Spain is running out of fiscal space to deal with future crises such as wars or pandemics

Spain is running out of fiscal room to respond to future crises such as wars or pandemics, according to recent analyses. Since entering the 2020s, the country has faced a rapid succession of economic shocks, including an unprecedented pandemic, volcanic eruptions, historic snowfall, severe flooding in Valencia, and two major conflicts that triggered an energy crisis. In response to these challenges, the government has had to draw heavily on its budget to cushion the blow for citizens. According to the Airef, the pandemic alone cost 35 billion euros in fiscal terms, while aid packages related to the war in Ukraine exceeded 40 billion euros. The damage caused by the DANA flood in Valencia amounted to around 12.5 billion euros, with additional spending of approximately 8.6 billion euros linked to the conflict in Iran, as estimated by the Bank of Spain. The increasing cost of financing public debt is restricting the government's ability to provide support during potential future emergencies. According to estimates from the Funcas research center, the cost of interest payments will rise by 46 percent over the next five years, reaching nearly 63.779 billion euros by 2031. This increase is due to the higher average rate of new debt issuance, which stands at 3.41 percent compared to the current average rate of 2.45 percent for existing debt. Funcas warns that economic growth projections suggest a slowdown starting in 2027, prompting the organization to urge administrations to create immediate budget cushions. Current forecasts indicate that the Spanish economy will grow by 2.5 percent this year and 1.8 percent in 2027, but a progressive deceleration is expected, leaving growth at 1.7 percent by 2028. This decline is largely attributed to high inflation rates, which are projected to reach 3.7 percent this year and 3.1 percent next year. Even if inflation decreases, financial factors could hinder expectations and lead to additional expenses that would strip the government of its maneuvering space during new crises. According to Funcas' central scenario, the analysis assumes that inflation will drop to 2 percent by 2029, and 10-year bonds, expected to average 4 percent annually in 2027, will fall to 3 percent by 2030. Without adjustment measures, the public deficit will inevitably exceed the European Union’s limit of 3 percent of GDP starting in 2030. This would result in an increase in interest payments from around 43.5 billion euros in 2026 to 63.7 billion euros by 2031. In the long term, the debt-to-GDP ratio, a key indicator of a country's financial health, is expected to decrease slightly from 98.1 percent this year to 96 percent in 2029 before stagnating. Although this appears positive, the level remains above the EU reference threshold of 60 percent, meaning Spain owes almost as much as it produces in a year. As the debt does not continue to decline, the economy lacks a safety buffer to handle future emergencies, similar to how it managed the pandemic or the effects of recent wars. Raymond Torres, director of Cyclical Analysis at Funcas, emphasizes the urgency of creating and increasing budget cushions to avoid losing all fiscal maneuverability in the future, particularly during the current phase of growth. These risks extend beyond macroeconomic impacts, affecting the purchasing power of Spaniards. With inflation at 4.9 percent and wages rising by 3.6 percent, families are experiencing a loss of real purchasing power. To maintain their standard of living, household spending has grown by 6.3 percent, above their disposable income, which has reduced their savings rate to 10.9 percent.