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The Government has increased public spending by two points since the start of the pandemic

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The Government has increased public spending by two points since the start of the pandemic

Organizations and analysis bodies are beginning to warn of the risk that Spain will maintain much of its economic growth potential through increased public spending. GDP recorded an increase of 0.8% during the third quarter of 2024, according to the INE, supported by an increase of 2.23% in public administration consumption, almost two points above -1, 91 points – the level recorded five years ago, before the outbreak of the pandemic. The increase in public spending achieved this year is such that Funcas bases the upward revision of its GDP forecast, up to 3%, on “the greater contribution of domestic demand, among which public consumption stands out, more expansive than expected. he admitted last week.

He shock We will start to notice it from next year. The structural budget plan that the government sent to Brussels a few weeks ago establishes strict limits on public spending capacity. “A moderation in public consumption is expected, since European tax regulations, as well as market surveillance, limit budgetary room for maneuver,” anticipates the Funcas analysis. With this, there will be a slowdown in economic growth, a result of the lower contribution of administrations to GDP.

The government recognizes in the document agreed with Ursula von der Leyen that the economy will slow down from 2025. It will grow by 2%, or seven tenths less than expected for this year, due to the loss of dynamism in the sector audience. BBVA Research forecasts that the weight of public consumption on GDP will increase from 3.9% in 2024 to the 2.7% expected for next year. For its part, the Bank of Spain estimates that the rate will be 1.7% in 2025 and will fall to 1.5% the following year. With this, the Economía intends to reduce the spending ceiling in accordance with the rule sent. From the 3.7% increase described for next year, the path will decrease until reaching the 2.4% estimated for 2031. marking an average of 3% over the next seven years.

However, the organization led by José Luis Escriva has been warning for months that the advance in public spending “could make it difficult to comply with the European Commission’s recommendation to our country regarding limiting the growth of net spending to 2.6 % in 2024. “. The institution had warned some time ago that behind the revival of the economy in 2023 lay the muscle of public investment.

Recipe for crisis

However, and although Moncloa is obliged to reduce the level of public consumption as quickly as possible, this recipe has been essential for Spain to have managed to position itself – along with the United States – as the developed country that has shown the highest level of consumption. growth rate in the world, as recalled last week by the Financial Times.

This data supports the strategy applied by the Sánchez government to combat the Covid crisis. Increasing public investment by 28% between 2019 and 2023 was key to GDP surpassing pre-pandemic levels last year. To realize this, it is enough to compare the behavior of the economy in the face of the last two major crises: that of 2008, and that of 2020. The austerity decreed by the European Union during the Great Recession caused public investments. 23%, leading to a contraction in GDP of 3.6% between 2007 and 2011. “In crisis situations, the most frequent response is to allow oneself to be dominated by the short term and to reduce investments more than the short term. current expenses”, underlines the BBVA Foundation in a report produced in collaboration with the IVIE.

The response to Covid has been very different. The approval of the “New Generation” by the Community Executive and the economic aid measures promoted by Moncloa succeeded in stopping the impact on GDP and employment, which was limited to the year 2020 , unlike what happened during the crisis of 2007, when just six years later, in 2013, GDP stopped its decline and the recovery began.

In the years to come, rising private consumption will fill the void left by reduced public investment. The budget plan estimates that the increase in the active population, employment and the expected improvement in productivity will result in a rebound in purchasing power which will increase household spending. “Growth will be based on domestic demand, particularly private consumption,” estimates the Bank of Spain in its latest macroeconomic projections report. “The expected revaluation of financial assets, the reduction of debt and the rise in real estate prices will contribute to the increase in net worth (5.3% per year),” adds the BBVA analysis service.

For its part, Funcas highlights two variables for next year. It anticipates a limited increase in gross fixed capital formation and estimates that companies will maintain a positive financing capacity (difference between disposable income and investment) equivalent to 1.5% of GDP.

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