2025 Treasury strategy in a context of reduction of Spain’s public deficit
Despite the reduction of the public deficit to around 2.8% of GDP, the Treasury’s funding needs remain high, with a projected net issuance of 60 billion euros. It will also have to deal with the end of reinvestments by the ECB and the impact of interest rates on public debt.
In 2025, we expect to see a reduction in the budget deficit of around half a percentage point of GDP, placing it close to 2.8% of GDP. This decrease is largely due to the end of the tax cuts and direct support measures, which in 2024 amounted to 5.5 billion euros (0.4% of GDP). This fiscal scenario already takes into account an exceptional increase in spending of several dozen basis points to support relief in the areas affected by the flooding in the Valencia region, which will be largely offset by the new revenue measures approved in December (minimum corporate tax rate of 15% for multinationals, increase in the top marginal personal income tax rate for capital income, tax on vapers, etc.). However, if the budgets for this year end up being approved and they incorporate additional spending measures, then the deficit could be somewhat higher.
A deficit of less than 3.0% is well below what is expected in countries such as France (between 5% and 6% of GDP) or Italy (deficit of around 3.5%) and it is also fully consistent with the fiscal rules that come into force this year. Specifically, as part of the Fiscal-Structural Plan 2025-2031 recently approved by the European Council, Spain has committed to a 40-bp reduction of its primary structural balance in 2025.1 As interest expenditure is expected to remain stable as a percentage of GDP in 2025, the reduction of the deficit will essentially result from a reduction of the primary structural deficit with the withdrawal of the support measures (as a general rule, the European Commission has a very narrow definition of what it considers a one-off measure, so measures to combat inflation fall within the perimeter of the structural balance).
Thus, the fact that the economy is in a good position in the cycle will allow public revenues to enjoy strong growth of around 6% year-on-year. The increase in public spending, meanwhile, will be lower, bearing in mind that the structural plan sets the growth for Spain’s net computable primary expenditure2 (which does not include the measures announced in response to the floods) at slightly below 4% in 2025.3
- 1. The plan proposes a cumulative fiscal adjustment in the period 2024-2031 in the primary structural balance of 2.9 percentage points of GDP (0.42 points on average each year). In this way, and taking into account that interest spending will remain stable below 3% of GDP, the government deficit would fall from 3.0% of GDP in 2024 to 0.8% in 2031, while the primary balance would fall from –0.4% of GDP in 2024 to +2.0% in 2031.
- 2. Computable expenditure includes net public expenditure on interest payments, discretionary measures relating to revenue, expenditure on EU programmes fully offset by revenue from EU funds, national expenditure on co-financing programmes financed by the EU, cyclical elements of expenditure on unemployment benefits, and ad-hoc and other temporary measures.
- 3. Net primary expenditure growth is expected to average 3% between 2025 and 2031.
Despite the expected decrease in the deficit, the Treasury’s funding needs remain high. In 2025, the Treasury expects a net issuance of 60 billion euros, mainly covered by medium- and long-term instruments. This is a significant amount and exceeds the 2024 figure by 5 billion, due to the funding needs derived from the measures to support those affected by the floods (it should be recalled that the central government has approved measures amounting to over 16 billion euros, with an impact on the deficit of 0.5 pps of GDP), although it is 5 billion less than in 2023. The gross issuance of debt in the medium and long term will be 176.5 billion euros.
This year the ECB will complete its withdrawal and will stop making reinvestments, marking a change of scenario for the placement of the debt to be issued.4 However, the context of higher interest rates relative to the period 2016-2022 and the anchoring of expectations should increase the attractiveness of public debt among investors, whether domestic or non-resident. In 2024, foreign investors increased their holdings of Spanish debt by 64.3 billion euros, well above the historical average in the period 2003-2021 (16.4 billion annual average increase). With this increase, the proportion of the total holdings of our debt (including bills, which account for just 5% of the debt portfolio) that is in the hands of foreign investors has risen to 44.2%, compared to 40.3% at the end of 2022.
On the other hand, Spanish retail investors have led domestic interest in Treasury bills, becoming the main holders, with a record increase of 24.1 billion euros since the end of 2022, although it has stabilised following the first rate cuts (–746 million between June and November). Thus, domestic investors as a whole account for 28.6% of all the debt in circulation (26.3% at the end of 2022).
Looking at the total stock, we estimate that public debt held by the ECB in 2025 will represent 25.7% of the total debt (26.3% of GDP), leaving the remaining 73.7% (75.9% of GDP) in the hands of other investors. Between 2012 and 2015, the proportion of the total debt held by non-central bank actors far exceeded this figure (peaking at 101.6% of GDP in 2014).
- 4. In 2024, the ECB already ceased its net purchases of Spanish sovereign debt and limited itself to reinvesting repayments under the PEPP (pandemic emergency purchase programme) amounting to 18.6 billion (1.2% of GDP). In 2025, the ECB will stop reinvesting repayments under the PEPP.
In 2024, the average cost of new Spanish Treasury issues fell to 3.16%, 28 bps less than in 2023 and 80 bps below the October 2023 peak. This reduction is in line with the ECB’s cumulative fall in rates, which remain higher than the average cost of the portfolio, and this will cause the average cost to continue to rise temporarily. The average life of the portfolio has remained stable at around eight years, as the Treasury has taken advantage of the years with low rates to issue debt in the longer sections of the curve. This stability has mitigated the impact of the rise in interest rates, with the average cost of debt increasing by just 57 bps since 2021 despite the surge in interest rates.
In 2025, the average cost of the total public debt is expected to increase very slightly, as a significant portion of the debt that will be repaid was issued seven or eight years ago at lower rates than the current issuance rates. In particular, interest payments on general government debt as a whole could be 2.5-2.6% of GDP in 2025, taking into account the rebound of sovereign rates through various channels such as the influence of the higher sovereign rates in the US, expectations of higher growth and greater uncertainty regarding where rates will be in the medium to long term. This would be a level similar to that of 2023-2024 and in line with AIReF’s expectations, but lower than a decade ago (in 2014, for example, interest payments reached 3.5%).
In the medium term, in 2027, the general government’s overall interest payments could be around 2.8% of GDP. Implementing a gradual and sustained fiscal consolidation strategy, in line with the new EU fiscal rules, will thus be key.
- 1. The plan proposes a cumulative fiscal adjustment in the period 2024-2031 in the primary structural balance of 2.9 percentage points of GDP (0.42 points on average each year). In this way, and taking into account that interest spending will remain stable below 3% of GDP, the government deficit would fall from 3.0% of GDP in 2024 to 0.8% in 2031, while the primary balance would fall from –0.4% of GDP in 2024 to +2.0% in 2031.
- 2. Computable expenditure includes net public expenditure on interest payments, discretionary measures relating to revenue, expenditure on EU programmes fully offset by revenue from EU funds, national expenditure on co-financing programmes financed by the EU, cyclical elements of expenditure on unemployment benefits, and ad-hoc and other temporary measures.
- 3. Net primary expenditure growth is expected to average 3% between 2025 and 2031.
- 4. In 2024, the ECB already ceased its net purchases of Spanish sovereign debt and limited itself to reinvesting repayments under the PEPP (pandemic emergency purchase programme) amounting to 18.6 billion (1.2% of GDP). In 2025, the ECB will stop reinvesting repayments under the PEPP.
Macrofinance
What factors will determine the evolution of interest rates, investment sentiment and macro-financial conditions in general?
