Published on Friday, October 6, 2023

Spain | Debt and recovery

The increase in public debt in 2020 was necessary and good economic policy. From a macroeconomic point of view, the fact that in the following two years 40% of the acquired debt (in terms of GDP) has been reduced is a sign of the soundness of the measure.

Key points

  • Key points:
  • The public support policies implemented in 2020 were necessary. The fall in demand reached historic proportions: private consumption expenditure fell by 26.2% in the first half of that year, largely not because people did not want to consume, but simply because they could not.
  • The sharp decline in general government debt over the last three years shows the wisdom of having increased it at the time. In 2020, public debt grew by just over 20 percentage points of GDP. About half of the increase in this ratio is explained by the decline in the denominator.
  • A few days ago, the INE revised the GDP series upward, which, all else constant, brings public debt today to 111% of GDP. This means that the decline we have seen since 2020 is the largest ever in a three-year period in Spain's recent history.
  • However, a significant part of this decline has been due to the strong recovery in activity and rising inflation. In the last three years there has been a structural deterioration in public finances, and particularly in spending, that has gone beyond what was necessary to cope with the pandemic.
  • The reduction in public borrowing over the next few years will not be as rapid as in the last three years. The current period of high growth and inflation may be coming to an end. Although price increases still remain high, they are moderating. At the same time, the economy is slowing down, partly because of the measures needed to contain inflation.

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