The OECD warns of damage to consumption, public spending and business investment growth in Spain

The OECD warned this Wednesday of the damage a rise in interest rates could have on household consumption, government spending and business investment in Spain. In the international context of this threat and weakness, the organization has reduced our country’s economic growth forecast to 1.4% in 2024 (the government’s working expectation of 2%), but hopes to accelerate to 2% in 2025.

In this update of its estimates, our country remains above the average of the Organization for Economic Co-operation and Development (OECD) for the next two years, after leading growth in 2021, 2022 and also in 2023 (which will end with an increase in GDP of about 2.5%), mainly due to the explosion of tourism, the rest Due to good external sector performance, labor market strength and faster moderation in price growth thanks to measures such as gas cap.

The OECD expects average inflation to fall to 3.5% this year, after 8.3% in 2022, and barely rise by a few tenths to 3.7% in 2024, precisely because of the gradual unwinding of its easing measures.

So far, the new coalition government has only said it will renew VAT cuts on food and discounts on public transport in 2024. The restriction on electricity or gas is valid only until the end of 2023. The international organization predicts in its report that these energy measures will not completely disappear until “the first half of next year”.

This issue has been influenced by the OECD, which believes that Spain should make more efforts to reduce the deficit (the imbalance between public expenditure and income). The organization estimates that our country’s deficit will shrink to 3.2% in 2024 and remain at 3.1% in 2025, down from 4.8% in 2023 and skyrocket in 2020.

This is not enough for the OECD. “Intensified and sustained fiscal consolidation is needed to keep debt on the downward path and create space for aging-related spending.” [pensiones] And that improves growth,” he says. “Substantial fiscal support has helped cushion the effects of inflation shocks on businesses and households, but the support should end as planned,” it recommends.

However, the shock of monetary tightening (the ECB’s interest rate hike) is hitting the biggest drivers of the economy: household consumption, government spending and business investment. “The tightening of monetary policy is affecting activity,” he admits.

“Tight monetary policy combined with less accommodative fiscal policy will moderate public and private consumption in 2024,” the OECD said. Likewise, “investment will slow due to tight credit and financial conditions,” he adds. And concludes: “Households are very exposed to rising interest rates because 70% of mortgages are variable. [se actualizan según el Euríbor]”.

New EU tax rules

From January, new EU fiscal rules are due to be released after previous rules were suspended due to COVID. A navy jacket that will surely continue with 3% of GDP targets for deficit (imbalance between government spending and revenue) and 60% of debt due to the difficulty of amending the Maastricht Treaty.

However, they will become medium-term goals. The real commitment remains to move towards them, according to a proposal that community partners are considering. According to the same OECD assessment, Spain is on this path.

Of course, public debt sustainability will continue to be a major concern in the EU due to new fiscal rules and European Central Bank (ECB) rate hikes. But Spain’s public debt is expected to fall to 106.5% of GDP in 2024, from the 107.5% it will end up at in 2023, and below the 109.5% that France will remain at next.

In addition to canceling all anti-inflation measures, in the previous OECD report on our country, it recommended increasing VAT in general, as well as special taxes on tobacco and alcohol and the environment.

Source: El Diario

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