Spain gets control of its budget deficit

Spain, which was one of the European Union's weakest economies for years, has balanced its books to the point where it is set to run a smaller percentage annual budget deficit than Germany, official figures show.

The turnaround means the country, which was one of the most heavily affected by the 2009 Eurozone debt crisis — alongside Greece, Ireland, Italy, and Portugal — is on course to see its budget deficit fall for the fifth consecutive year, to 2.5 percent of GDP in 2025, the Bank of Spain said this week. It said the deficit should shrink to 2.3 percent next year.

Europe's fourth-largest economy achieved the feat through several years of robust economic growth and expanded tax revenue.

Spain's success came as Germany, Europe's economic powerhouse, has hit headwinds that have pushed its annual budget deficit up to 2.3 percent this year and an anticipated 3.1 percent in 2026, the German Council of Economic Experts said, adding it could go up to 4 percent in subsequent years.

The turnaround bucks a trend that has seen Spain with larger percentage annual budget deficits than Germany for the past 17 years.

The difference between Spain's economic situation and those of Germany and France, which has seen its parliament divided and paralyzed by rows about slashed government spending and tax hikes, is clear.

Karsten Junius, chief economist at Swiss private bank J Safra Sarasin, told the Financial Times: "The different fiscal trajectories show how much the pecking order between euro area countries has changed since the euro crisis."

Spain is now one of the world's fastest-growing large developed economies, having sustained average quarterly GDP growth of 3.9 percent since the start of 2022. Germany has had average quarterly GDP growth of 0.3 percent.

Melanie Debono, an analyst at London-based macro advisory Pantheon Macroeconomics, told the FT: "The investment cycle in Germany has faltered while investment has boosted Spanish GDP."

The economic growth has been fed by tourism, immigration, low energy costs, and public spending from government funds and EU bailouts, which amounted to around 41 billion euros ($47.6 billion) after the Eurozone crisis.

But it is not all good news for Spain. During the Eurozone debt crisis, Spain had annual budget deficits as high as 11.5 percent, which pushed up the country's overall debt from about 35 percent of GDP in 2007 to more than 100 percent today.

Germany's overall debt, meanwhile, has remained relatively low at 64.4 percent because of the huge size of its economy, according to the International Monetary Fund.

The Bank of Spain said last week Spain's high level of overall debt makes the country vulnerable by limiting wiggle room if there is another financial crisis, and by risking exposure to higher interest rates.