Elections present voters with a stark choice:
There are two feasible outcomes following the 23 July snap parliamentary elections. One is a continuation of the current Socialist-led government supported by other left-wing and regionalist parties—arguably the most leftist administration in Spain’s recent democratic history. The other would be a government comprised of the conservative Popular Party (PP) and right-wing Vox, which would be the most right-of-center Spain has seen in decades. The first outcome would result in more measures to support the least well-off and make the tax system more redistributive, while the second would likely result in public spending restraint, lower taxes and efforts to streamline business regulations. The impact on overall GDP growth is ambiguous: While a PP administration would likely see stronger corporate investment, this could be offset by more muted government spending. What seems clearer is that the share of the economic pie would likely be more skewed towards firms and wealthier citizens under the PP.
The EU and fiscal reality as moderating forces:
That said, neither Socialist- nor PP-led governments will be able to stray too far from the political center ground. Both will need to keep the European Commission on their side in order to ensure the continued disbursements of EUR 140 billion—close to 10% of GDP—in loans and grants under the Recovery, Transformation and Resilience Plan. This will involve implementing reforms in areas such as digitization, the green transition, and fiscal sustainability in line with the Commission’s recommendations. Plus, the next administration will hardly be able to undertake any rash fiscal experiments with public debt close to 110% of GDP and the budget still deep in the red.
Favorable growth prospects:
The Consensus among the analysts that we poll is for Spain’s economy to be among the best performing in Western Europe from now to end-2027, with growth easily outpacing that seen in neighbors such as France, Germany and Italy. This will be in no small part thanks to the EU’s fiscal generosity: the bloc’s Next Generation funding is expected to boost Spain’s GDP by around 2% by 2024 and create a quarter of a million jobs by 2026. A strong tourism recovery will be another factor at play: Visitor arrivals were up by around a third in annual terms through April this year. Last year’s immigration reform, which makes it easier for foreigners to live and work in Spain, could also provide support. But the incoming government will face myriad challenges—an aging population, high structural unemployment and an underperforming education system, to name but a few. Despite positive growth projections, the next few years will be far from plain sailing for policymakers.
Insights From Our Analyst Network
On the fiscal panorama, EIU analysts said:
“The need to put Spain’s public finances back on the path to long-term sustainability is likely to prove the most challenging for the current and next government. […] The economic rebound in 2021-22 and surging inflation as a result of the cost-of-living and energy crises have helped to improve the deficit and debt ratios. However, we expect the budget deficit to be close to 5% of GDP in 2023 and the public debt/GDP ratio at about 115% as economic growth slows sharply and the left-wing government implements its plan to lift social spending to record levels ahead of the election at year-end.”
On the tourism industry, ING’s Wouter Thierie said:
“The first months of 2023 already showed a promising start for international tourism in Spain this year. In the first quarter, the number of foreign visitors reached 97% of pre-pandemic levels. Falling energy prices and stable labour market conditions may have underpinned the tourism sector. If this trend continues into the summer peak, it is likely that tourism figures in the summer months could match or even exceed 2019 levels for the first time.”