Testimony by the Governor of the
Banco de España before Parliament
in relation to the Draft State
and Social Security Budget for 2019
Pablo Hernández de Cos
Governor

Ladies and gentlemen,
For the first time I am appearing before you in this Chamber as part of the process to discuss
and approve the State and Social Security Budget for 2019 (hereinafter "Draft Budget").
During my address I shall first be reviewing the developments in and the macroeconomic
outlook for the Spanish economy, within the international context. I shall then offer my
views on the main aspects of the Draft Budget for 2019. To conclude, I shall mention what
are, in my opinion, the fiscal policy challenges our country faces over the coming years.
1 MACROECONOMIC FORECASTS FOR THE SPANISH ECONOMY
The Banco de España's latest macroeconomic projections for the Spanish economy were
published on 14 December last year,1 taking as a reference the information available at
end-November. These projections were part of the joint exercise conducted by the
Eurosystem central banks, whose results for the euro area were released by the European
Central Bank (ECB) a day earlier.
1.1 External environment and financial conditions
The forecasts are produced drawing on information that characterises the context of the
Spanish economy (in particular regarding the international environment and monetary and
financial conditions) (see Table 1). According to these assumptions, the expected course
of activity in and imports from the main geographical areas with which Spain trades were
revised downwards over the course of 2018. The resulting growth rates for Spain's export
markets in 2019 were estimated at slightly over 3%, a similar rate to that forecast for 2018,
but significantly lower than that observed in 2017. The price of oil per barrel is expected to
stand below $70 on average in 2019, 6% less than in 2018. Finally, I should stress that
borrowing conditions for households and firms are expected to remain easy.
Allow me to go into greater detail on some of the above. Regarding the international
environment, the world economy admittedly ended 2018 maintaining a broadly expansionary
course. But the signs of an across-the-board slowdown are evident, albeit more marked
in some regions than in others. Largely, this is in response to the partial materialisation of
certain focal points of uncertainty, assailing the world economy since early last year.
These include most notably the trade tensions between the United States and China, the
uncertainty over the terms of the United Kingdom's withdrawal from the European Union
(EU) and some tightening of global financial conditions. The first of these factors, namely
trade tensions, have already been reflected in the lower growth of global trade in 2018
(4%, compared with 5.3% in 2017), which does not prevent them from continuing to pose
a significant downside risk, subject to the future of the international negotiations currently
under way.
FORECASTS FOR THE SPANISH ECONOMY: ASSUMPTIONS ON THE EXTERNAL ENVIRONMENT TABLE 1
AND FINANCIAL CONDITIONS
Annual rate of change (%) unless otherwise specified
2013 2014 2015 2016 2017 2018 2019
International environment
World output 3.4 3.5 3.3 3.1 3.6 3.6 3.3
Spain's exports markets 2.7 4.4 4.1 2.3 4.9 3.1 3.3
Oil price in dollars/barrel (level) 108.8 98.9 52.4 44.0 54.4 71.8 67.5
Monetary and financial conditions
Dollar/euro exchange rate (level) 1.33 1.33 1.11 1.11 1.13 1.18 1.14
Spain's nomial effective exchange rate vis-à-vis the world including
the euro area (2000 = 100 and percentage differences)
112.3 113.8 110.6 113.2 114.6 117.9 118.0
Short-term interest rate (3-month EURIBOR) 0.2 0.2 0. -0 0. -3 0. -3 0. -3 0.3
Long-term interest rate (10-year bond yield) 4.6 2.7 1.7 1.4 1.6 1.4 1.8
SOURCES: ECB and Banco de España.
Global financial conditions, which were exceptionally favourable in previous years, have
begun to go into reversal. They have done so more acutely in certain particularly vulnerable
emerging market economies, and relatively moderately - to date - in the advanced
economies where share prices have fallen and corporate debt spreads have risen since
mid-2018.
Against this background, consumer price indices have tended to post significant
slowdowns in the final stretch of 2018, which are mainly due to the notable recent decline
in oil prices.
In the euro area, the lesser pace of economic activity in the first three quarters of 2018 led
the ECB, in December, to revise down its growth forecast for the year to 1.9%, 0.6
percentage points (pp) less than in 2017. Discounting the effect of certain transitory
factors, such as strikes, bad weather and, more recently, the temporary difficulties in the
automobile industry, especially in Germany, and the "yellow jackets" crisis in France,
everything points to a significant slowdown in the pace of expansion of the euro area in
2018 compared with 2017. Of particular note is the sluggishness of exports, weighed
down by the moderation of global trade and by the possible lagged effects of the
appreciation of the euro. Conversely, domestic demand appears to have remained firmer,
at least until the most recent period, underpinned by the favourable financial conditions
and the growth of employment and of household and corporate income. According to the
latest ECB forecasts, the expenditure of these agents will continue to allow GDP growth
rates in the euro area to remain somewhat above their potential over the coming years.
However, it cannot be ruled out that the increase in political and trade uncertainty may
ultimately constrain the growth of business investment plans. This is especially the case in
certain economies, such as Italy, where some signs of a tightening in financial conditions
are already discernible, in a setting in which Italian public debt yields have, since spring
last year, held at relatively high levels.
The lower rate of growth in the euro area has contributed to delaying the prospect of a
pick-up in the core component of euro area inflation somewhat. And compounding this
has been the effect of the recent decline in oil prices on overall inflation. In these
circumstances, the ECB's monetary policy maintains a markedly expansionary stance,
aiming to prompt the convergence of inflation, in the medium term, towards rates of
increase in prices that are below but close to 2%. Backing this trajectory is the foreseeable
progressive widening of the output gap and the increase in labour costs observed in
recent quarters.
At this moment, once the Eurosystem has ceased to acquire new assets under its
purchase programme, the expansionary stance of the common monetary policy at the
start of this year has been mainly determined by two developments: the ECB Governing
Council's announcement that interest rates would remain unchanged at least until the
summer of 2019; and the reinvestment over a prolonged period (in any event, for the
time needed to prompt the sustainable convergence of inflation on its medium-term
reference) of the financial securities acquired under the ECB's quantitative easing
programme.
1.2 The Spanish economy: developments and outlook
In this setting, in 2019 the Spanish economy will remain on the expansionary course on
which it embarked six years ago. But there will be a further easing in its growth rate, to
2.2%, compared with the increase of 2.5% estimated for 2018 (see Table 2). The
expected slowdown is largely in response to the weaker international setting I mentioned
earlier. Nevertheless, the Spanish economy has, in recent quarters, proven significantly
resilient, slowing to a lesser degree than our main area of reference, namely the euro
area. The contributing factors include, among others, the boost to household income
arising from the entry into force, in the second half of 2018, of certain measures included
in the Draft Budget for 2018.
The continuation of the current upswing in 2019 will continue to rest on the expansion of
domestic demand (see Chart 1). Underpinning this will be: financial conditions that are
expected to remain relatively favourable; an improvement in the financial position of
households and firms; the gains in competitiveness observed throughout the recovery;
and the strength of the employment creation process. It is expected that employment
creation will slow this year, partly owing to the lesser pace of activity, but also to the
increase of more than 22% in the national minimum wage. In any event, according to the
Banco de España's projections, the annual growth in numbers employed will stand at
around 1.6% in 2019, providing for further reductions in the unemployment rate, to around
14% at end-2019 (see Chart 2).
All told, there are grounds for a progressive slackening of economic growth in Spain over
the coming years. These are, namely: the recent easing in global growth, which is proving
FORECASTS FOR THE SPANISH ECONOMY: COMPOSITION OF OUTPUT GROWTH CHART 1
GDP. ANNUAL GROWTH AND CONTRIBUTIONS NET EXTERNAL DEMAND. CONTRIBUTIONS
Projections
% Projections
%
4.0
4.0
2.0 2.0
0.0 0.0
-2.0 -2.0
-4.0
-4.0
2011 2012 2013 2014 2015 2016 2017 2018 2019
2011 2012 2013 2014 2015 2016 2017 2018 2019
IMPORTS OF GOODS AND SERVICES
NET EXTERNAL DEMAND NATIONAL DEMAND
EXPORTS OF GOODS AND SERVICES
GROSS DOMESTIC PRODUCT
NET EXTERNAL DEMAND
SOURCES: INE and Banco de España.
CHART 2
FORECASTS FOR THE SPANISH ECONOMY: EMPLOYMENT AND UNEMPLOYMENT
GDP GROWTH(%)
UNEMPLOYMENT RATE
Contributions of employment and labour productivity (pp)
(% of the labour force)
Projections
Projections
4
28
25
2
22
0 19
16
-2
13
-4 10
2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019
LABOUR PRODUCTIVITY EMPLOYMENT GDP
SOURCES: INE and Banco de España.
particularly marked in the euro area; the progressive normalisation of monetary and
financial conditions; and the very limits on the growth of domestic demand, such as, for
example, those derived from the current, historically low levels of the household saving
rate. On Banco de España estimates, the Spanish economy's already positive output gap
will widen during 2019 (see Chart 3).
The recent course of consumer prices in Spain has once more been greatly influenced by
the behaviour of oil prices. These fell strongly in the closing months of 2018 and account
for the decline in the year-on-year rate of change in the harmonised index of consumer
prices (HICP) to 1.2% in December. Relative to expectations, moreover, the latest
November and December figures were a surprise on the downside, largely - but not
exclusively - due to the behaviour of energy prices (see Chart 6). Conversely, core inflation,
which excludes the more volatile elements such as energy and fresh food, continues to
stand at around 1%, but it is expected to begin to rise in 2019 as GDP growth rates remain
above potential. The opposing trajectories of the energy and core components will
determine how prices trend in the coming years. In terms of the overall indicator, prices will
slow in 2019 (see Table 2).
FORECASTS FOR THE SPANISH ECONOMY: CYCLICAL POSITION CHART 3
SPANISH OUTPUT GAP
ECONOMY'S
% of potential GDP
6
4
2
0
-2
-4
-6
-8
-10
1 995 2001 2007 2013 2019
SOURCE: Banco de ESpaña.
FORECASTS FOR THE SPANISH ECONOMY: BUDGET DEFICIT CHART 4
GENERAL GOVERNMENT BALANCE
% of GDP Projections
0
-1
-2
-3
-4
-5
2 016 2017 2018 2019
SOURCES: IGAE and Banco de España.
The projections report published in December also included a forecast of the Spanish
general government deficit for 2019, consistent with the macroeconomic and financial
picture I have just described, with the deficit then being estimated at 2.4% of GDP (see
Chart 4). Nonetheless, as indicated in the report, this estimate was subject to greater than
usual uncertainty, as a result of the indefiniteness surrounding the budgetary cycle at the
information cut-off date for the exercise, in late November. In particular, at that time neither
the Draft Budget for 2019 nor the plans for the creation of the new taxes announced in the
October 2018 draft budgetary plan had been submitted to Parliament, meaning that
uncertainty over the scope and details of the new measures persisted.
Consequently, the assumptions for budgetary policy in 2019 did not include these new
measures. The only exceptions were those measures that had already been approved (the
tax reductions in Royal Decree-Law 15/2018 of 5 October 2018 on urgent measures for the
energy transition and the protection of consumers, and the impact of the Supreme Court
ruling of 5 October 2018, which stipulates exemption for maternity benefits for personal
income tax purposes), or those that were more clearly defined since they were in response
to specific agreements (the inflation-linked rise in pensions, and those relating to public-
sector employment and wages).
In the fiscal policy arena, moreover, I should like to point out that the latest budgetary
outturn figures appear to confirm an exit scenario from the Excessive Deficit Procedure in
FORECASTS FOR THE SPANISH ECONOMY: MAIN RISKS. A MORE UNFAVOURABLE EXTERNAL ENVIRONMENT CHART 5
GDP GROWTH FOR 2019 LONG-TERM IMPACT OF A "NO-DEAL" (a)
% % deviation from baseline scenario
3.5 0
3.0
-2
2.5
-4
2.0
-6
1.5
-8
1.0
-10
0.5
0.0 -12
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 United Kingdom EU-27
UNITED STATES EURO AREA IMF (JUN-2018) BANK OF ENGLAND (NOV-2018)
SOURCES: Consensus Forecasts, IMF and Bank of England.
a Deviation in the level of cumulative GDP in 5 years, the time considered necessary to reach the new "long term". The two simulations assume a "no-deal" that
includes a long-term scenario under WTO rules.
FORECASTS FOR THE SPANISH ECONOMY: MAIN RISKS. SURPRISES ON THE DOWNSIDE FOR INFLATION CHART 6
OVERALL INFLATION OIL PRICES
% Projections Dollars/barrel Projections
70
3
65
2
60
55
1
50
0
45
40
-1
35
-2
30
2013 2014 2015 2016 2017 2018 2019
2016 2017 2018 2019
LATEST PUBLISHED PROJECTIONS PROVISIONAL UPDATE ASSUMPTIONS USED IN LATEST PUBLISHED PROJECTIONS
UPDATED PROJECTIONS
SOURCES: ECB, INE, Reuters and Banco de España.
which Spanish general government has been immersed since 2009, as part of the
"corrective arm" of the EU's Stability and Growth Pact. Specifically, the budget deficit is
expected to be below 3% of GDP both in 2018 and 2019.
1.3 Main risks and elements of vulnerability
The macroeconomic and financial scenario I have just sketched, which prolongs the
expansionary phase of the Spanish economy, is, however, subject to certain downside
risks. It should also be added that these risks have tended to increase recently and are
being reflected in sharper downward revisions of analysts' opinions on the outlook for the
global economy in 2019 (see left-hand panel of Chart 5).
In the international sphere, as I have already mentioned, some of the elements
which have already adversely affected activity in recent quarters may have even more
unfavourable effects in the future. Such is the case, for example, of the possible adoption
THE MACROECONOMIC PROJECTIONS FOR THE DRAFT BUDGET CHART 7
REAL GDP GENERAL GOVERMENT BUDGETARY BALANCE
Rate of change (%) % of GDP
4
0
3
-1
-1.3
2
-2
-2.1
-2.4
1 -3
0 -4
2017 2018 2019 2017 2018 2019
STATE BUDGET 2019 BANCO DE ESPAÑA (DECEMBER 2018) CONSENSUS FORECAST
SOURCES: Consensus Forecasts, IGAE, INE, State Budget 2019 and Banco de España
of additional protectionist measures by some countries and of the potential responses
to them by other economies. Nor can we rule out fresh tensions linked to the changes
in US monetary policy, particularly in those economies with a high dollar-denominated
debt and, in general, in the international financial markets. Also, the final terms of the
UK's exit from the EU continue to be highly uncertain, with possible adverse effects on
the euro area (see right-hand panel of Chart 5), where, moreover, uncertainty regarding
the fiscal policy of certain countries persists. All these elements may contribute to a
strengthening of the decelerating trend in world trade and activity which is already
under way.
In Spain, this deceleration has already caused some deterioration in the economy's
current-account deficit. The compatibility of strong domestic demand with an ongoing
external surplus has unquestionably been one of the most positive features of the
current upturn, compared with previous ones. However, some of the factors which
favoured the strong performance of the external balance have tended to lose steam
recently, as is the case of the higher energy bill during much of 2018 due to oil price
rises and the weaker tourism flows from the rest of the world. In the future, persistence
of the recently observed moderation in activity on a global scale, particularly in the euro
area, or a hypothetical increase in the cost of funding Spanish external debt will pose
risks for the performance of the external balance. At the same time, the need to reduce
the still-high external debt makes it essential for the Spanish economy to keep running
external surpluses in a sustained manner.
1.4 Macroeconomic projections of the Draft Budget
The Draft Budget is based on macroeconomic projections of real GDP growth in Spain of
2.2% in 2019, down 0.4 pp from the 2.6% projected by the government for 2018, while the
increase in nominal GDP is estimated at around 3.8%. This growth projection and its
composition are generally consistent with the baseline scenario of macroeconomic
projections for Spain published by the Banco de España in mid-December and with those
of most analysts (see left-hand panel of Chart 7).
However, I would like to point out the two risks which I consider most significant for the
macroeconomic scenario of the Budget.
First, the macroeconomic projections of the Budget include an adjustment to the budget
deficit clearly exceeding that expected by other analysts (see right-hand panel of Chart 7).
In particular, the deficit target for general government as a whole stands at 1.3% of GDP
in 2019, which is a reduction of 1.4 percentage points (pp) with respect to the envisaged
final figure of 2.7% for 2018. By contrast, the projections of the Banco de España and of
most analysts, as reflected by the Consensus Economics Forecasts, put the deficit for
2019 above 2%. Therefore, if the greater fiscal efforts required to meet the deficit target for
general government as a whole included in the Draft Budget, amounting to 1.3% of GDP,
were included in the projections of other analysts, their economic growth estimates for this
year would be liable to a risk of downward revision.
Second, as I noted when looking at the macroeconomic scenario, the overall economic
slowdown is becoming stronger, particularly in the euro area, which poses downside risks
to the macroeconomic scenarios of the Draft Budget and of the Banco de España.
I now review the main courses of action defined by the Draft Budget for budgetary policy
in 2019.
2 DRAFT STATE AND SOCIAL SECURITY BUDGET FOR 2019
Meeting the deficit target of 1.3% of GDP for general government as a whole included in the
Draft Budget depends largely on the projected growth of taxes and social security
contributions. On official estimates, the additional revenue would be sufficient to finance a
significant portion of the proposed increase in the spending of the State (observing the ceiling
set by the Council of Ministers), the social security system and regional and local government.
Regarding the behaviour of government spending, many, albeit not all, of the measures in
the Draft Budget, were included in the budgetary plan published by the government in
October 2018, which moreover provided the expected broad outline of the budgets for the
rest of general government. The budgetary plan projected an increase in overall government
expenditure in 2019 of 3.1% (in National Accounts terms), below nominal GDP growth for
that year, thus allowing a corresponding reduction of the budget-deficit-to-output ratio.
2.1 Main public spending measures
The Draft Budget includes an increase in public-sector employee compensation of 2.25%
in 2019, plus an additional 0.25% if GDP growth in 2018 is equal to or higher than 2.5%,
and other additional funds for specific targets and bodies. The hiring policy of the past two
years remains in place, with replacement rates being increased in some sectors and
additional measures being taken on working hours and temporary contracts. As regards
social benefits, the Draft Budget includes a rise of 1.6% in State pensions and growth of
3% in minimum and non-contributory pensions in 2019, and an increase of 4 pp in the
regulatory base of widows' pensions. Other spending measures are the reinstatement of
unemployment benefits for persons over 52 years old, more funds for dependent persons
and the extension of paternity leave to eight weeks.
The Draft Budget exhaustively details the other spending measures and priorities, which I
shall not repeat here for the sake of brevity. In all, in 2019 State expenditure will, in
accordance with this Draft Budget and in budgetary accounting terms, grow by 6.7% with
respect to the budget outturn projection provided for 2018 (see Chart 8). By component,
PUBLIC SPENDING IN THE DRAFT STATE BUDGET CHART 8
PRIMARY EXPENDITURE (a) PENSION EXPENDITURE (a)
As % of annual change Projections As % of annual change Projections
10
10
5
8
0
6
-5
-10
4
-15
2
-20
-25 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
STATE GENERAL GOVERNMENT
SOURCES: IGAE, Plan Presupuestario 2019, State Budget 2019 and Banco de España.
a Cash-basis outturn data, 2018 Budget outturn projection and initial 2019 Budget, except general government spending, which is National-Accounts-based.
among the payments subject to greater discretionality, purchases of goods and services
will grow by 2.7%; capital expenditure by 7.9%; and expenditure on staff by 4.8%. Among
the expenditure items influenced by the behaviour of the financial, macroeconomic or
demographic fundamentals, interest payments in cash terms will grow by 4.6% in 2019,
while, in the social security budget, spending on contributory pensions will increase by
5.3% and that on unemployment benefits by 1.2%.
The targets for the less discretionary items taken as a whole are in line with the estimates
of the models used by the Banco de España. This is particularly so for pension expenditure
(the behaviour of which is determined by the increases agreed for 2019 and population
ageing), unemployment benefits (which depend mainly on the behaviour of unemployment)
and interest in National Accounts terms (which reflects the behaviour of government debt
and of interest rates).
2.2 Projected revenue in the Draft Budget
On the revenue side, a broad set of legislative changes is proposed, including notably
an increase in personal income tax and in wealth tax at higher income levels, the
establishment of a minimum rate of 15% of taxable income for large corporations, the
limitation of double taxation exemptions, and an increase in hydrocarbons tax, focused
on diesel. On official estimates, these changes would raise government revenue by
some €2.8 billion in 2019. Also, the Draft Budget includes the new taxes on financial
transactions and certain digital services, with an officially estimated impact on revenue
of some €2 billion in 2019.
The Draft Budget revenue projections are also affected by the introduction in July 2017 of
the system known as "immediate supply of VAT information" (SII by its Spanish initials).
Among the changes entailed by the new system in 2017 was the delay in the filing of VAT
self-assessments (from the 20th to the 30th day of the month following the accrual), which,
for accounting purposes, meant that the revenues for a month that would previously have
been included in 2017 were actually included in 2018. Under the Draft Budget, with the
new system firmly established, in 2019 the filing of VAT self-assessment will be put back
to the 20th day of the month, so that there will be an opposite effect to the one in 2017.
CHART 9
REVENUE FORECAST IN THE DRAFT BUDGET
EFFECTIVE SOCIAL SECURITY CONTRIBUTIONS
REVENUE (a)
As % of annual change Projections
As % of annual change Projections
10
10
8.2
8 6.9
6.9
6
5
5.6 5.0
4
2
0
0
-2
-5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
STATE BUDGET 2019 STATE BUDGET WITHOUT ICS (b)
STATE BUDGET 2019 WITH HIST. ELASTICITY (c)
WITH HIST. ELASTICITY (c)
SOURCES: Agencia Tributaria, State Budget 2019 and Banco de España.
a Sum of shared taxes (personal income tax, corporate income tax, VAT and excise duties) plus effective Social Security contributions.
b Immediate supply of VAT information. In 2019, the submission date for VAT self-assessments shall be brought forward from the 30th to the 20th each month.
This will mean that, for that year, revenue takings will cover 13 months, instead of 12.
c Historical elasticities estimated by the European Commission.
Overall, the Draft Budget assumes growth in tax revenues and social contributions of
8.2%, in budgetary terms, as a result of the entry into force of the measures announced,
the effect of the above-mentioned SII and the growth in the tax bases, which basically
depend on the macroeconomic situation (see Chart 9).
These government revenue estimates are subject to significant downside risks, in National
Accounts terms, arising from various considerations.
First, the higher revenues under the new VAT SII system are not passed through to National
Accounts items. Under European law - specifically, Article 2 of Regulation (EC) No
2516/2000 - the impact on the general government deficit of taxes and social contributions
must follow the accrual principle. This means that taxes should affect the deficit of the
period in which the taxable events giving rise to the tax payments take place. Applying this
regulation, the VAT accrued in 2017 and collected in 2018 was recorded in 2017 and, in a
similar manner, the increases in revenue included in the Draft Budget due to the effect of
the SII would not affect the general government deficit in National Accounts terms.
Second, although there is always some uncertainty regarding the response of government
revenues to tax bases (elasticity of taxation), the Draft Budget projections seem to be
based on higher elasticities than have been recorded on average in the past. This
consideration is based on the Banco de España's estimation of a set of standard models
for the main items of government revenue (personal income tax, VAT, corporate income
tax, social contributions and excise duties). These items are made to depend on the
growth in the macroeconomic bases of the Draft Budget for 2019, with an impact
proportional to the tax elasticities estimated by the European Commission and the
Organisation for Economic Co-operation and Development (OECD), to which should be
added the effect of the measures I have already described, taking the impact on the Draft
Budget estimated ex ante. According to these calculations, the aggregate collection of
shared taxes and social contributions would increase by 5.6% in 2019, as compared with
the increase projected in the Draft Budget of 6.9%, correcting for the effect of the SII in
both cases (see left-hand panel of Chart 9). The main source of this discrepancy is the
difference in the projected social contributions (see right-hand panel of Chart 9).
The third source of risk for projected revenues that I wish to highlight relates to the fact that
the estimation of the revenue impact of the new taxes is subject to a high degree of
uncertainty, given the absence of any data on how they have functioned in the past.
Finally, caution should be exercised in relation to the potential delay in the entry into force
of the measures accompanying the Draft Budget, which adds a further risk for expected
revenues in 2019.
2.3 The government deficit target and the fiscal policy stance in 2019
Having discussed the spending policies and revenues of the Draft Budget separately I will
now consider them together, in order to assess the uncertainty surrounding achievement of
the deficit target of 1.3%. For this purpose, economists at the Banco de España have
conducted a preliminary updating of the December projections, which I have already
considered in detail. In particular, the impact on these projections of the revenue and spending
measures that have been included in the Draft Budget since then is estimated, resulting in a
general government deficit of around 2% of GDP in 2019, as compared with the Banco de
España's December projection of 2.4%. Moreover, the economic growth forecast would be
revised down slightly, mainly as a result of incorporation of the impact of the tax measures.
This tentative estimate suggests that achievement of the official deficit target of 1.3% in
2019 is subject to far-from-negligible risks.
A smaller revenue impact of the new taxes than officially estimated, a delay in the entry
into force of the tax measures included in the Draft Budget or potential materialisation of
the downside risks to the economic growth outlook that I have already discussed would
raise the projected deficit. On the other hand, a more dynamic response by tax revenues
to macroeconomic conditions than historically estimated or a containment of discretionary
spending would have the opposite effect.
In any event, the Banco de España will publish a complete estimate at the end of March,
including an update of the macroeconomic projections with all the information that has
become available since the last projection exercise was conducted in December.
As regards the fiscal policy stance in 2019, derived from these preliminary estimates and
measured by the change in the general government structural balance, it would be roughly
neutral. The level of the structural deficit would stand at around 2.5% of GDP, according to
the Banco de España's estimates, similar to its value over the last five years and higher than
in 2013-14, which implies that practically the entire reduction observed in the government
deficit since 2013 has been due to the effect of the business cycle (see Chart 10).
Although the general government "structural deficit" is not directly observable and,
therefore, its calculation is based on assumptions subject to a high degree of uncertainty,
it is a useful indicator of the underlying state of public finances. This indicator will,
moreover, play a more important role in the new phase of fiscal policy due to begin, in
the event that the EU Council eventually rules that Spanish general government is no
longer in an excessive deficit situation. As I have already mentioned, the latest data
point in this direction.
In fact, exiting the "corrective arm" of the EU's Stability and Growth Pact would involve
Spain automatically entering the "preventive arm". Countries in this situation remain
THE BUDGET DEFICIT TARGET AND THE FISCAL POLICY STANCE IN 2019 CHART 10
GENERAL GOVERNMENT STRUCTURAL BALANCE STRUCTURAL BALANCE CHANGE
% of GDP % of GDP
4.0
0
-1
3.0
-2
2.0
-3
-4
1.0
-5
0.0
-6
-7
-1.0
-8
-2.0
-9
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
BANCO DE ESPAÑA (WITH 2019 STATE BUDGET MEASURES) 1.3% DEFICIT FULFILMENT
SOURCES: European Commission, IGAE, 2019 State Budget and Banco de España.
GENERAL GOVERNMENT DEBT IN THE DRAFT BUDGET CHART 11
PUBLIC DEBT
BREAKDOWN OF GENERAL GOVERNMENT DEBT
% of GDP
120
2017 2018 2019
100
Debt as a % of PIB 98.3 96.9 95.4
80
Debt change
(as GDP pp)
-0.7 -1.4 -1.5
60
Due to:
40
Balance 3.1 2.7 1.3
20
GDP nominal rate of change -4.2 -3.6 -3.7
0
Flow-stock adjustment 0.5 -0.6 0.9
75 78 81 84 87 90 93 96 99 02 05 08 11 14 17
PUBLIC DEBT 2019 STATE BUDGET FORECAST
SOURCES: Banco de España and 2019 State Budget.
subject to a set of rules restricting fiscal policy which, in Spain's case, would mean that:
first, the structural government deficit would have to be reduced each year by 0.5 pp of
GDP, under normal conditions, until the medium-term objective (MTO) of structural balance
were achieved; second, the annual growth of general government spending would have to
be less than or equal to the economy's potential medium-term growth; and, finally, the
government debt-to-GDP ratio would have to be reduced each year by one twentieth of
the difference between its level and the target of 60%. Given that the debt ratio stood at
98.3% of GDP in 2017, the latest year for which data are available, this rule would require
an average annual reduction of 1.5 pp of GDP over the next decade.
2.4 Government debt in the Draft Budget
According to the Draft Budget,