Spain will continue to reduce its public deficit and grow strongly in 2024, with GDP growth of around 2%

The document, which is published on the website of the Ministry of the Treasury and Public Function and can be viewed here, includes updates to forecasts for the macroeconomic scenario and the evolution of public finances.

Update to the macroeconomic framework

The Budget Plan includes a review of the macroeconomic framework. The Spanish economy made a strong recovery from 2021 onwards and has maintained strong growth throughout 2023, which has already put GDP 2% above the pre-pandemic level. In a context of high uncertainty and lower economic growth in the international arena, the Spanish economy maintains differential growth thanks to the dynamism of the labour market, the positive evolution of the foreign sector, the solid assets of households and companies and the rapid deployment of the Recovery Plan.

These factors explain why the Spanish economy remains strong and resilient in 2023, with a cautious economic growth forecast of 2.4%. In 2024, GDP growth is expected to be 2%, higher than the average for the euro area.

The evolution of the Spanish economy in the coming months will be influenced by two relevant international factors: geopolitical conflicts and the impact of the European Central Bank's contractionary monetary policy. Geopolitical tensions and conflicts are currently the main risk factor for the economy because of their potential impact on energy markets and economic activity in Europe and globally. After a rapid rise in interest rates, monetary policy is starting to succeed in reducing inflation, but it is also slowing demand at the European level.

In a complex international context, Spain will lead economic growth among the main developed countries in the 2023-2024 period, thanks to the deployment of the Recovery Plan and the effects of the economic policy adopted in the past five years, according to the forecasts for the main national and international organisations.

The labour market is performing remarkably well. During the first half of the year, 60% of the total employment generated in Europe was in Spain, largely in R&D, science and ICT. During the period spanning 2023 and 2024, 700,000 full-time jobs are expected to be created. Moreover, unemployment will continue to fall in 2024 to bring the average unemployment rate below 11%, which is particularly relevant in a context of an increasing labour force of around 24 million people in 2024.

The quality of employment will continue to improve, with remuneration per employee rising at higher rates than consumer prices, allowing workers to gain purchasing power during this period. Productivity will also improve as a result of the Recovery Plan reforms.

The dynamism of the external sector reflects one of the main structural changes in the economy, thanks to the strong increase in exports of non-tourism services and gains in competitiveness due to the drive towards digitalisation and energy transition. Greater diversification of goods and services will partially offset the impact of slower economic growth in Spain's main trading partner countries.

Moreover, Spain's net lending capacity will be raised to 3.5% of GDP and the country's net debt position vis-à-vis the rest of the world, which stood at 56.6% of GDP in the second quarter of 2023, the lowest level since 2004, will continue to fall.

The improvement in the financial position of households and companies, thanks to the income support measures and financial guarantees deployed by the Government of Spain, the reduction of their debt and the good performance of employment, together with the improvement in household purchasing power, will allow consumption to accelerate in 2024 and will be one of the main growth drivers of the Spanish economy next year.

The measures adopted to cushion the impact of the rise in energy costs meant that Spain has been among the countries with the lowest inflation and highest growth in the euro area for over a year. Even in a scenario of withdrawal of measures to cushion the impact of inflation, the GDP deflator will continue its decline next year.

Budget Plan with an inertial fiscal scenario

The drafting of the Budget Plan has been influenced by the Government of Spain's acting status, which means that it has limited regulatory capacity and therefore cannot approve a General State Budget Bill or present other legislative initiatives except in duly justified cases of urgent need.

This means that the Budget Plan has been made in an inertial fiscal scenario, i.e. in the absence of changes or new measures. In any case, this does not presuppose that in the future the measures that are in force until 31 December 2023 cannot be adopted or extended, with the aim of mitigating the impact of inflation should this be deemed necessary after assessing the situation with the data available at the end of the year.

On the spending side, some measures are included, because they are considered to be adopted in any scenario. This applies to the revaluation of pensions in accordance with the CPI to guarantee that their purchasing power is maintained, as established by the law approved by the Government of Spain, or the increase in public employees' salaries for 2024, as stated in the General Negotiating Committee of the Civil Service's agreement dated October 2022.

Revenue forecast

The Budget Plan 2024 envisages a revenue forecast in an inertial scenario due to the Government of Spain's acting status. In this context, general government revenues are estimated to represent 42% of GDP, reaching 648.66 billion euros in national accounting terms. This is a slight increase from 41.9% of GDP in 2023.

Taxes are expected to reach 382.755 billion euros, an increase of 7.5% compared to 2023. This increase is similar to that expected this year (7.6%) and is due to the good performance of personal income tax due to the improvement in employment and the increase in pensions. However, this is also the result of other measures adopted this year that will still have a positive impact in 2024, such as, for example, the increase in rates for the highest incomes above 300,000 euros or the impact on corporate income tax of loss compensation being restricted in groups.

For next year, social security contributions are expected to increase by 6.4% due to the dynamism of the labour market and the roll-out of the pension reform.

On the spending side, the Budget Plan envisages reaching 694.268 billion in 2024, or 45% of GDP. This is a reduction from 45.8% in 2023. This evolution of spending is compatible with the revaluation of pensions in line with the CPI, as established by the law passed by the Government of Spain during the last legislature. In addition, it also includes a 2% pay increase for all public employees in 2024. This percentage could be increased by an additional 0.5% depending on the variation of the harmonised CPI, as established in the Framework Agreement for a 21^st Century Administration agreed with the civil service trade unions.

Deficit and debt reduction

The Budgetary Plan shows the Government of Spain's commitment to budgetary stability. This includes a target to reduce the deficit to 3% by 2024, a reduction of more than 7 percentage points in four years.

Within this framework, the document envisages an easing of the deficit for the Regional Governments in 2024, with a rate of 0.1%, as opposed to the balanced budget set out in the Stability Programme from last April. This extra tenth of a percentage point for the Regional Governments will be assumed by the Central Government of Spain, whose deficit rate in 2024 will be 2.9%, compared to 3% in the previous forecast.

In turn, Social Security maintains the 0.2% deficit rate for 2024 that was included in the Stability Programme. Local bodies also maintain the 0.2% surplus for next year that was already included in the document sent to the European Commission in April.

The plan submitted to Brussels also states that the good economic performance will allow the debt-to-GDP ratio to be reduced to 108.1% in 2023, achieving the target of being below 110% a year earlier than envisaged. Next year, this will continue to fall to 106.3%, a reduction of 14 points from its 2020 value.

The economic policy pursued by the Government of Spain in recent years has shown that this significant reduction in the deficit and public debt is compatible with strengthening the welfare state and deploying a social shield to mitigate the impact of rising inflation on the middle and working classes, on the most vulnerable groups and on SMEs and the self-employed.

In this regard, the Government of Spain's efforts to combat inequality are reflected in how various indicators have volved, such as the Gini index, which measures inequality and has been reduced by more than one point since 2018, reaching its lowest level for 16 years. There has also been a narrowing of the gender gap in the activity rate and a progressive increase in the number of women being included on Boards of Directors, which has risen by almost 14 points (from 23.7% in 2018 to 37.5% in 2022).

Impact of the Recovery Plan

A key element for economic policy in 2024 will be to make further progress in rolling out the investments and reforms in the Recovery Plan for Spain, which are key for modernising the productive system, as well as for digitalisation, energy transition, social and territorial cohesion and equality.

Spain is leading the deployment of the Recovery Plan in Europe, having already received 37.036 billion euros from the Recovery and Resilience Mechanism, following the successful completion of 121 milestones and targets out of a total of 416, equivalent to almost 30% of the total.

Calls for grants and tenders for services and works have been processed for 80% of these funds (30 billion euros), which are financing over 500,000 projects throughout Spain, and the Spanish Treasury has already paid out 38.7 billion euros to the managing bodies and final beneficiaries, i.e. more than the European funds transferred by the European Commission so far.

These resources have been deployed through co-governance with the Regional Governments, to which more than 24.3 billion euros have already been allocated since these funds were launched through 159 sectoral conferences or collaboration agreements.

The concentration of reforms and investments during the 2021-2023 period has increased GDP by 2 percentage points since 2021. These has boosted business investment, with 5% growth since their inception, and have accelerated the green and digital transitions. The fact that companies have a sound financial position and momentum is driving developments under the Recovery Plan will allow business investment to continue to grow in 2024.

Non official translation