In the case of the pension system, the 2011 and 2013 reforms included a progressive raising of the retirement age, the application of the sustainability factor, which links the initial pension to the increase in life expectancy, and an annual revaluation index for pensions, with their increase conditional upon the system’s revenue and expenditure being in balance. These reforms were geared to gradually correcting the system’s current shortfall, significantly countering the effect of the expected increase in the dependency rate in the long term. However, the latest legislative developments appear to be moving towards relaxing the application of the current re-balancing mechanisms, the sustainability factor and, above all, the annual revaluation index for pensions. A return to inflation-indexed pensions would, on Banco de España calculations, give rise to an increase in public spending of over 3 pp of GDP in 2050 compared with the scenario based on the strict application of the revaluation 8/14  index. Ensuring the system’s financial sustainability would therefore require including additional measures on the revenue or on the expenditure sides of the system. In any event, it is desirable that any reform strategy chosen should increase the system’s transparency, strengthen its contributiveness (i.e. the relationship between contributions and benefits) and, in particular, maintain an automatic adjustment mechanism that ensures the sustainability of the population’s future pensions.
Challenges facing the Spanish economy First, regarding fiscal policy, let me stress that maintaining high public debt over a prolonged period may have negative effects on economic growth: it raises financing costs for the economy; it makes it necessary to run substantial primary surpluses that demand higher tax levels or lower levels of productive spending; it lessens the room for countercyclical fiscal policy measures to address potential adverse shocks; and it is a source of vulnerability in the face of changes in market investor sentiment. Accordingly, resuming fiscal consolidation is a priority, so as to enable the progressive reduction of the public debt/GDP ratio and of the structural deficit, in line with the demands of European and national fiscal rules. The fiscal consolidation process should, moreover, be compatible with an improvement in the quality of public finances. The adjustment needed should be anchored in a mediumterm programme in which the measures allowing the attainment of budgetary objectives should be spelt out, along with a prudent macroeconomic and public revenue forecast. Furthermore, the composition of the adjustment takes on particular importance, as it should be conducive to a greater contribution of public finances to the economy’s potential growth. Population ageing is also a challenge of the highest order for the sustainability of public finances. Specifically, the latest estimates of its impact on public spending on pensions, health and long-term care reveal a significant increase in expenditure on these areas over the next three decades.