When talking about the public accounts of Spain, it is common to hear references to the public deficit and the warnings from Brussels. This is one of the economic indicators most monitored by the European Commission because it reflects whether a country is spending more money than it receives and whether its finances are sustainable in the medium and long term.
The deficit does not necessarily imply that a country is in crisis, but it does require monitoring the evolution of public accounts to prevent debt from continuing to rise uncontrollably.
What is the public deficit?
The public deficit occurs when public administrations spend more money than they receive during a fiscal year.
Income comes mainly from taxes, social contributions, and other fees, while expenses include items such as pensions, salaries of civil servants, healthcare, education, infrastructure, or social benefits.
If the opposite happens and income exceeds expenditure, it is referred to as public surplus.
Why does Brussels pay so much attention to the deficit?
All countries in the European Union must comply with common fiscal rules aimed at ensuring the economic stability of the entire bloc.
Among them, it stands out that the public deficit does not exceed, in general, 3% of Gross Domestic Product (GDP), a limit included in the Stability and Growth Pact.
When a State exceeds that threshold for a prolonged period, the European Commission can open a procedure for enhanced surveillance and demand a plan to reduce the imbalance.
What consequences can a high deficit have?
A high deficit forces the State to finance that difference, usually by issuing public debt.
The greater that financing need, the greater the volume of accumulated debt and the interest that will have to be paid in the future.
If markets consider that public accounts present a high risk, the cost of financing may increase, which reduces the Government's margin to allocate resources to other policies.
Does that mean the Government must cut spending?
Not necessarily. Experts remind that the deficit can also increase temporarily during an economic crisis, a pandemic, or a recession, when the State increases spending to protect businesses and citizens or when tax revenues fall.
For that reason, the European fiscal rules contemplate certain exceptions and allow for some flexibility in extraordinary situations.
What does Spain do when Brussels asks to reduce the deficit?
When the European Commission considers that a country must correct its public accounts, the Government usually presents measures to increase revenues, reduce certain expenses, or boost economic growth, with the aim of gradually decreasing the weight of the deficit on GDP.
The Commission periodically supervises that evolution and analyzes whether the measures adopted are sufficient to meet the commitments made.
How does it affect citizens?
Although the public deficit is a macroeconomic concept, its effects can ultimately reach day-to-day life.
Decisions related to taxes, public investment, social aid, pensions, or healthcare spending may be conditioned by the need to balance the State's accounts.
Therefore, every time Brussels analyzes the economic situation of Spain or publishes new recommendations, the public deficit is once again among the most relevant economic indicators.