06. 06. 2017 appearance by the governor before the senate in relation to the draft state budget for 2017 luis m. linde governor ladies and gentlemen, in my appearance, which forms part of this chamber ’ s discussion and approval of the state budget for 2017, i shall begin by reviewing the current macroeconomic setting and outlook for the spanish economy. i shall then analyse the main aspects of the state budget for this year, according to the draft law approved by the government on 31 march, and the updated stability programme for the period 2017 - 2020, submitted by the council of ministers to the european commission on 29 april. the external environment of the spanish economy the current international economic setting is characterised by an increase in uncertainty, chiefly the outcome of the political changes in the past year in the united states and the united kingdom. however, that does not appear to have exerted a significant influence, so far, on the real economy, or on the financial markets. both have continued to perform favourably and, despite rising in the final months of 2016, interest rates are holding at stillmoderate levels at all terms. the main exception to this climate of relative stability has been oil prices, which have been highly volatile in recent months. recent economic developments in the euro area show a firming in the recovery, which is progressively extending to more sectors and countries. euro area inflation stood in may at 1. 4 %, after several months of high volatility, the result – among other things – of the oscillations in energy prices. in the medium term, the projections published in march by the ecb, the update of which will be released this very week, suggest a continuation of the recovery in activity and inflation across the euro area. performance of and outlook for the spanish economy the spanish economy grew by 0. 8 % in 2017 q1 and the latest indicators show that the rate of expansion remained high in april and may. the increase in activity in q1 continued to be underpinned by domestic demand, with an acceleration in investment in equipment and construction, and in government consumption, which offset the easing recorded in household consumption. the external sector was highly dynamic, with export and import growth slightly increasing their positive contribution to growth. for 2017 as a whole, the consensus among analysts suggests gdp growth will once again clearly outpace the average for the euro area. next week, the banco de espana will publish new projections for the spanish economy and, on the basis of the latest

trend in public investment as a proportion of gdp, which has already lasted more than a decade, would continue. interest payments are expected to continue to decline as a result of the expected favourable developments in financing conditions, although at a more moderate rate than over the last two years. the increase in revenues included in the stability programme is based mainly on the measures approved in december last year in royal decree - law 3 / 2016. notable among these is the amendment to corporate income tax to broaden the tax base, the increase in duties on alcoholic drinks and tobacco products, the increase of 3 % in the maximum social contribution base and the 8 % increase in the minimum wage. notwithstanding the positive impact of these measures, achievement of the government ’ s medium - term revenue target is subject to some uncertainty, as revenue will need to perform more favourably relative to activity than it would if the historical relationship between these two variables were to remain unchanged. as a result, the performance of revenue and the impact on spending of the plans announced for public - sector employment will need to be monitored over the next few years, so that, in the event of any deviation from the projections, action can be taken in time to avoid the risk of failure to achieve deficit commitments. the importance of budgetary consolidation finally, it seems to me necessary to stress the importance of completing the budgetary consolidation process. the current environment of high growth and low interest rates is a very favourable one in which to reduce the structural budget deficit and public debt to levels more in line with those in the main euro area economies, and this opportunity should not be wasted. the cost of financing public debt ( which still stands at 100 % of gdp ) would be reduced and there would be some scope for fiscal policy to respond to possible adverse scenarios. moreover, consolidation is essential to address the challenge that an ageing population will pose for spending on health, dependency and, above all, pensions. in this respect, the magnitude of the adjustment needed to achieve sound public finances in spain is still significant. hence the need to comply with all the domestic and european budgetary framework requirements. following their strengthening in recent years, this means not only that the budget deficit ( defined in total and structural terms ) and public debt must be progressively reduced, but also that the so - called spending rule must be observed. the spending rule is especially important in the case of those government entities that have already achieved budget balance. 6 / 8 under the rule, neither the budgeted nor the