ABSTRACT
The expansionary nature of fiscal policy at the end of the 1980s and in the early 1990s is apparent in Figure 6. Thereafter, given the pressing need to lower the deficit to the three per cent ceiling by 1997, as stipulated by the Maastricht Treaty, the budget deficit was 2.8 per cent of GDP by 1997. As a result, the structural deficit came down by 2.6 percentage points, to stand at 2.5 per cent of GDP in 1997. Figure 6 confirms the markedly restrictive fiscal policy stance pursued in 1996 and 1997. Although the end of the process of expansion in spending, following the overshoot observed in previous years, is a positive development, an in-depth analysis of its composition shows that expenditure containment was based primarily on two headings that are unlikely to contribute to the same extent to the reduction of the budget deficit in the future. The first of these, interest payments, fell as a proportion of GDP by 0.5 percentage points, reflecting the positive impact of lower interest rates, whereas the second, public investment, declined as a percentage of GDP by 1.2 points. An end to the process of convergence in interest rates with Europe (interest rates on the Spanish Treasury’s ten-year bonds fell by 490 basis points over a two-year period), and to the refinancing of debt issued at higher rates, suggests that this expenditure heading will make only a modest contribution to the reduction of the budget deficit in the periods ahead. Likewise, if further progress is to be made in real convergence with the more developed countries, the correction of the budget deficit should not be borne by public investment, in view of the beneficial impact it has on productivity and competitiveness.
