The latest estimates point to a significant increase in public expenditure on pensions, healthcare and long-term care deriving from the surge in the dependency ratio, which even in the most optimistic demographic projections is set to rise from 25% at present to over 50% by 2050. In the case of the pensions system, the 2011 and 2013 reforms included some adjustments that managed to significantly offset the effect of the expected increase in the dependency ratio in the long term. However, the 2018 Budget and the Budget for 2019 being discussed here today, mark an easing of the entry into force of those mechanisms, as they delay the application of the sustainability factor until 2023 and, in particular, they entail a return to the system of annual revaluation of pensions in accordance with the CPI. According to Banco de España calculations, the permanent reinstatement of this indexation system would entail an additional increase in expenditure of more than 3 pp of GDP in 2050. In consequence, in order to ensure the financial sustainability of the public pensions system, additional measures will be required on the revenue or the expenditure side, or on both sides, to offset that extra burden.
In view of the medium-term challenges posed by the high debt-to-GDP ratio and the impact of population ageing on public expenditure, the process of redressing fiscal imbalances must be compatible with an increase in the quality of public finances. In this respect, the composition of the income/expenditure adjustment in the necessary mediumterm programme is of utmost importance in order to achieve the objectives set without BANCO DE ESPAÑA  14	 TESTIMONY BY THE GOVERNOR OF THE BANCO DE ESPAÑA BEFORE PARLIAMENT IN RELATION TO THE DRAFT STATE AND SOCIAL SECURITY BUDGET FOR 2019  THE QUALITY OF PUBLIC FINANCES  CHART 14  TAX STRUCTURE IN SPAIN  GENERAL GOVERNMENT INVESTMENT % of GDP  % of public expenditure  12  18  10  15  8  12  6  9  4  6  2  3  0  0  100 90  70  75  80  85  90  95  00  05  10  PUBLIC EXPENDITURE IN SPAIN (2017)  80  CONSUMPTION  70 60  CAPITAL  50 40 30 20  LABOUR  10 0  16  2017  GEN. GVT. (% of GDP)  GENERAL GOVERNMENT  SOCIAL SECURITY  GEN. GVT. (% OF TOTAL EXPENDITURE) (right-hand scale)  REGIONAL GOVERNMENT  LOCAL GOVERNMENT  SOURCES: IGAE, INE and Banco de España. hampering economic growth.