AIREF Lowers Economic Growth Forecasts amid Military Spending Uncertainty
The Independent Fiscal Authority warns of necessary measures for fiscal compliance as global trade tensions affect Spain's growth outlook.
The Independent Fiscal Authority (AIREF) has revised its economic growth forecasts for Spain, projecting a lower growth rate for 2025 and 2026 amid increasing military expenditures and the repercussions of ongoing global trade tensions.
According to AIREF, the Spanish government must take action as early as 2027 to meet European fiscal commitments, largely due to a projected military spending increase to €10.741 billion, which aims to achieve 2% of the GDP in defense by 2025, up from 1.4%.
In its report on the Annual Progress of the Medium-Term Fiscal and Structural Plan 2025-2028 submitted to Brussels in late April, AIREF criticized the government for not updating its macroeconomic framework to reflect the uncertain global economic landscape.
AIREF President Cristina Herrero noted deficiencies in the Structural Fiscal Plan and expressed concern that the latest progress report does not adequately fulfill expectations.
The report addressed commitments for 2024 and 2025 post-factum and provides only partial updates to economic and budgetary forecasts.
The authority pointed out that it lacks the capacity to identify prior risks and guide budgetary policy effectively, prompting AIREF to update its macroeconomic projections.
The authority's analysis diverges from government predictions, which previously suggested Spain could avoid adverse impacts from the trade war initiated by former U.S. President Donald Trump.
AIREF forecasts that the Gross Domestic Product (GDP) will grow by 2.3% this year—two-tenths lower than its prior estimate—and 1.7% in 2026—three-tenths lower—primarily due to a deteriorating external balance.
The authority anticipates a continued gradual slowdown, with growth expected to reach 1.5% by 2029.
In contrast, the government estimates 2.6% growth for 2025 and 2.2% for 2026, seen as overly optimistic by AIREF’s Director of Economic Analysis, Esther Gordo.
This discrepancy is attributed to the government's confidence in national demand's ability to offset the external balance deterioration caused by the trade war, a viewpoint that AIREF contests, noting worse investment outlooks than those posited by the government.
AIREF anticipates that public administrations will register a deficit of 2.8% of GDP in 2025, improving by five-tenths in 2026 due to the phasing out of energy measures and a reduction in non-recurrent operations.
However, from 2027 onwards, the deficit is expected to break its downward trend due to increased spending on interest, gross capital formation, pensions, and defense, while remaining below 3% of GDP until 2029, when it is projected at 2.9%.
Long-term forecasts indicate a rise in the debt-to-GDP ratio starting from the next decade, climbing to 107.2% by 2041.
Regarding new fiscal rules that rely primarily on net primary spending measures, the government reportedly gained five-tenths of GDP in its control account due to lower-than-expected spending in 2024. This additional margin may soon vanish as the government projected a 4.1% spending growth for 2025, exceeding the 3.7% commitment in the Medium-Term Structural Fiscal Plan—largely due to efforts to fulfill defense commitments.
AIREF, however, anticipates spending could rise to 4.5%, effectively using up the gained margin and nearing the limits of the annual control threshold.
Under AIREF’s predictions, accumulated growth for 2024 and 2025 is estimated at 8.8%, compared to the government’s 8.4%, which remains below the overall plan's 9.2% target.
AIREF's report does not provide estimates for spending during the remainder of the PFEMP's validity period until 2028, leading to calls for the government to disclose net primary spending information for better risk assessment.
Despite acknowledging that the Annual Progress Report fulfills European Commission guidelines, AIREF criticized it for lacking sufficient ambition to inform long-term policy effectively.
AIREF urged the government to enhance the report's content to include a comprehensive fiscal scenario to accurately identify risks associated with the commitments outlined in the Medium-Term Structural Fiscal Plan.
The authority also stressed the need for incorporating European fiscal frameworks into national legislation.
According to AIREF, the Spanish government must take action as early as 2027 to meet European fiscal commitments, largely due to a projected military spending increase to €10.741 billion, which aims to achieve 2% of the GDP in defense by 2025, up from 1.4%.
In its report on the Annual Progress of the Medium-Term Fiscal and Structural Plan 2025-2028 submitted to Brussels in late April, AIREF criticized the government for not updating its macroeconomic framework to reflect the uncertain global economic landscape.
AIREF President Cristina Herrero noted deficiencies in the Structural Fiscal Plan and expressed concern that the latest progress report does not adequately fulfill expectations.
The report addressed commitments for 2024 and 2025 post-factum and provides only partial updates to economic and budgetary forecasts.
The authority pointed out that it lacks the capacity to identify prior risks and guide budgetary policy effectively, prompting AIREF to update its macroeconomic projections.
The authority's analysis diverges from government predictions, which previously suggested Spain could avoid adverse impacts from the trade war initiated by former U.S. President Donald Trump.
AIREF forecasts that the Gross Domestic Product (GDP) will grow by 2.3% this year—two-tenths lower than its prior estimate—and 1.7% in 2026—three-tenths lower—primarily due to a deteriorating external balance.
The authority anticipates a continued gradual slowdown, with growth expected to reach 1.5% by 2029.
In contrast, the government estimates 2.6% growth for 2025 and 2.2% for 2026, seen as overly optimistic by AIREF’s Director of Economic Analysis, Esther Gordo.
This discrepancy is attributed to the government's confidence in national demand's ability to offset the external balance deterioration caused by the trade war, a viewpoint that AIREF contests, noting worse investment outlooks than those posited by the government.
AIREF anticipates that public administrations will register a deficit of 2.8% of GDP in 2025, improving by five-tenths in 2026 due to the phasing out of energy measures and a reduction in non-recurrent operations.
However, from 2027 onwards, the deficit is expected to break its downward trend due to increased spending on interest, gross capital formation, pensions, and defense, while remaining below 3% of GDP until 2029, when it is projected at 2.9%.
Long-term forecasts indicate a rise in the debt-to-GDP ratio starting from the next decade, climbing to 107.2% by 2041.
Regarding new fiscal rules that rely primarily on net primary spending measures, the government reportedly gained five-tenths of GDP in its control account due to lower-than-expected spending in 2024. This additional margin may soon vanish as the government projected a 4.1% spending growth for 2025, exceeding the 3.7% commitment in the Medium-Term Structural Fiscal Plan—largely due to efforts to fulfill defense commitments.
AIREF, however, anticipates spending could rise to 4.5%, effectively using up the gained margin and nearing the limits of the annual control threshold.
Under AIREF’s predictions, accumulated growth for 2024 and 2025 is estimated at 8.8%, compared to the government’s 8.4%, which remains below the overall plan's 9.2% target.
AIREF's report does not provide estimates for spending during the remainder of the PFEMP's validity period until 2028, leading to calls for the government to disclose net primary spending information for better risk assessment.
Despite acknowledging that the Annual Progress Report fulfills European Commission guidelines, AIREF criticized it for lacking sufficient ambition to inform long-term policy effectively.
AIREF urged the government to enhance the report's content to include a comprehensive fiscal scenario to accurately identify risks associated with the commitments outlined in the Medium-Term Structural Fiscal Plan.
The authority also stressed the need for incorporating European fiscal frameworks into national legislation.
Translation:
Translated by AI
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