The climate-fiscal timebomb: Spain

Fiscal outlook

Spain recorded a 3.2% deficit and a debt-to-GDP ratio of 101.6% in 2024. Madrid is running on a rolled-over 2023 budget due to political backlog. This has also led the government to assume €83.25bn of regional debt to free up space for investment.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

The Spanish State Meteorological Agency confirmed summer 2025 as Spain’s hottest on record. Climate change has made this year’s wild fires, the worst for at least three decades, more than 40 times more likely, pushing up civil-protection and infrastructure costs. The Bank of Spain highlights a reduction in crop yields due to prolonged periods of water scarcity: in 2022 and 2023, prolonged drought is estimated to have reduced wheat and barley yields by between 20% and 30%. As the government set out its State Pact for the Climate Emergency, extreme weather has already caused ~€32bn in material losses and over 20,000 deaths in the last five years. During the 2024 flood in Valencia, the city received a year’s wort of rain in just eight hours, causing over 220 fatalities, the displacement of 15,000 residents, long-term health and environmental consequences and incurred financial losses estimated over €50bn. Storms in February 2026 put further pressure on the country, with more than 3,000 people evacuated and dozens injured. 

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Spain’s GDP declining by 13% by 2050 and 19% by 2070 under current policies. Our modelling shows the following:

• Under current policies (BAU – business as usual), Spain’s debt is 81 pps higher than the climate-agnostic baseline in 2050 and 276 pps higher in 2070.

• With early EU mitigation and sufficient adaptation spending, debt is 46 pps higher in 2050 and 86 pps in 2070

• Delayed EU investments and insufficient adaptation results in higher debt levels of 64 pps in 2050 and 126 pps in 2070.

• EU early action combined with global cooperation results in 1 pps higher debt levels than the climate-agnostic baseline in 2050 and 22 pps lower levels in 2070.

• Progressive taxation, such as a wealth tax, combined with EU early action would increase debt by 4 pps in 2050 and lead to equal debt levels in 2070 compared to the climate-agnostic baseline.

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