• The Government approves the agreement on the limit of non-financial expenditure that suspends, following European recommendations, the fiscal rules
  • The public deficit will register one of its biggest declines next year and will drop 3.6 points to 7.7% of GDP
  • In line with national and international organizations, a fall in GDP of 11.2% is expected in 2020 and a recovery in 2021 of 7.2%
  • The effect of the Recovery, Transformation and Resilience Plan can boost economic growth in 2021 by more than two additional points, up to 9.8%, thanks to the greater dynamism of investment, exports, consumption and employment

The Council of Ministers today approved an Agreement to establish the limit of non-financial spending by the State for 2021, which is a fundamental step for the preparation of the General Budgets, which should lay the foundations for the social and economic reconstruction of the country. This is a spending ceiling that amounts to 196,097 million euros. It is a figure that does not allow a homogeneous comparison with previous years due to the pandemic context in which it has been drawn up and because it includes extraordinary transfers to CCAA and Social Security, as well as the significant absorption of a first package of European funds.

Likewise, the agreement also contemplates suspending the fiscal rules in 2020 and 2021. This is an extraordinary measure that is adopted in a pandemic scenario and is based on the decision taken by the European Commission to activate the safeguard clause for this year and next.

The objective of the Executive with this measure is to make available to all the public administrations all the possible tools to face the health emergency and, at the same time, allow a fiscal flexibility that allows promoting economic and social recovery.

The Government will ask Congress to assess whether Spain is in an emergency situation that allows it to adopt this exceptional measure contemplated in the Spanish Constitution and in the Stability Law.

In any case, as the Minister of Finance, María Jesús Montero, has recalled, the suspension of fiscal rules does not mean that fiscal responsibility disappears. In fact, the Government's intention is to move towards a downward path of the public deficit that will start significantly from next year.

Suspension of fiscal rules

In a scenario of a global pandemic, the European Commission decided to apply the general safeguard clause of the Stability and Growth Pact in 2020, which will also be extended in 2021. This measure allows Member States to suspend the path of fiscal consolidation approved earlier of the crisis.

Following these guidelines from the community authorities, the Government of Spain today approved suspending the fiscal rules in 2020 and 2021. This is a measure that other European countries have adopted and that has also received the approval of the IMF.

As a consequence of this decision, the Council of Ministers has suspended the path and the stability objectives approved by the Government in February, which have been completely out of date due to the impact of the crisis.

The suspension of fiscal rules, in addition to going in the same direction as that adopted by the EU, is a measure protected by the Spanish Constitution and by the Stability Law. Specifically, article 135.4 of the Magna Carta includes this suspension in the event of “natural catastrophes, economic recession or extraordinary emergency situations that are beyond the control of the State and considerably harm the financial situation or the economic or social sustainability of the State, appreciated by the absolute majority of the members of the Congress of Deputies ”.

Therefore, the Council of Ministers has asked Congress to declare whether Spain is in one of those cases set out in the Constitution and that enable the suspension of fiscal rules. The Minister of Finance has shown her confidence that the Lower House will have no difficulties in pronouncing in favor of a measure that "provides public administrations with sufficient flexibility to address the health, social and economic crisis."

However, the head of the Treasury has made it clear that the suspension of the fiscal rules does not mean the disappearance of fiscal responsibility. In fact, Montero has stressed that the Government does not renounce budgetary stability or the principle of prudence when it comes to carrying out the General Budgets.

In this sense, the Minister of Finance explained that, despite the absence of stability objectives for next year, some reference deficits have been established based on the growth forecast and that they should serve as a guide to prepare the accounts public to each of the administrations.

Deficit reference

The forecast for the current year is that the public deficit will close at around 11.3% of GDP. A high figure due to the impact of the pandemic, but Montero has emphasized that the Government's intention is to start the path of fiscal consolidation through a gradual reduction of the public deficit starting next year. In fact, the reference deficit in 2021 will be 7.7%, which represents a decrease of 3.6 points compared to 2020. This is one of the largest deficit reductions ever recorded.

The Minister of Finance has stressed that the reduction of the deficit will not be at the cost of applying cuts and widening inequalities, but will be compatible with the strengthening of the Welfare State and the social and economic recovery of the country.

References by subsectors

The reference deficit by subsector shows how the Central Administration assumes most of the cost of the pandemic, something that has occurred since the start of the health emergency. In fact, the Central Administration will assume a large part of the deficit of the Autonomous Communities and Social Security.

In principle, the reference rate for the deficit of 7.7% for 2021 would be distributed as follows: 2.4% for the Central Administration; 2.2% for the Autonomous Communities; 3% for Social Security; and 0.1% for Local Entities.

However, the Minister of Finance has announced that the Government will approve extraordinary transfers of 18,396 million euros for Social Security and 13,486 million for the Autonomous Communities. That is, the State will assume 31,882 million of deficit of the Social Security and the Autonomous Communities.

Therefore, the reference rate in 2021 will finally be 5.2% for the Central Administration. The reference of the Autonomous Communities will be reduced by half and will stand at 1.1%. Social Security will go from a reference deficit of 3% to 1.3%.

Local Entities will maintain their deficit rate of 0.1%, although thanks to the suspension of fiscal rules they will be able to make use of their remainder and thus contribute to the economic and social recovery of Spain.

Spending ceiling

The Council of Ministers has also set today the limit of non-financial expenditure of the State for 2021. It is a key step for the preparation of the General Budgets that aim to rebuild the economic, social and health damages caused by the pandemic. The minister has indicated that public accounts should also be the vehicle for channeling European funds that allow the design of the transformation of Spain's production model towards greater digitization, a boost to the energy transition and greater gender equality.

All these circumstances mean that the spending ceiling for 2021 is not comparable to that of previous years. In fact, to analyze the spending ceiling, various factors must be taken into account.

In the first place, there is what could be called a homogeneous spending limit, which amounts to 136,779 million. It is 7.2% more than the spending limit approved for 2020. This increase is due to higher items to cover the Minimum Vital Income, increase dependent items, strengthen education or contributions to the European Union. This spending limit does allow comparison with the previous one.

However, several elements must be added that are not equivalent in previous years. This is the case of the extraordinary transfer of 31,882 million to absorb half of the regional deficit and part of the Social Security reference. This item raises the spending ceiling to 168,661 million euros.

In addition, a part of the European funds must be included. Thus, the Minister of Finance recalled that the European Council approved the mobilization of 750,000 million euros, which will be articulated mainly through a Recovery Fund. Specifically, Spain is accounted for 59,168 million from the Recovery and Resilience Mechanism and another 12,436 million from the REACT-EU Program.

The Recovery Plan that Spain will present to the European institutions will collect 25,000 million transfers from the Recovery Mechanism in 2021, which are incorporated into the spending ceiling. In addition, as reported in the Fiscal and Financial Policy Council held yesterday, most of the 12,436 million of the REACT-EU program will go to the Autonomous Communities, although there will be 2,436 million that will be incorporated into the Ministry of Health to later distribute it between territories for the acquisition of vaccines, reinforcing primary care or renewing health supplies.

Therefore, the 2021 spending ceiling will incorporate a total of 27,436 million from European funds, which raises the non-financial spending limit to 196,097 million. Minister Montero has indicated that European funds increase the spending ceiling, but have no impact on the public deficit since they are recognized as income.

With this unprecedented amount of resources, the Government will prepare expansive General Budgets that will make it possible to protect families with a strengthening of the Welfare State and help companies by reactivating the economy.

The Minister of Finance once again invited all political formations to make their contributions to a Budget that, she said, she wants to go ahead with the maximum possible support.

Debt forecasts

Regarding the public debt objectives, the Government expects that at the end of this year it will be around 118% of GDP as a result of the fiscal effort made to mitigate the health, economic and social effects of the crisis and the impact of automatic stabilizers. No additional debt issues will be necessary for this year over those already planned.

Economic situation report

Likewise, the Government has analyzed the report on the situation of the Spanish economy, which reviews the macroeconomic scenario incorporating the latest published data, in an environment that continues to be highly uncertain for the preparation of estimates.

Forecasts for 2020 point to a drop in Gross Domestic Product (GDP) of 11.2%, in line with estimates from the OECD, IMF, European Commission and Bank of Spain.

This downward revision with respect to the one carried out in April in the Stability Program is mainly due to the data recorded in the second quarter, weighed down by the weakness of domestic consumption and investment, as a result of the measures to reduce mobility in the hibernation period of the economy.

In the case of the third quarter, growth is expected to be over 10%, above what was forecast in April.

For 2021, a 7.2% recovery is estimated, not counting the additional effects provided by the Recovery, Transformation and Resilience Plan. The unemployment rate would stand at 16.9%, two tenths better than estimated.

These figures do not include the effects of the aforementioned plan, which may boost growth in 2021 by more than two additional points, reaching 9.8%, as a result of greater dynamism in investment, private consumption, exports and employment. This would allow the unemployment rate to drop further to 16.3%.

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