Spain | Public debt digs in its heels: the tailwinds peter out

Summary

Spanish public debt will come down very slowly over the coming years and is at risk of stagnating at around 100% of GDP. It seems that the extraordinary conditions that helped it come down have been squandered to promote reforms that would lead to a more robust path of fiscal consolidation.

Key points

• Key points:
• While one can optimistically argue that public debt exceeded 120% just five years ago, that the economic recovery resulting from this reduction is partly a product of the fiscal support that took place during the pandemic, and that this improvement has coincided with an environment of high interest rates, the fact remains that the structural reality is somewhat less encouraging.
• The trend in public debt largely depends on the differential between economic growth and the cost of borrowing, provided that the primary deficit remains low. If economic growth exceeds the cost of borrowing, debt falls and this is precisely what happened between 2021 and 2024.
• Meanwhile, inflation has been converging towards 2%. If it consolidates at that level, the real interest rate will rise to values close to 0.5%. In parallel, economic growth is slowing.
• In this new environment, the gap between growth and the real cost of debt will remain positive, but will narrow dramatically. This limits the automatic adjustment of debt and puts the focus on the fiscal component.
• BBVA Research’s forecasts suggest that the structural primary deficit – the one consistent with trend growth – is close to 1.5% of GDP. Therefore, a reversal of the tailwinds driving growth, interest rates and inflation, prompting a return to fiscal imbalances greater than those we are currently seeing, could push up debt even further.

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