested by the Bank of Spain in its annual report, especially in VAT, where we have too many products at low rates,” says Díez. “In recent years, excessive spending has been encouraged through expansionary fiscal policies, supported by a European Central Bank (ECB) that acted as a source of financing at no cost to European governments,” Gil comments.

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The recourse to the Treasury

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Unless income is again higher than expected due to the effect of inflation, Increasing the spending promises above the 8,000 million that go up to date will force either to review other items by the Contingency Fund, or to raise the net debt limit set by the Treasury in 2023 by 70,000 million euros. Precisely, against this new net debt limit is counted the promise to create, through ICO guarantees, loans to finance affordable rental housing for a total amount of 4,000 million.

The long-term effects of these policies do not end here. The 8.5% rise in pensions (about 15,000 million), 8% in public salaries (another 3,000 million that can reach up to 9.5% between 2022 and 2024) and the increase in the interest item from the debt will leave, at least, another $25 billion in additional future spending commitments compared to just a year earlier, given that the increases in wages and pensions are consolidated. For the moment, the collection increases are covering this spending gap. The question is until when.

2023-05-19 04:55:33
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