In the Spanish case, the pension system reforms introduced in recent years have addressed this challenge by, among other measures, putting back the retirement age, introducing a sustainability factor linking the initial pension to the increase in life expectancy and setting in place a new mechanism making the annual rise in pensions conditional upon the system’s revenue and expenditure being balanced, with ceilings and floors duly in place. On the estimates available, in benign macroeconomic scenarios, these reforms would be successful in countering the effect of the expected increase in the so called dependency ratio, the ratio of the population aged over 65 to the working-age population, on pension spending and, therefore, would contribute to restoring the system’s long-term sustainability. 4/9  But, without further increases in the system’s revenue the adjustment mechanism would operate chiefly through reductions in average pensions relative to the average wage, i.e. via a reduction in the public pension replacement rate, thus, raising the issue of the “social sustainability” of the adjustment mechanism. Beyond specific proposals, what remains crucial is that any reform strategy should be transparent, increases the link between intertemporal contributions and benefits of the system and is anchored in an adjustment mechanism that guarantees its financial balance. In this context, a medium-term fiscal programme is needed to complete successfully the fiscal consolidation process. This programme should detail the legislative initiatives needed to achieve the targets and include a prudent medium-term macroeconomic and fiscal revenues forecast.

The session will also discuss how to improve the fiscal governance framework to support the achievement of fiscal objectives in the medium term, both at the national and European  3/9  Union levels. These are crucial issues, and their discussion in this Conference is fully warranted. Let me briefly share with you some thoughts on how we see at the Banco de España the key challenges for the Spanish economy that arise from the domain of public finances. The economic and social impact of the recent crisis has been deep and painful in many aspects, including in the case of public finances. During the past decade, public authorities in Spain had to deal with the challenge of keeping welfare state services functioning, while, at the same time, delivering the necessary fiscal adjustment that could ensure the long-term sustainability of public finances. Between 2011 and 2017, the public deficit-to-GDP ratio was significantly cut, from a peak of 9% in 2011, excluding financial sector assistance, to 3.1% last year. In that process, public expenditure was reduced, as a proportion of output, by more than 3.5 percentage points (pp). Notwithstanding this effort, the historically very high debt-to-GDP ratio of the Spanish General Government sector, currently around 98% of GDP, poses specific risks for economic growth. Economic literature finds evidence that maintaining a very high public debt-to-GDP ratio over a prolonged period tends to hamper economic growth, becoming a source of economic vulnerability, which, in addition, reduces the stabilising capacity of the public budget.