Spain fiscal path miss raises bond risk

AIReF president Inés Olóndriz used the warning to press the next government, which will emerge from the ballot box, to negotiate a fresh fiscal plan with Brussels and avoid further permanent spending increases without lasting funding. She also urged the finance ministry to set out a complete fiscal strategy despite the absence of new budgets, saying the lack of fresh accounts is already complicating fiscal oversight across the state, regions and municipalities.

The watchdog said Spain’s central government and nearly all autonomous regions face a risk of breaching the country’s stricter domestic spending rule over the next two years and beyond. Even after applying the national escape clause for defense and energy security worth six-tenths of GDP in the current biennium, Spain would still exceed the limits allowed under the new European fiscal framework.

That matters because a looser spending trajectory raises the odds of larger deficits, more debt issuance and a tougher negotiation with European institutions over how quickly Spain can restore compliance. AIReF lifted its deficit forecast to 2.8% of GDP in 2026 and 2.6% in 2027, compared with a 1.9% reading this year and 2.3% next year without the government’s energy and disaster-relief measures.

The growth picture remains comparatively strong, which gives policymakers more room to tighten later but does not remove the fiscal problem. AIReF nudged its GDP growth forecasts up to 2.6% for this year and 2.2% for next, citing resilient domestic demand and private consumption, while warning that productivity remains the economy’s weak link and growth will slow gradually toward 1.7% by 2031.

Inflation is also proving stickier than expected. AIReF raised its inflation forecast to 3.6% for this year and 3% for next, while noting that October consumer prices came in at 4.9%, above its own outlook, though the government’s emergency measures have shaved between one and four tenths off price growth.

For investors, the immediate issue is not a market shock but a policy risk premium: a wider fiscal gap can keep pressure on Spanish sovereign yields, complicate funding plans and weigh on domestically exposed assets if Brussels demands tougher adjustment. With a new government likely to inherit the problem, the next catalyst is whether Madrid presents a credible medium-term spending plan that can keep Spain inside the EU rules without choking growth.