Spain: Positive Fiscal Recovery But Structural Challenges Remain

This commentary analyses the latest available fiscal information for Spain, which suggests a better than expected fiscal performance driven by improving economic conditions. DBRS Morningstar takes the view that this fiscal outperformance is a sign of Spain's resilience, but once these cyclical tailwinds start to fade, further efforts to address structural challenges in public finances may be needed. Given the high level of public debt in Spain rated A (Stable trend) by DBRS Morningstar, which stood at 118.7% of GDP in 2021, the implementation of a credible medium term plan to consolidate public finances on a durable basis and put the debt ratio on a firm downward trajectory will remain crucial to rebuild fiscal space and to improve the country's credit profile. The discussion around potential measures to strengthen the sustainability of the pension system and plans for a comprehensive tax reform, both in the context of the NGEU milestones and targets, present good opportunities to make progress in this direction.

Key highlights include:
• Despite the weaker than anticipated economic recovery, Spain is set to outperform the government’s fiscal projections for 2021.
• A better starting point and still strong cyclical tailwinds should support fiscal repair in 2022/23.
• Once the pandemic setback is behind us, the implementation of a credible medium term plan to tackle the structural deficit will remain key.

“Spain’s public finances appear to be rebalancing faster than anticipated despite a strong but partial recovery. Given that the economy has not fully recovered, relying on cyclical forces to reduce the fiscal imbalance seems appropriate for now, however, tackling the post-pandemic structural deficit will require the implementation of a credible plan and growth enhancing structural reforms,” said Javier Rouillet, Vice President at DBRS Morningstar.