On Wednesday, the Independent Authority for Fiscal Responsibility (Airef) revised its growth forecasts for Spain, projecting a GDP increase of 2.3% in 2025 and 1.7% in 2026. These figures reflect a downward adjustment of two and three-tenths of a percentage point, respectively, compared to its previous outlook.

This revision diverges from the Spanish government's claims, which maintain growth estimates of 2.6% and 2.2% amidst escalating commercial tensions with the United States.

Airef's adjustments, as articulated by its president, Cristina Herrero, are primarily attributed to the adverse effects of the ongoing trade war initiated by the administration of former U.S. President Donald Trump.

Herrero emphasized that this external risk should not be overlooked when assessing macroeconomic scenarios.

The government's position, as presented in its fiscal plan to the European Commission on April 30, contends that the trade war will only detract a marginal one-tenth from the country’s GDP growth in 2025. They posit that strong domestic demand and investment will adequately compensate for the impact of uncertainty.

In contrast, Esther Gordo, head of Airef's Economic Analysis Division, has characterized the government's outlook as overly optimistic, asserting that internal demand may not sufficiently offset the anticipated downturn.

Airef has forecasted a more tempered growth trajectory, citing heightened risks associated with external insecurity that may weigh heavier on the Spanish economy than previously anticipated.

However, the authority acknowledges that Spain is likely to be relatively better equipped to withstand such uncertainty, estimating a GDP growth of 1.5% for 2027.

Besides GDP growth, Airef also expressed differing views from the government regarding public finances.

While it concurs that the public deficit will remain below 3% of GDP until 2028, it warns of a deterioration in the fiscal trajectory post-2026. For the next two years, a positive budgetary balance is expected, yet structural pressures are anticipated to emerge subsequently.

These pressures include rising interest payment burdens due to increased financing costs, public investment demands, defense expenditure, and population aging, all of which could hinder fiscal consolidation and slow the decline of public debt.

The discrepancies in macroeconomic assessments have raised questions, particularly regarding the government's obligation to secure Airef’s endorsement for its projections.

Herrero noted that the government incorporated updated forecasts in its fiscal plan report without seeking formal approval from Airef, which, while not mandatory, would benefit from technical discussion.

The most recent macroeconomic forecasts approved by Airef were published in September 2024, prior to a changing geopolitical and economic landscape.

Under the new European fiscal rules emphasizing net public expenditure growth, Airef suggests that Spain has some short-term fiscal leeway but will require more stringent measures starting in 2027 to remain compliant.

Due to lower-than-anticipated expenditure in 2024, attributed in part to a lack of approved budgets, the Spanish government gained a cushion of five-tenths of GDP (approximately €7.5 billion) that could be accessed later under EU regulations.

Nonetheless, this margin is poised to shrink as the government anticipates a public spending increase of 4.1% in 2025, mainly driven by rising defense spending, with Airef projecting an even higher increase of 4.5%, which could quickly consume the buffer.

As a result, while Airef argues no immediate additional measures are needed for 2026, adjustments may be imperative in subsequent years.

Special attention must be given to defense spending, which is viewed as a potential upward risk factor.

Spain has pledged to escalate its military expenditure to 2% of GDP by year-end, amidst NATO's advocacy for that figure to rise further, possibly approaching 3%.

Herrero cautioned that increases in military investment will impact overall public spending, deficit, and public debt.

While the authority posits that enhancements in defense will stimulate economic activity, the multiplier effect is expected to be less than one, indicating that the growth generated will be lower than the expenditure.

The government maintains that these investments can be accommodated within existing budgets through reallocation, yet this may involve utilizing previously unallocated funds for 2025, directly affecting public accounts.

Herrero pointed out that this maneuver, while legally permissible, raises concerns as it represents a covert reform of the General Budgetary Law.