Spain: Attempts More Defence Spending Without Cuts Elsewhere

The Kingdom of Spain (rated A (high) with a Stable trend) recently announced its Industrial and Technological Plan for Security and Defence to increase defence spending to the NATO guidance level of 2.0% of GDP in 2025 from 1.3% of GDP in 2024. The government aims to close the gap primarily by redirecting previously committed budgetary resources, and it claims that the larger defence budget will not affect social spending or worsen public finances. We believe that Spain will likely need to make more difficult and persistent budgetary adjustments to sustain spending at 2% of GDP to enhance its defence capabilities, as we consider it unlikely that the government can successfully do so over the long term without cutting expenditures elsewhere, raising taxes, or delaying fiscal consolidation. This commentary breaks down Spain's public expenditures to illustrate the non-defence-related growth areas in the Spanish budget over the last decade.

-- Spain has been among the EU countries to spend the least on defence as a share of GDP. Its current plan increases defence spending to the NATO guidance of 2%.
-- The government plans to increase its defence spending mostly by redirecting previously committed budgetary resources.
-- We expect that Spain will likely need to implement durable budgetary adjustments to maintain defence spending at the 2% target.

"In our view, for Spain to structurally increase defense spending to the 2% of GDP level and for the fiscal deficit to remain on its downward trajectory, the government will likely need to more aggressively freeze or redirect spending commitments, raise additional tax revenue, repurpose EU funds, or tap new EU defense-related lending facilities," said Jason Graffam, Senior Vice President, Global Sovereign & Financial Institution Ratings.