Spain | Primary balance: a fiscal milestone built on still fragile foundations

Summary

Public finances could achieve a balanced primary budget this year, marking an important step toward sustained debt reduction. However, part of this improvement is due to cyclical causes. In addition, the possible slowdown in the economy and lower inflation work against this reduction.

Key points

• Key points:
• Without additional measures, fiscal consolidation and debt reduction are likely to proceed more slowly in the years ahead.
• In 2025, the Spanish economy may achieve the milestone of balancing its public accounts, excluding interest costs.
• In other words, the overall deficit could settle at around, or even below, 2.5% of GDP, an amount fully attributable to debt‑service expenditures by the public sector.
• The Spanish public deficit has narrowed partly because of cyclical factors tied to the current favorable economic cycle. Lower unemployment has helped cut specific expenditures, notably spending on unemployment benefits. Likewise, improved profits have supported higher tax revenues.
• However, this situation could be reversed in a less favorable context. BBVA Research estimates that without the cyclical boost from the strong economy, the public deficit would hover near 3.5% of GDP, while the primary balance would remain in deficit by about 1% of GDP.

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