STABILITY PROGRAMME UPDATE 2019-2022 KINGDOM OF SPAIN 2019 - 2022 Stability Programme Update 2019-2022 e-NIPO 102-19-055-3 -1- Stability Programme Update 2019-2022 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY ................................................................................................... 6 2. INTRODUCTION ............................................................................................................ 10 3. MACROECONOMIC OUTLOOK ................................................................................. 12 3.1. Recent developments in the Spanish economy ........................................... 12 3.1.1. International environment ......................................................................... 12 3.1.2. Recent developments and adjustment of macroeconomic imbalances in Spain in 2018 ................................................................................ 14 3.2. Assumptions of the Macroeconomic Scenario ............................................. 19 3.3. 2019-2022 Macroeconomic Scenario ............................................................. 20 3.4. Comparison with the scenarios of other organisations ................................ 27 4. PUBLIC DEFICIT AND DEBT ........................................................................................... 30 4.1. The General Government in 2018 .................................................................... 30 4.2. Budget scenario for 2019 ................................................................................... 37 4.3. Fiscal Strategy 2019-2022 ................................................................................... 48 4.4. Role of Regional Governments and Local Entities in the fiscal strategy ... 59 4.5. Public debt forecasts ......................................................................................... 65 4.6. Fiscal Stance ........................................................................................................ 67 4.7. Adjustment path towards the Medium-Term Objective (MTO) .................. 74 5. COMPARISON WITH THE PREVIOUS STABILITY PROGRAMME. SENSITIVITY ANALYSIS .......................................................................................................................... 76 5.1. Risk scenarios and sensitivity analysis .............................................................. 77 5.1.1. Change in interest rates ............................................................................ 78 5.1.2. Changes in the economic growth of trade partners .......................... 79 5.1.3. Change in oil prices .................................................................................... 80 6. THE SUSTAINABILITY OF PUBLIC FINANCES ............................................................... 82 6.1. Long-term budget projections ......................................................................... 82 6.2. Strategy ................................................................................................................ 85 6.3. Contingent liabilities ........................................................................................... 89 7. THE QUALITY OF PUBLIC FINANCES ........................................................................... 92 7.1. Spending efficiency, effectiveness and composition .................................. 92 7.1.1. Spending review 2018 Outcome ............................................................. 92 7.1.2. Spending review 2019 ................................................................................ 95 7.1.3. Other actions to strengthen efficient public spending ........................ 97 7.2. Structure and efficiency of the revenue system ........................................... 98 -2- Stability Programme Update 2019-2022 8. INSTITUTIONAL FRAMEWORK OF THE FISCAL POLICY ............................................ 104 8.1. Implementation of the measures provided for in the Organic Law on Budgetary Stability and Financial Sustainability ................................................. 104 8.2. Financially Sustainable Investments (DA 116 of the General State Budget Law for 2018 and Royal Decree-Law 10/2019) ................................................... 105 8.3. Gradual access of Regional Governments to financial markets ............. 106 8.4. Transparency measures ................................................................................... 107 8.4.1. National Subsidies Database .................................................................. 107 8.4.2. Public procurement .................................................................................. 107 8.4.3. General Government's Economic and Financial Information Centre108 8.4.4. Oversight of the State Institutional Sector ............................................ 108 9. COMPARISON OF ECONOMIC FORECASTS AND REALISATION ......................... 109 9.1. Methodological aspects ................................................................................. 109 9.1.1. Baseline forecasts ..................................................................................... 109 9.1.2. Observed variables to compare ............................................................ 109 9.1.3. Criteria for the existence of a systematic and significant bias ......... 110 9.1.4. Variables to compare and implementation of the prudence criterion110 9.2. Analysis of forecasts 2014-2018 ....................................................................... 114 ANNEX ............................................................................................................................. 120 ANNEX: TABLES ............................................................................................................... 121 -3- Stability Programme Update 2019-2022 TABLES INDEX Table 3.2.1. Basic assumptions of Macroeconomic Scenario 2019-2022.................. 19 Table 3.3.1. Macroeconomic outlook ............................................................................. 22 Table 3.3.2. Labour market ................................................................................................ 23 Table 3.3.3. Price developments ...................................................................................... 24 Table 3.3.4. Sector-wide balances .................................................................................. 24 Table 3.4.1. Comparison of macroeconomic scenarios 2019-2020 ........................... 29 Table 4.1.1. General Government balance in 2018 ..................................................... 30 Table 4.1.2. General Government in 2018 ...................................................................... 31 Table 4.1.3. Central Government in 2018 ....................................................................... 32 Table 4.1.4. Regional Governments in 2018 ................................................................... 34 Table 4.1.5. Local Corporations in 2018 .......................................................................... 34 Table 4.1.6. Social Security in 2018 ................................................................................... 35 Table 4.1.7. Deviations between the 2018 year-end forecast included in the 2019 Budget Plan and actual year-end data ........................................................................ 37 Table 4.2.1.1. Total tax revenue 2018-2019 ..................................................................... 40 Table 4.2.2.1. Social contributions measures.................................................................. 46 Table 4.2.2.2. Social expenditure measures ................................................................... 48 Table 4.3.1. Budgetary projections .................................................................................. 49 Table 4.3.2. Impact of new revenue measures ............................................................. 51 Table 4.3.3. Forecasts in a no-policy-change scenario ............................................... 54 Table 4.3.4. Comparison with the Commission's forecasts .......................................... 54 Table 4.4.1. Budgetary developments of Regional Governments ............................. 60 Table 4.5.1. Stock-flow adjustment of debt in 2018 ...................................................... 66 Table 4.5.2. Public debt dynamics ................................................................................... 67 Table 4.6.1. Cyclical developments ................................................................................ 68 Table 4.6.2. Calculation of the Expenditure Benchmark ............................................. 70 Table 5.1.1. Differences with the previous Stability Programme update .................. 76 Table 5.1.1.1. Impact of a 120 b.p. increase in interest rate ....................................... 79 Table 5.1.2.1. Impact of 4 percentage points fall in export demand ....................... 79 Table 5.1.3.1. Assumptions on oil price ............................................................................ 80 Table 5.1.3.2. Impact of an increase in oil prices of €8.9/barrel ................................. 80 -4- Stability Programme Update 2019-2022 Table 6.1.1. 2016-70 Projections of ageing-related expenditure ................................ 82 Table 6.1.2. Comparison of ageing-related expenditure projections ....................... 85 Table 6.1.3. Evolution of pension expenditure. Core AIReF scenario ........................ 85 Table