The Revenue Agency returns to office and urges the Government to carry out an “overall” reform of the national tax framework, adapting it to the new European regulations which came into force this year and which Spain has not yet adapted to its own legislation. “There is a large margin for improvement,” the president of the organization, Cristina Herrero, said at a press conference on Monday, listing the weaknesses and shortcomings of the current rules, which came into force more than ten years ago to deal with a situation very different from the current one: the sovereign debt crisis. The economist recalled that the spending rule, analyzed in a medium-term time horizon, is the new reference variable of the community framework, and that by virtue of this change of perspective, both communities and large municipalities should have different deficit objectives each year, instead of a single objective set by subsector at an aggregate level. “The stability objective must be consistent with the spending rule,” he added.
The issue is complex and the connections are many. The European Union has crippled fiscal rules during the pandemic, a kind of corset that set maximum deficit and debt limits for member states and sanctions for non-compliance. Now the framework is back in force, but after having been subjected to a reform which made the expenditure rule, i.e. the maximum growth that public administration disbursements can have, as the main reference variable. The goal is that its increase does not overflow, so that the public debt of the bloc’s partners heads towards a downward and steady path. In the case of Spain, the average increase cannot exceed 3% between now and 2031.
Spain, however, has not transposed the new European rules into its legislation, which is reflected in a directive that is expected to be transposed by the end of the year. The Ministry of Finance limited itself to announcing that only two decrees will be approved by the end of the year, to align the Spanish rules with the community ones, defending that the national spending rule is more severe than the European one, an assumption that according to the Airef would not be respected in every year. According to Herrero, this duplicity of frameworks also generates confusion, inefficiencies and exposes Spain to non-compliance, which is why a profound reform is urgently needed which includes the modification of the organic law on budget stability and the development of the general principles contained therein: efficiency, effectiveness, loyalty and transparency.
Airef’s opinion on the reform of the national fiscal framework comes just a week before the celebration of the Council on Fiscal and Financial Policy (CPFF), the body at which the Ministry of Finance informed the branch’s regional councilors that they could incur a deficit equal to 0.1% of their GDP each year between 2026 and 2028 – a roadmap technically known as the stability path. Airef, the independent body responsible for monitoring public finances, regretted that the criteria used by the Government to set these objectives were not clear and insisted that the path should have been calculated based on the spending rule.
“For some communities, this stability objective is irrelevant, because they could achieve it and even increase spending beyond the norm; for others it is unattainable, and therefore they have no objective to achieve it,” said Ignacio Fernández-Huertas, director of the organization’s Budget Analysis Division. “Furthermore, they are established without taking into account the spending rule, which would lead to different situations in terms of balanced budgets,” he explained.
In this sense, Airef proposed that all subsectors of public administration (State, community, municipalities, social security) present their medium-term structural fiscal plans, the document that Brussels now requires Member States to analyze the sustainability of their budgets in the new fiscal framework and which does not require a breakdown by administration.
The spending rule is a complex concept, but crucial for the sustainability of public finances, since it indicates the maximum growth that primary spending net of the measures – discounting the outlay in interest and unemployment – of all administrations can have without this implying a disaster in the budgets. The national tax framework also considers this variable, but calculates it differently than the EU, which can lead to very different diagnoses. The community law takes into account all public administrations – Social Security is excluded from the national formula – while it excludes European funds and non-recurring operations (so-called lump sum), for example extraordinary expenses caused by reconstruction after the damage.
National framework
Apart from the reform of European fiscal rules, Airef believes that the national framework has numerous weaknesses and gaps, since it requires compliance with multiple objectives at the same time – expenditure rule, deficit and debt objectives – even if in practice the balance between revenue and expenditure takes precedence, and there is a lack of coherence between them, since the objectives are set without taking into account the expenditure rule or the starting situation of each administration. A potpourri that reduces the credibility of the budget path and discourages compliance with the rules.
It also believes that the sanctions and corrective measures provided for by the national framework may become so severe as to be unenforceable and become mere bureaucratic procedures that do not encourage compliance with fiscal discipline. Because of all these design issues, the current framework is not effective, as demonstrated by the poor compliance it has had in the seven years it has been in place (2012-2020). If the rules had been respected, the organization estimates that public debt today would be around 69% of GDP, although it makes clear that this would have meant even more painful adjustments to the already harsh cuts implemented during the Great Recession.
