The IMF demands a fiscal adjustment to Spain of up to 6,000 million in the middle of an election year

One day after the European Commission gave the go-ahead to the Spanish budget, the International Monetary Fund recalls the need for fiscal adjustments, both by way of income and efficiency in spending. On Tuesday, Brussels gave the green light to some public accounts that, according to the Fiscal Authority, will barely lower the deficit next year once the anti-inflation measures are included. This Wednesday, the IMF indicates that in 2023, in the middle of an election year, the Government should undertake a structural fiscal consolidation of between 0.25 and 0.5 points of GDP, between 3,200 and 6,500 million euros, taking advantage of the positive impact that they will have European funds. “It will help boost investor confidence and contain inflationary pressures,” he says. Although he admits that the provisional budget plan contains a reduction in the deficit in the low range, of 0.3% of GDP, he stresses that this will depend on the robustness of revenues and less spending on energy measures in 2023.

It should be remembered that the alternative budget scenario that the Government sent to Brussels, which is considered the main one, contemplated spending an amount similar to that of 2022 on the aid package against inflation. Perhaps for this reason, the IMF recommends targeting measures against inflation to generate savings. As of 2024, according to the Fund, consolidation efforts would have to be increased to achieve at least 0.6 points of GDP per year until the end of the decade, close to 8,000 million euros per year. “It would make it possible to channel the debt and achieve an almost balanced position,” says the Washington-based institution. On this point, it is aligned with the Bank of Spain, which has already requested that the fiscal consolidation effort begin next year in a context of rate hikes, a global economic slowdown and high debt after the covid and the Great Recession. These are the preliminary conclusions published by the IMF technical staff at the end of their visit to Spain to prepare their annual evaluation of the Spanish economy, the so-called Article IV that they carry out for all countries.

“Public finances continued to improve in 2022, but public debt remains high and a sustained consolidation effort would be needed,” the IMF document indicates. Despite the good behavior of collection, the international organization maintains that the high income in proportion to the evolution of GDP “could be temporary and it is prudent to assume that they will decrease over time, at least partially”. The pension item will rise with inflation. And the proportion that must be dedicated to paying the interest on the debt will increase. In the longer term, the aging of the population will strain public finances. For all these reasons, the Fund insists that a plan be carried out to redirect public accounts and the debt.

On the other hand, government aid has cushioned the impact of rising energy prices, acknowledges the IMF. But at the same time, he defends that a greater degree of targeting of the measures would be desirable. Thus, the institution values positively the electric and thermal social bonds, the improvement of the minimum vital income and direct aid to affected sectors. “They benefit the most vulnerable with a relatively low fiscal cost,” he says. However, the agency points out that most of the public support has been devoted to “non-targeted measures that distort price signals.” He mentions as examples of this the lowering of taxes on electricity and the rebate on fuels. “They are expensive and have disproportionately benefited higher-income households,” he adds.

Regarding the Iberian mechanism to cap the price of gas in the electricity market, he points out that it reduces electricity prices, but also moderates the incentives to adjust demand. Although this mechanism also has the positive side that it does not entail a fiscal cost, he emphasizes. Given that gas prices will remain high for some time, in the Fund’s view, support measures should be tailored to reduce demand and contain the tax burden. He recommends checks linked to income or the size of the household, further expansion of social rates with discounts such as the social bonus or rates for consumption brackets, which increase based on use. The international institution welcomes the fact that the support granted to higher-income households is recovered through taxes to ensure the progressivity of the measures.

Although it considers it appropriate to finance relief for vulnerable groups with temporary taxes on high incomes and companies, the Fund stresses that taxes on energy companies and banks are applied to income instead of profits and, therefore, do not take into account count the costs. De la banca says that, despite the fact that it will enter more due to the rate hike, it could also suffer from less favorable economic prospects and more restrictive financing conditions. “Impaired assets could increase substantially in stress scenarios,” he explains. And he warns that it will be important to monitor how the tax affects the granting of credit, its costs and the resistance of the banks. These new taxes should be temporary and not substitute for necessary tax reform, he concludes. This reform should follow the recommendations of the expert report, which pointed to an increase in green taxation and increases in reduced VAT rates, thereby compensating low incomes through spending.

The reduction in gas prices and the Iberian mechanism have contributed to moderating the rise of the CPI. However, there is a transfer of energy prices to the generals. Although for now there are no signs of significant wage increases, the IMF recommends an income pact to help spread the costs and avoid an inflationary spiral. “The loss of purchasing power is inevitable and will have to be absorbed by a temporary decline in real income for households and businesses,” he says.

Regarding pensions, remember that re-linking benefits to inflation and removing the sustainability factor leads to a considerable increase in spending. Extending the pension calculation period and raising the maximum contribution bases “could have a positive financial effect, but the specific details of their design will determine whether they will be sufficient to preserve sustainability,” he stresses.

The body led by Kristalina Georgieva highlights the strength of the labor market and praises the positive results of the labor reform when it comes to increasing permanent employment. However, she explains that it is too soon to assess its overall impact: “It will be important to follow up to determine if it is having the desired effect of increasing employment stability while preserving the flexibility of companies.”

Energy prices, the global slowdown, the deterioration of confidence and more restrictive financial conditions, which greatly affect Spanish mortgage holders due to variable rates, have slowed down the economic recovery. “Growth is expected to be relatively weak in the coming quarters,” anticipate the organization’s economists. Spanish GDP will grow this year a little more than previously forecast by the institution: 4.6% instead of 4.3%. And the next one will slow down to the 1.2% that he had already predicted. As progress is made in 2023, there should be a rebound in activity, thanks to the recovery of services, the disappearance of bottlenecks and the boost of European funds, predicts the Fund.

The IMF places great emphasis on the fact that productivity growth has been lower in Spain compared to its other similar economies, “which has not favored income convergence,” it says. And he attributes it to the greater presence of SMEs, temporary employment and the lack of training. “More efforts are required to address the high number of regulatory thresholds associated with the size of companies and the differences in regulatory frameworks between regions,” he argues. Although the spending of European funds is accelerating, he asks for more information on their execution. And he calls for rising housing prices to be monitored, although at the moment he does not believe it is necessary to activate measures to limit mortgage credit.