The empirical evidence reveals that maintaining a very high level of public debt for a prolonged period tends to hamper economic growth as it becomes a source of vulnerability and reduces the scope for the public budget to act as a stabiliser in the event of a recession. The simulations made in a number of papers published by the Banco de España show that, on realistic assumptions, the process of reducing Spain’s government debt will be very gradual. It may even take several decades to reach a debt-to-GDP ratio of 60%, which is the reference value in Europe’s current fiscal rules. In the light of these considerations, priority should be given to taking advantage of the current favourable economic context to reduce the vulnerabilities deriving from the public finances and create budgetary room for manoeuvre with which to address future crises. These efforts should be given the form of a medium-term programme spelling out the measures enabling the budgetary objectives to be met, and a prudent macroeconomic and public revenue projections. This process of reducing the fiscal imbalances also needs to be compatible with an improvement in the quality of the public finances. In this connection, the composition of the programme’s revenue and expense adjustment is very relevant to achieving its objectives without hindering economic growth. Combining fiscal consolidation efforts with other structural reforms should also help in this respect. Reducing the vulnerability of Spain’s public finances is even more important when we consider the medium and long-term challenge posed by population ageing.

The structural reforms undertaken in Spain over the course of recent years have helped make the economy more robust and adaptable to adverse situations. This is particularly desirable in an increasingly changeable and uncertain global environment. One of the key elements providing greater resilience and flexibility is the labour-market reform, which gave businesses more internal flexibility. This flexibility provides additional tools with which to adjust labour costs in the event of a short downturn instead of the traditional mechanism whereby workers – mainly those on temporary contracts – are laid off. Other reforms have also encouraged better allocation of funds by the financial system to new, higher potential, investment projects. These include financial system reform and insolvency law reform, in particular. Despite these changes, the Spanish economy still faces major structural challenges that limit its potential growth. I would like to highlight three of these challenges: population ageing, the high unemployment rate, and low productivity growth. Population ageing has consequences for the effectiveness of traditional macroeconomic policies, the sustainability of the public finances, and productivity growth. Addressing this challenge requires a multidisciplinary policy that creates incentives for older workers to remain in the labour force, revises migration policy to try to adapt it to the needs of the labour market, and boosts the birth rate to bring it closer to rates in other European countries by improving the work-life balance and enhancing job stability in the childbearing years. Meanwhile, the high unemployment rate remains a serious drag on growth and welfare.