The public deficit: an insufficient adjustmentThe public deficit: an insufficient adjustment

Now that we are well into the new year, it is a good time to review the trend in the national accounts for 2015 and deduce what might be in store this year. The cumulative deficit of the public administrations up to September 2015 was 4.1% of GDP, only 0.1 pps below the target for the whole year, namely 4.2%. Therefore, although the deficit for Q3 was 0.8 pps below that of one year ago, the adjustment seems insufficient: following the same trend as in previous years, the deficit in 2015 will be in excess of 5%.

This trend in the national accounts is striking as it is occurring within a considerably better economic context than expected in the state Budget (PGE) of 2015.1 GDP growth in 2015 was 3.2% while the forecast in the PGE, according to which the expected target was 4.2%, was 2.0%. Moreover the environment of low interest rates brought about by the ECB also helped to contain expenditure on interest payments (see the table). The improvement in the main macroeconomic variables should therefore have led to a larger reduction in the deficit than initially expected just as, a few years ago, when economic conditions worsened unexpectedly, the deficit target was revised upwards. The surprisingly good growth figures in 2015 might have had a significant effect on the deficit adjustment.

An analysis of the revenue and expenditure of the different public administrations shows that the improved trend in economic activity helped the central government in particular, which saw a notable advance in its tax revenue during the first half of the year (6.1% year-on-year up to June compared withthe 5.4% forecast in the PGE of 2015). However, this boost to tax revenue in the first half of the year led the government to adopt additional expansionary measures not contained in the Budget; namely bringing forward the fiscal reform for income tax initially planned for 2016 and refunding 25% of the civil service bonus payment from 2012.

The impact of the economic upturn on Social Security accounts has also been limited. Revenue from Social Security contributions, for which an ambitious increase had already been budgeted according to the estimates by the Independent Authority for Fiscal Responsibility (AIReF), was affected by new measures offering rebates on employment contracts which limited the growthin revenue. Nonetheless it is important to note that unemployment benefit expenditure fell more than expected as a consequence of a larger drop in the number of unemployed. However, this has not been able to offset the smaller revenue. The need to explore new formulas to ensure the system is sustainable2 should be considered given the likely fiscal deviation in Social Security in a year in which unemployment fell by more than 2 pps, together with factors of a structural nature such as the demographic outlook.

In summary, the fiscal boost received by the Spanish economy in 2015 was notable and helped to improve confidence in the economy's growth capacity. However, the limited deficit adjustment has deferred, for yet another year, the stabilisation of the level of public debt. As this is around 100% of GDP, it is vital to take advantage of tail winds to strengthen the national accounts and thereby be able to adopt counter-cyclical fiscal policies when the economy once again faces a headwind.

1. The deviation by the Autonomous Communities was already expected, as warned by the AIReF in its report of October 2014.

2. See «On the sustainability of the pension system», published in MR01/2015, and «Using the Social Security Reserve Fund», published in MR05/2015.