Spain's proposed central government budget (PGE in Spanish) for 2014 reveals one highly significant difference compared with previous years: the effort made by central government regarding fiscal consolidation will decrease considerably next year. There are mainly two reasons for this: a less ambitious reduction target for the central government deficit and the expected positive effect of the economic recovery on public accounts.
With regard to the first aspect, in 2014 the central government is required to reduce its deficit by just 0.1 percentage points, from 3.8% of GDP to 3.7%. This is therefore a smaller correction than those carried out in 2011 and 2012, of 0.5 and 0.9 percentage points, respectively. The second factor reducing budgetary requirements is the expected improvement in the Spanish economy in 2014. According to the government, GDP will grow in real terms by 0.7% year-on-year in 2014 and in nominal terms by 2.1%. Since the deficit target is set as a ratio of GDP, with merely an increase in the latter (the denominator), the government deficit will fall by 0.1 percentage points.
Moreover, the recovery in economic activity will also help to improve public sector budget flows. According to the 2014 Budget, higher household consumption will boost VAT revenue by 1.3 billion euros next year (2.5% more than in 2013). But this is no isolated case. According to the Bank of Spain's estimates, 1.0% growth in nominal GDP leads to a 1.3% rise in tax revenue.(1) Direct taxes are the most elastic: for each percentage point rise in GDP, income tax revenue increases by 1.9% and corporation tax by 1.2%. If we apply these figures to the growth in nominal GDP forecast by the 2014 Budget, we can see that, in three out of the four main tax areas, the increase in revenue forecast by the Budget is lower than the figure obtained by using historical elasticity and government projections. It therefore seems that the trend in tax revenue projected by the Budget is relatively conservative. In fact, should there be any deviation from the target deficit this year, next year there will probably be some room to manoeuvre and make up any ground lost.
The smaller fiscal effort expected for 2014 will also help to reduce pressure on central government spending. In fact, on a national accounts basis, the spending budgeted by the central government will increase slightly in 2014. Spending on infrastructures and research, which almost halved between 2010 and 2013, will continue to fall but at a lesser rate.
To sum up, after several years of tough adjustments in central government accounts, the pressure will finally start to ease. This circumstance, however, must not jeopardise the commitment to carry out fiscal consolidation. Public debt will exceed 100% of GDP in 2015, a level at which no last-minute surprises can be afforded.
(1) See Banco de España, la nueva Ley de Estabilidad Presupuestaria. Boletín Económico, April 2013.