The Bank of Spain warns of the impact on GDP and the deficit if public consumption is not moderated in 2024

The Bank of Spain has warned that if public consumption does not slow down in 2024, there would be a risk for the growth forecast of the Gross Domestic Product (GDP), but also for the public deficit.

For this year, the Bank of Spain assumes a moderation in the pace of growth of public consumption, in the context of the European recommendation for cost containmentaccording to the latest quarterly report published by the organization a few days ago.

Furthermore, finally the extension of the 2023 Budgets for this year will favor some containment of public spendingsince there will be budget items that, in the absence of public accounts, cannot be executed.

Specifically, the estimates of the organization directed by Pablo Hernández de Cos indicate that, after growing by 3.8% in 2023, this item will slow its momentum in 2024 to 1.2% and will stand at 1.7% and 1.5% in 2025 and 2026, respectively.

But the report warns that greater public consumption than estimated in this central scenario would mean a additional pressure on public accountswhich would reaffirm the need to undertake a rigorous process of fiscal consolidation in Spain.

The progress of the National Accounts for the fourth quarter of 2023, together with the review of data from previous quarters, have provided a considerable surprise rising in relation to the behavior of public consumption.

Thus, for the year as a whole, this item would have increased by 3.8% in real terms – compared to the 2.2% forecast in the Bank of Spain’s projection exercise in December – a rate much higher than that observed in 2022. and even during the period of greatest incidence of the pandemic.

Both the remuneration of employees and the rest of the public consumption items would have contributed to this acceleration, which can also be seen in nominal terms. In this way, as a percentage of potential GDP, public consumption would have been at a level very close to historical maximum that it reached in 2009.

Looking ahead to 2024, the agency has warned that, to the extent that the recent evolution of this item – over whose determinants there is considerable uncertainty – may not respond to transitory factors, such as possible expenses related to the NGEU program or other measures temporary in nature, this greater public consumption would put additional pressure on public accounts, which would reaffirm the need to undertake a rigorous fiscal consolidation process in Spain.

For its part, the estimates for private consumption are the opposite. In fact, it is expected that this factor, together with investment, will be the main drivers of Spanish economic activity in the coming years.

After moderating somewhat more than expected in the last months of 2023, private consumption would have maintained a pace of 2024 at the start of 2024. similar growth to that of the fourth quarter of last year.

This progress would be supported, among other factors, by the strength that the labor market continues to show, by the high starting levels of the savings rate and by the gradual recovery of the consumer confidenceparticularly those located in the middle and high income strata.

In any case, the recent evolution of the consumer credit and automobile sales suggests that the boost to consumption provided by household spending on durable goods would be declining.

Looking ahead to the coming quarters, in a context of progressive moderation of inflationary pressures, relative robustness of the labor market and somewhat more favorable financial conditionsfamily spending is expected to continue its expansionary trend, so that the pace of growth of this component of demand would be, for this year as a whole, somewhat higher than that observed during 2023 (1.8%).

Specifically, the Bank of Spain’s estimates suggest that private consumption will increase by 2.3% in 2024; 1.9% in 2025 and 1.7% in 2026.