The President of the Institute of Economic Studies, Íñigo Fernández de Mesa, and its General Director, Gregorio Izquierdo, today presented a report dedicated to public debt in Spain, which includes the high level of indebtedness of our country, located in 97.6% of GDP in 2018. The document shows that, despite the fact that the economy has expanded in recent years at rates much higher than its potential growth, an annual average of 3%, among the years 2015 and 2018, fiscal imbalances have not yet been corrected forcefully.
The level of public debt affects economic growth in a non-linear manner, triggering its negative effects from a certain threshold. Thus, a high degree of leverage by the public sector makes the economy more vulnerable to adverse shocks, reduces the margin to carry out a countercyclical fiscal policy response and increases uncertainty about debt payment, in addition to the fact that it can move the private sector from access to financing and modify the behavior of economic agents if they anticipate future tax increases. In addition, states are forced to allocate a significant part of their income to the payment of interest. Spain allocates more than 6% of its budgetary income to the item ‘national debt service’.
The fact of belonging to the eurozone and being under the umbrella of the ECB and the euro, together with the current situation of interest rates, and with very lax monetary policies, such as the purchase of public debt by the ECB itself, is masking some risks. These measures by the monetary authority to keep rates at record lows and the systematic purchase of public debt have brought the cost of borrowing in the euro countries also to their lowest levels, apparently without taking into account the fundamentals of the economy of each country. In fact, Spain is issuing new debt with negative returns for maturities at five years and below, which is still an anomalous situation that will reverse over time as the ECB begins to normalize its monetary policy.
During these years, governments have neglected the adoption of the structural reforms and measures necessary to undertake the reduction of our debt. A unique opportunity to correct budgetary imbalances and tackle the problem of excessive indebtedness has been lost. Moreover, it has been the opposite, everything has been entrusted to the growth and laxity of monetary policy, and budgetary consolidation has been neglected. But we cannot lose sight of the fact that unconventional monetary policy is designed for an extraordinary situation and cannot last forever. However far the ECB normalization process may seem, it will come. One must look at the long term and recover the principles of economic orthodoxy, giving an additional boost to fiscal consolidation to finally achieve a credible and consistent path of surpluses, taking advantage of the fact that the cycle still maintains a positive tone. Otherwise, the next bearish cycle will reach us in a vulnerable position, without monetary or fiscal ammunition.
The factors that influence debt sustainability are, fundamentally, economic growth, the cost of debt, the stock of said debt and the primary fiscal balance. From them you can specify those endogenous factors on which a country without monetary sovereignty has the capacity to influence to improve the sustainability of the debt, which are essentially the risk premium, economic growth and fiscal balance. The potential growth needs structural reforms that affect factor and product markets, especially in a context, such as that of the Spanish economy, with low productivity and demographic aging. The reduction of the structural deficit will require adequate budgetary consolidation, while the risk premium tends to experience tensions when the institutional and regulatory climate is not stable and predictable. In addition, these factors are, in turn, interrelated. For example, it should be noted that an improvement in potential growth due to the implementation of appropriate reforms can contribute to reducing the deficit.
According to recent evidence of our environment and the latest studies, the fiscal consolidation processes that are carried out through the improvement of the efficiency of public spending and through the containment of spending are less harmful for the growth of the economy and employment , and are perceived for much less time, than when fiscal consolidation is undertaken by way of increasing taxes, which has a greater negative impact on private investment and the trust of agents, extending its negative effects for several years . In addition, within this containment of public spending, there is ample room to improve its efficiency and equate with the best practices within the international public sectors, which can contribute to a fiscal saving compatible with the maintenance of the quality of the services.
Debt Day
On the other hand, this document includes the adaptation made by the Institute of Economic Studies for Spain of the report on the state of public accounts in the twenty-eight countries of the European Union, which is annually carried out by the Institut Économique Molinari. Under the title of the Debt Day, the report indicates that December 9 is the date on which public revenues end up being able to finance public spending in our country, and as of this date public spending must be financed via public deficit , with the consequent increase in public debt.
The calculation of the Debt Day for 2018, carried out with Eurostat data, shows that the most bulky negative budget balance of the EU was the one harvested by Cyprus (November 24). The second place goes to Romania (November 30), while Spain closes the top three, with which the income of our AA.PP. they finance only public spending made from January 1 to December 9. Eleven countries of the EU-28, despite having deficits, present a better budgetary picture than Spain, while the other fourteen achieve a positive budget balance; that is, a fiscal surplus that allowed them to finance all public spending of 2018 with the resources achieved that same year, income that was sufficient to pay part of the 2019 expenditure. The average of the AA.PP. of the EU reaches its Debt Day on December 25, which only covers six days a year with debt.