Spain will grow 4.6% this year, three tenths more than previously forecast, according to estimates by the International Monetary Fund (IMF), which congratulated the Government on Wednesday for its social measures but highlighted the need to control the debt.
The agency left projections for 2023 unchanged, at 1.2%, a year in which inflation is expected to “gradually moderate” due to the normalization of world fuel prices.
In the coming quarters there will be “relatively weak” growth due to the deterioration of consumer confidence, but in 2023 it will pick up and by 2024 production will already have reached pre-pandemic levels.
The data for 2022 is even higher than the forecasts of the Spanish Government (4.4%) and is extracted from the analysis of a regular mission that the IMF carried out to the country. It is also higher than the forecasts that the agency offered in October, at its last annual meetings.
“The unprecedented public support measures adopted in 2020–22 have helped protect businesses and households,” the Fund says in a report that highlights the recovery of the labor market, with pre-pandemic levels, and the strong tourism performance.
However, the IMF indicates as a priority that the Government reduce the excessive public debt that it has accumulated, precisely as a consequence of social policies.
These economic prospects “are subject to great uncertainty” due to the evolution of the war in Ukraine, although “the risks are mostly on the downside” due to Spain’s low dependence on Russian gas and its well-developed liquefied natural gas infrastructure. .
Social policies but with control of public debt
In its report, the institution led by Kristalina Georgieva highlights the “timely display of public support” with policies such as social bonds or the increase in the minimum vital income, which has cushioned the impact of the sharp rise in energy prices, although “a greater degree of targeting of the measures would be desirable”.
And it is that, adds the IMF, “most of the fiscal support has been allocated to non-targeted measures and that distort price signals”, such as reductions in the tax on electricity and the rebate on fuel, which have They have been costly from a fiscal point of view and have benefited higher-income households.
“Support policies must be adapted in order to provide adequate incentives to reduce demand and increase supply, while containing fiscal costs” and for this reason the use of direct transfers is preferable, instead of the application of measures of Price reduction.
And it is that the IMF points out that the government’s response to the pandemic was “very effective but at the same time expensive” and therefore warns that public debt is too high.
For this reason, the agency recommends a moderate reduction in the primary structural fiscal deficit for next year —from a quarter to half a percentage point of GDP— to help alleviate price pressures and reaffirm the commitment to fiscal discipline. This would mean an adjustment of between 3,000 and 6,000 million euros.
A recommendation that is in line with the Government’s plan, which contemplates in its budgets a reduction of the structural deficit of 0.3 percentage points.
“A sustained consolidation effort would be needed to rebuild the fiscal cushion,” to create room to respond to negative shocks in the future, he adds.
Undertaking discretionary fiscal consolidation in 2023 “will help boost investor confidence and contain inflationary pressures,” the agency adds.
Taxation and finance
In fiscal matters, the IMF describes as appropriate measures such as the increase in taxes on energy companies and banks, as well as on companies and high-income households that have been less affected by the energy crisis to finance support for the most vulnerable.
Although, he adds, it will be important to monitor the incidence of taxes on the availability of credit, credit costs and the resilience of banks, as well as on investment incentives for energy companies.
These measures, he points out, “should be temporary and should not be considered as a replacement for the necessary tax reform in the medium term” that could “help to forge the necessary social consensus and shore up investor confidence.”
Although the financial sector has weathered the pandemic and the fallout from the war in Ukraine well so far, the worsening macroeconomic outlook and tightening financial conditions are likely to erode borrowers’ ability to pay in the future, the IMF says. .
These are highly exposed to rising interest rates, given the high proportion of variable-rate mortgages (approximately 75% of all mortgages). Higher interest rates will also increase the financial burden on businesses, and the impact will be more severe for small and medium-sized enterprises (SMEs).
Regarding labor, the fund ensures that the labor reforms approved in December 2021 are yielding positive results in terms of permanent employment growth, but it is too early to assess their general impact.
And he points out that it remains important to keep policies focused on raising productivity in order to improve living standards, help rebuild fiscal buffers and make growth more inclusive.