Should there be a greater fiscal adjustment, for example if the structural primary balance improves by 0.5 pp of potential output each year until reaching equilibrium – a path more consistent with the Stability and Growth Pact rules –, public debt could fall to 82% of GDP by 2040. Were this adjustment also accompanied by an ambitious package of structural reforms, the government debt ratio could be around 79% of GDP by 2040. In short, in order to bolster the sustainability of public finances, a multi-annual fiscal consolidation plan will have to be implemented once the pandemic is over and the adverse economic effects of the war in Ukraine have diminished. Although the necessary fiscal adjustment should be carried out gradually, the definition and early communication of this plan – in which all tiers of general government should participate – would be desirable, as this would help boost confidence and certainty about Spanish economic policies. Such confidence is particularly important amid the current context of monetary policy normalisation and the consequent tightening of financial conditions. As part of this plan, government expenditure policies must be subject to an exhaustive review to increase expenditure efficiency and to optimise the distribution between items in order to promote more robust and equitable economic growth. For instance, the weight of education and public investment expenditure in Spain is below the EU average,18 despite the broad consensus regarding the importance of these items to drive economic growth and mitigate inequality.
Of that increase, the return to pension revaluation in line with the consumer price index accounts for 55% to 65%, and the removal of the sustainability factor for 20%. The remaining 15% to 25% would be associated with the fact that, even with the 2013 reform, under the demographic and macroeconomic scenarios considered pension expenditure will grow by between 0.7 pp and 1 pp of GDP between 2019 and 2050. In addition, a permanent increase has been agreed in the transfers from the central government to the social security system, to meet the latter's so-called extraneous expenses, estimated at around 2% of GDP. Higher transfers from the central government serve to correct the current social security system deficit, but evidently have zero impact on public finances overall and, therefore, on their sustainability. Moreover, other measures introduced to align the effective and statutory retirement ages – chiefly a new regime of early retirement penalties and new incentives for late retirement – may alleviate the pension system’s shortfall, but their estimated effectiveness is subject to high uncertainty. The Government estimates an impact, in terms of lower spending, of between 1.1 pp and 1.6 pp of GDP by 2050. Likewise, the repealed sustainability factor will be replaced by the new “intergenerational equity mechanism” which, by means of a specific-purpose increase in social security contributions, envisages bolstering the Social Security Reserve Fund and adopting new measures as from 2032, depending on developments in pension spending relative to GDP.