Dealing with a change in the economic growth pattern, high unemployment and the need for fiscal sustainability

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1 Dealing with a change in the economic growth pattern, high unemployment and the need for fiscal sustainability Elena Martín Córdova Doha, November

2 General Outlook I. Special features of the Spanish crisis and the fiscal stimulus Plan. II. The impact of the crisis on the budget. III. Main challenges for the budget: The need for fiscal sustainability. Public debt. The exit strategy. 2

3 I. Special features of the Spanish crisis and the fiscal stimulus Plan 3

4 Special features of the Spanish crisis: property bust and non financial crisis There is a double crisis in Spain: The international global crisis- The Spanish Economy is the second most open economy in Europe. The internal housing slump- Adjustment more severe than expected. Main features of the Spanish crisis: The property bust. High unemployment. Sound banking sector: there haven t been any bank bailouts. 4

5 Spanish Plan to stimulate the economy and employment 1. Families 2. Companies 3. Employment Plan E Strategic items 4. Financial and budgetary measures 5. Economic modernization Coordinated with the European Economic Recovery Plan. More than 100 measures included. Fiscal measures amounted to 1,8% of GDP in 2008 and to 2.3 % of GDP in

Spain had a good fiscal position at the beginning of the crisis Growing surpluses 2005-2007 As a percentage of GDP Public debt in the EU 2008 As a percentage of GDP 2,5

6 Spain had a good fiscal position at the beginning of the crisis Growing surpluses As a percentage of GDP Public debt in the EU 2008 As a percentage of GDP 2,5 2,0 1,5 1,0 0,5 0,0-0,5 2,0 2,2 1, ,0 100,0 80,0 60,0 40,0 20,0 0,0 105,7 65,6 67,1 50,1 ITALY GERMANY FRANCE UNITED KINGDOM 68,7 EUROZONE 39,8 SPAIN 6

7 Job creation measures Local Investment Fund for Local Authorities (In 2009: 8 billion / In 2010: 5 billion) Fund for Economic Reactivation ( 3 billion) Tax allowances in the Corporate Income Tax to boost employment Measures to support strategic sectors, for example, the automobile industry. 7

8 Financial Measures Main goals: to underpin the financial sector and to prevent a financial institutions crisis to inject liquidity into the financial system Budget fund to buy assets: billion Public guarantee of 100 billion Deposit guarantee fund has been raised to 100,000 per client and per bank Fund for Ordered Bank Restructuring ( 9 billion) 8

9 II. The impact of the crisis on the budget 9

10 The economic downturn has affected public finances Crecimiento en varios países de la UE Tasa Economic de variación growth in EU countries (%GDP) Saldos presupuestarios en varios países de la UE Porcentaje Budget del PIB deficits forecasted for 2009 (%GDP) 4,5 3,5 2,5 1,5 0,5-0,5-1,5-2,5-3,5-4,5-5,5 ITALIA ALEMANIA FRANCIA REINO UNIDO ZONA EURO ESPAÑA (F) 2010 (F) Fuente: Comisión Europea, FMI, Proyecto PGE 2010 Source: European Commission and Spanish Draft Budget Alemania Reino Unido Francia Italia España (p) Fuente: European Commission, Economic Forecast, spring Para España 2009, proyecto PGE Source: European Commission and Spanish Draft Budget

11 The functioning of automatic stabilizers during the crisis During 2008: There was a significant difference between the budget passed and the execution. Quick reaction of automatic stabilizers. Expected surplus Deficit in budget execution In 2009: Free functioning of automatic stabilizers An increase in unemployment benefits A fall in tax revenues (emphasized by previous fiscal allowances) Budget for 2010: The recovery may start but the consequences of the crisis in the labour market will continue. 11

12 Strong impact on the labour market Unemployment TASA DE PAROrate Media anual UE EU Zona Euro Euro zone España Spain EEUU United States (E) 2009(P) 12

13 Fiscal revenues Evolución de los ingresos del Estado En millones de euros Fiscal revenues trend (Million Euros) (p) 2010 (p) 13

14 III. Main challenges for the budget 14

15 Challenges for the budget: the need for fiscal sustainability (I) Real GDP -0,3 1,8 2,7 Public budget balance (% GDP) -8,4-8,1-5,2-3,0 Spending limit for 2010: Homogeneous non-financial spending (Million Euros) 3,9%

16 Challenges for the budget: the need for fiscal sustainability (II) From the side of public spending: Austerity measures. From the revenue side: increase taxes, fiscal benefits, strong fight against fiscal corruption Interests and other nof discretionary spending 27% Unemployment benefits 9% Intereses y otros gastos no discrecionales 27% Is there any fiscal space? Local Fund 2% Desempleo 9% Fondo local 3% Other spending 2% Otros gastos 2% Ministries Spending 30% Gastos ministerios 30% Transfers Financiación AATT to 29% subcentral Governments 29% 16

17 Public debt Deuda pública Porcentaje del PIB Public debt (%GDP) Zona Euro Direct impact on the budget (interests burden). According to the EU, new medium-term plans are neccesary to reduce the public debt < 60% GDP % intereses/presupuesto no financiero Estado España CCAA (f) Public finances sustainability needs to incorporate longterm perspective

18 Exit strategy: A change in the economic growth model The exit strategy should take into account what cause the current crisis: An economy excessively dependent on one sector. Shift to a sustainable economic pattern based on: R+D, infrastructures and education. Changes in the legal framework: Sustainable economy draft law Draft law to make the service sector more dynamic The withdrawal of the fiscal stimulus measures will be gradually not to hamper economic growth 18

19 Final remarks Is this a cyclical crisis or a crisis of the economic model? New role for the budget New role for the State 19

20 Thank you so much 20

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