The Stability Plan for 2022-2025 presented by the Spanish government calls for a gradual reduction in the general government deficit, driven by the economic recovery, bringing it from 6.8% of GDP in 2021 down to 5.0% in 2022 and to 2.9% in 2025 (CaixaBank Research’s forecast for 2025 places it still just above 3.0%). This is based on an inertial scenario, in that it does not incorporate new measures beyond those already approved for 2022, meaning that the structural deficit remains above 3% throughout the forecast horizon. Thus, the entire reduction in the budget deficit would come from its cyclical component, which will go from a deficit of 3.3% of GDP in 2021 to a surplus of 0.2% in 2025.

The macro outlook on which the Stability Plan is based is reasonable and has the AIReF’s approval. The forecasts are for a cumulative economic growth of 12.5% between 2022 and 2025 (similar to our forecasts), with investment playing a major role in the next two years thanks to the NGEU programme.1 This means that wage pressures will remain contained and that inflation will fall sharply from 2023 onwards.

Delving into the public accounts, on the revenue side there is no tax reform in the Plan. Revenues are expected to decline moderately as a percentage of GDP to 41.3% of GDP in 2025 (43.7% in 2021) due to a moderation in non-tax revenues (which includes income from capital transfers and European funds, excluding funds from the NGEU Recovery and Resilience Facility). Specifically, non-tax revenues would go from 4.9% of GDP in 2021 to 3.3% of GDP in 2025. Nevertheless, the tax burden is expected to remain stable (taxes and social security contributions will grow in line with nominal GDP).

Public spending would fall significantly as a percentage of GDP, owing to the significant increase in nominal GDP and some containment of non-pension spending. Thus, primary public expenditure (i.e. excluding interest payments) would fall from 48.4% of GDP in 2021 to 42.2% in 2025. Most notable is the reduction (as a percentage of GDP) in employee wages, expected to shrink from 18.1% in 2021 to 16.1% in 2025. This is a plausible result in a context of strong nominal GDP growth and considering that wage rises had already been agreed prior to the inflation rally. In contrast, pension expenditure, which in theory is tied by law to inflation, is expected to continue to grow at a rate similar to nominal GDP.

As for interest charges, a key variable for debt sustainability, the Stability Plan projects that this item will continue to fall in GDP terms to 2.1% of GDP in 2025 (2.2% in 2021), thanks to GDP growth and an assumption that rates will remain very low (the Stability Plan assumes that the Spanish 10-year bond will remain stable at around 1% between 2022 and 2025, although it has recently climbed to 2.0%). In a scenario in which rates gradually rise from their current levels (e.g. with the 10-year bond at around 3.0% in 2025), the debt burden could pick up slightly in 2025, although it would still be well below the 3.0% reached in 2012,2 according to our sensitivity analysis.3

Finally, public debt would gradually decline as a percentage of GDP, but would still remain high, going from 118.4% in 2021 to 109.7% in 2025. The bulk of the reduction is due to GDP growth in nominal terms; the Plan envisages cumulative nominal GDP growth of 24.3% between 2022 and 2025.

An interesting exercise is to compare the state of the public accounts as projected by the government for 2025 in the Stability Plan with that of the pre-COVID world. There are three key outcomes worth highlighting:

1. In 2025, the relative weight of the public sector in the economy will be greater than in 2019; specifically, it will be over 2.0 pps higher in GDP percentage terms. This suggests there will be a structural step change in public spending, due to factors such as the indexation of pensions to inflation4 and a structural increase in healthcare spending.
2. The structural deficit will be very similar in 2025 (3.2%) to 2019 (3.5% of GDP). The reason is that, although expenditure will increase, revenues are also expected to rise to a similar degree (see third result).
3. The government projects that the increase in tax revenues, following the large increase in collections in 2021, will be consolidated without the need for new tax measures. Thus, according to the Stability Plan, tax revenues as a percentage of GDP will be 1.8 pps higher in 2025 than in 2019. This is based on an inertial approach, with the assumption that tax revenues can be maintained at levels similar to 2021 (24.5% of GDP) in 2025 (the projection is 24.1%), well above that of the pre-COVID world.5 The question is whether this increase in revenues will be structural. The digitalisation of the economy during the pandemic may have reduced the shadow economy, which would support such a scenario. However, the increase in direct taxation in 2021 may be related to the exceptional measures implemented during the pandemic, such as the ERTE furlough schemes.