The paradox sums up five years of expansionary fiscal policy: almost half a billion additional euros of liabilities accumulated in an economy which, at the same time, experienced strong growth in nominal terms.
In March 2020, in full confinement, the debt of Public Administrations amounted to approximately 1.26 trillion euros and was equivalent to approximately 101% of gross domestic product (GDP). Today, they are around 1.71 billion.
During these five and a half years, the volume increased by approximately 450 billion. The increase is 35.7%.
Over the same period, the debt-to-GDP ratio fell from around 101% to just over 103%, following a sustained downward trajectory since the maximum of 124% reached in March 2021.
The key is the difference between level and relative weight. Absolute debt corresponds to the total euros owed, while the ratio relates this volume to the size of the economy.
Since 2021, nominal GDP has increased significantly thanks to the resumption of activity and inflation.
The increase in the denominator means that, even if the debt has increased significantly in absolute terms (in euros), the ratio is only 1.8 points above the level it had at the start of the health crisis.
In turn, the percentage is more than twenty points below the peak of the pandemic.
Debt to GDP
The behavior of recent years also shows a clear change in the rate of reduction. From the peak of 124% of GDP in spring 2021 until the end of 2022, the ratio declined sharply.
During this period, it fell almost fifteen points, to around 109%. Was an adjustment of more than seven points of GDP per yeardriven by reopening and inflation which triggered nominal growth.
From 2023, the slope softens. Between the start of this year and the end of 2024, debt falls from levels close to 109% to just over 101 or 102% of GDP.
The reduction is still in place, of the order of three or four annual points, but already a long way from the initial adjustment. The most recent data even indicates a plateau phasewith a ratio hovering around 103% and without any further significant declines.
“The important thing now is not only to know where the debt is, but how fast does it go down», summarizes Diego Martínez López, professor of economics at the Pablo de Olavide University and researcher at Fedea.
According to him, the debate is no longer limited to the level reached, but to the capacity to maintain a sufficient correction rate to prevent the debt from becoming a persistent problem. “The rate of decline of debt in relation to GDP This is the variable that must be monitored,” he insists.
Context helps us understand how we got here. March 2020 is the latest data that reflects an economy that has still not suffered the full impact of Covid.
From the second quarter of that year, the closure of entire sectors, the massive extension of ERTE, aid to businesses and the strengthening of health spending Public sector financing needs have skyrocketed.
In subsequent years, the cost of measures aimed at cushion the energy crisis and rising prices after the Russian invasion of Ukraine, which prolonged the phase of intense debt even after reopening.
“The way to cushion the blow to the productive fabric was an expansive fiscal policy This has practically continued since the pandemic until very recently,” explains Martínez López.
This election avoided greater damage to businesses and jobs, but left a sharp increase in public debt.
The economist focuses on the conditions for the next stage. The future evolution of the ratio, he emphasizes, will depend on several factors.
“This debt-to-GDP ratio and the speed at which it is reduced depends not only on GDP, but also on interest rate, inflation and primary balance“, he emphasizes.
Inflation in recent years has helped to reduce the relative weight of the debt, because swollen nominal GDP, but Martínez warns that it is not a harmless tool.
“Inflation is eating away at the debt, yes, but It is not an adequate remedy to combat debt. This has collateral effects on income, savings and investment,” he says.
Interest rates are the second risk factor. After at least years, the cost of financing has increased significantly and is making debt servicing more expensive.
“Guys can scare us or not, and that’s a variable we don’t directly control,” Martínez admits. For this reason, it places the decisive ground in the primary balance, the difference between income and expenses after interest has been deducted.
Without new general budgets and with a lower growth scenario, Martínez doubts that the public sector can generate the primary surplus needed to accelerate adjustment.
The distribution by subsector shows who has the most debt. Central Administration absorbed most of the impact of the pandemic and the energy crisis: its ratio increased from around 91% of GDP before Covid to more than 111% in 2021.
Since then, it has reduced part of this surplus, but it remains around 95% of GDP, concentrating practically all the debt of all administrations.
Social security This has become another sore point. Its liabilities have gained more than three points of GDP since 2020 and reached series highs, with a balance close to 126 billion euros.
Most of the increase is due to state loans intended to cover the recurring deficit of the pension system, which continues to spend more than it earns each year.
Despite this, the Social Security debt, around 7.6% of GDP, remains much lower than that of autonomous communities, whose debt still exceeds 20%.
However, territorial photography is very uneven. A small group of communities, including Navarre, Canary Islands, Madrid, Basque Country and Asturias— is already located debt below 13% compared to GDPthe reference threshold set in the budgetary stability regulation.
Others remain well above this bar and top the national ranking of relative debt, such as Valencian Community, Region of Murcia, Castile-La Mancha or Catalonia.
This gap between compliant territories and territories that are still highly indebted overlaps with the debate on the reform of regional financing and on how to distribute budgetary consolidation efforts in the years to come.
“There are some autonomy which are very good and others which are very bad; some will remain in a compromised situation for decades, even if debt relief is offered,” Martínez warns.
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