## 1espea2025001-print-pdf ## Source details **Canonical URL:** [1espea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1espea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1espea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1espea2025001-print-pdf.pdf.json) --- ### Recent developments - Growth and labor - Economy grew at an average annualized rate of over 3 percent since end-2023. - Immigration contributed around 75 percent of the 5 percent increase in aggregate employment in 2024. - Per-capita income gap vis-à-vis high-income euro area economies narrowed by over 3 percentage points during 2022-24 but remained about 29 percent in 2024 (17 percent relative to the euro area overall). - Gross fixed capital formation (GFCF) only returned to pre-pandemic levels in 2024, implying a cumulative capital formation shortfall of over 15 percent since the pandemic. - Inflation and wages - Headline inflation declined throughout 2024, rebounded close to 3 percent in early 2025 due to higher energy prices. - Nominal wage growth per employee remained close to 5 percent in 2024. - Collectively bargained increases: 3.7 percent in agreements signed in 2024 and 3 percent at the national level. - Bargained wage growth was 3.2 percent in collective agreements signed in Q1 2025. - Core inflation has been slowly declining and broadly aligned with historical relationships with main drivers. - Credit, housing, and financial conditions - Financial conditions close to long-term average and easier than in 2022. - Household credit growth: about 0 percent in 2022 to 1 percent in 2024; credit to corporates contracted by 0.2 percent in 2024. - House price growth accelerated; looser financial conditions and excess housing demand sustain upward pressure. - Public finances and external sector - Overall fiscal deficit declined by 0.3 percentage points to 3.2 percent of GDP in 2024; meets government’s 3-percent deficit target when excluding DANA emergency response amounting to 0.35 percent of GDP. - Primary spending (excluding DANA) grew by 5.1 percent. - Debt-to-GDP ratio declined to 101.8 percent from 105 percent in 2023. - Trade balance surplus: 4.3 percent of GDP in 2024; services balance: 6.3 percent of GDP; goods balance: -2 percent of GDP. - Current account surplus: 3 percent of GDP in 2024. Net international investment position (NIIP) improved to -44.0 percent of GDP by end-2024. ### Outlook and risks - Growth projections and drivers - Growth projected: 2.5 percent in 2025; 1.8 percent in 2026. - Unemployment projected to stabilize at around 11 percent. - Growth to be sustained by private domestic demand; consumption solid due to real wage gains and gradual decline in household saving rate. - Investment expected to pick up on lower interest rates, progress with NGEU funds, and pent-up housing demand. - Inflation outlook - Inflation expected to return close to the ECB’s target by end-2025. - Core and headline inflation projected to converge near 2 percent by year-end 2025. - Risk assessment - Most risks are to the downside (escalation of trade measures, domestic political fragmentation). - Simulations: each 10 percentage points rise in US tariffs on the EU could lower Spain’s GDP by about 0.1 percent in the short and medium term. - Upside possibilities: sustained high immigration, stronger tourism momentum, larger unwinding of household savings from COVID. ### External sector and current account outlook - Current account path - Projected decline in 2025 by 0.5 percentage points to 2.5 percent of GDP (from 3.0 percent in 2024). - Further gradual weakening projected to 1.5 percent by 2030 as tourism and non-tourism services normalize and imports rise with domestic-demand-led growth. - External sector assessment (2024) - 2024 CA: 3.0 percent of GDP. - 2024 cyclically-adjusted CA: 3.5 percent of GDP. - IMF staff CA norm: between 0.6 and 2.4 percent of GDP, midpoint 1.5 percent of GDP. - CA gap: range 1.2 to 2.9 percent of GDP, midpoint 2.0 percent of GDP. - NIIP: −44.0 percent of GDP by end-2024. Gross assets: 201.2 percent of GDP; Gross liabilities: 245.2 percent of GDP; Debt liabilities: 144.5 percent of GDP. - Staff assesses REER midpoint undervaluation of 7.3 percent in 2024 (range ±3.1 percent). - Policy implications - Continue CA-supportive policies: sustained fiscal consolidation, accelerate structural reforms (complete Spanish single market, invest in innovation, enhance education, reduce energy dependence). - Temporary, narrowly targeted fiscal support for firms affected by trade restrictions. ### Fiscal framework, projections, and consolidation strategy - Authorities’ MTFSP commitments - Net primary spending growth path implies deficit reduction to 2.5 percent of GDP for 2025—excluding DANA-related one-offs of 0.3 percent of GDP—and gradual decline to 0.8 percent by 2031. - MTFSP entails structural primary balance improvement of 0.4 percent of GDP per year on average over 2025-31 (3 percent overall). - Tax and revenue measures approved Nov 2024 - Minimum corporate income tax (CIT) rate of 15 percent for multinational firms. - Increase in top bracket on personal capital earnings. - Rise of excise taxes on tobacco and e-cigarettes. - Bank levy extended for 3 years and converted into a tax with revamped design. - Temporary energy company levy was not renewed. - April 2025 preemptive support package for firms potentially affected by US tariffs - Approximately 0.9 percent of GDP of credit lines and loan guarantees: 0.5 percent of GDP new initiatives; 0.4 percent repurposed existing facilities. - Measures include approximately €6 billion of credit lines/guarantees, a €2 billion increase to an existing credit insurance program for exporters, and €0.7 billion additional financing for the Fund for Firms’ Internationalization. - Staff baseline fiscal projections and DSA highlights - Staff baseline: overall deficit stabilizes at 2 percent of GDP and debt-to-GDP ratio declines to about 93 percent by 2030. - Interest payments expected to increase from 2.5 to 2.8 percent of GDP over the projection period. - Structural primary balance expected to improve by approximately 1 percentage point over the medium term. - To meet authorities’ MTFSP primary deficit path, staff estimate additional measures of about 1 percent of GDP by 2029 and 2 percent by 2031 will be needed. - Overall sovereign stress risk assessed as moderate; long-term debt risk assessed as high absent further reforms. - Staff consolidation recommendation - Frontload consolidation: reduction in the primary structural fiscal deficit of 0.6 percentage point of GDP each year for a cumulative adjustment of 3 percentage points over 2025-29. - Historical fiscal multiplier for Spain: 0.6 implies faster rebuilding of fiscal space would come at a small growth cost of around 0.1 percentage points per year. - Growth-friendly measures suggested: VAT harmonization, enhanced environmental taxation, broaden VAT base limiting exemptions, equalize diesel and gasoline excise duties, increase carbon pricing, discontinue revamped banking sector tax at end of 3-year duration, ensure liquidity support for firms affected by tariffs is well targeted and temporary. ### Debt dynamics and baseline projections (selected figures) - Public debt (percent of GDP): 2024 = 101.8; 2025 = 100.7; 2026 = 99.1; 2027 = 97.7; 2028 = 96.2; 2029 = 94.6; 2030 = 93.0. - Primary deficit (percent of GDP): 2024 = 1.3; 2025 = 0.6; 2026 = -0.1; 2027 = -0.1; 2028 = -0.3; 2029 = -0.5; 2030 = -0.5. - Interest expenditures (memo; percent of GDP): 2024 = 2.5; 2025 = 2.7; 2026 = 2.8; 2027 = 2.8; 2028 = 2.9; 2029 = 3.0; 2030 = 3.0. - Gross financing needs (percent of GDP): 2024 = 16.8; 2025 = 15.7; 2026 = 15.2; 2027 = 15.0; 2028 = 14.6; 2029 = 14.3; 2030 = 14.1. - Average residual maturity of public debt: 7.9 years. - Bank of Spain share of total debt: peaked at 28.5 percent in mid-2022; fell to 24.4 percent by late-2024. - Share held by other residents rose from 29.3 to 31 percent (mid-2022 to late-2024); share held by non-residents increased from 42.3 to 44 percent (same period). ### Spending efficiency, AIReF, and MTFSP strengthening - Spending trends and recommendations - Primary spending as a share of GDP grew by about 2.5 percentage points since COVID-19; almost half reflects higher social transfers and salaries. - Recommendations: rebalance spending using cross-country benchmarking; expand the Spending Review Monitoring Unit (SRMU) within the Ministry of Finance; enhance AIReF’s reviews by providing assessment of budgetary implications and political feasibility. - Strengthening MTFSP and AIReF - Establish official technical engagement between authorities and AIReF when preparing MTFSP updates. - Require AIReF to opine on the MTFSP prior to submission. - Ground consolidation strategy in well-identified tax increase and spending reduction priorities to reduce fiscal policy uncertainty. - Spending Review institutional facts - AIReF’s 357 recommendations (first set): 203 fully implemented; 79 rejected; 75 “in process” as of March 2024. - SRMU role: assigns recommendations to entities and tracks implementation with a “comply or explain” process; publishes an annual report every March. ### Pension system and safeguard clause - Pension findings and risks - AIReF projects a rise in the gap between pension expenditures and social security contributions; AIReF estimates gap increase by 2.4 percent of GDP by 2050. - AIReF’s March 2025 review: projected expenditures net of revenue measures average 13.2 percent of GDP over 2022-2050—did not trigger safeguard clause. - Impact of 2021-2023 pension reforms (AIReF): increased projected pension expenditures in 2050 by 2.7 percent of GDP and increased revenues by 1 percent of GDP. - Staff guidance: prioritize employment-friendly pension options; consider further lengthening contributory period; amend safeguard clause to be more forward-looking and define ex ante a narrow set of direct revenue measures to enter computation of net future spending. - Central government transfers to social security - Transfers rose by 1.3 percent of GDP between 2020 and 2024. - Royal Decree 100/2025: AIReF to include all direct income sources defined in the General Law of the Social Security, including government transfers, in computation of revenue measures for safeguard rule. - Risk: counting transfers as revenues without explicit financing could undermine broader public finance sustainability. ### Financial sector resilience, housing, and macroprudential guidance - Banking sector health - Systemic risks low and unchanged from 2024 FSAP. - Regulatory capital to risk-weighted assets: 17.5 (2024). - Nonperforming loans to total loans: 2.9 (2024). - Return on assets: 1.3 (2024); Return on equity: 14.1 (2024). - CET1 ratios somewhat below euro area peers; profitability supported by net interest margins. - Household and corporate balance sheets - Only 7.7 percent of households have a debt service-to-income ratio exceeding 40 percent. - Corporate debt ratio about 48 percent in 2024. - Share of firms with interest coverage ratio below one: 13.2 percent in 2023. - Housing market and policy guidance - House price growth accelerated to double-digit year-on-year in 2024Q4 for some measures. - Average prices remain below 2007 levels in real terms and only slightly above fundamental value per some models. - Household leverage inched up; no noticeable relaxation of lending standards. - Policy priorities: boost housing supply (Land Law reform, simplify construction permits), increase social housing, target demand-side measures in less constrained areas, retain stringent price caps in ICO guarantees, evaluate and discard rent caps if they reduce supply. - Tenure-cost indicator defined: share of population with total housing costs > 40 percent of disposable income ('net' of housing allowances). - Countercyclical Capital Buffer (CCyB) - Bank of Spain set CCyB at 0.5 percent effective October 1, 2025; planned increase to 1 percent from October 1, 2026. - Full CCyB equals just over 15 percent of annual (2024) pre-tax profits. - Staff supports phasing in the one-percent positive neutral CCyB; pause possible if downturn accompanied by significant tightening of credit conditions. - FSAP follow-up and supervisory resources - BdE and CNMV hiring specialists; progress on BdE independence via amendment under parliamentary discussion to remove Ministry of Economy appeal powers. - Remaining actions: grant CNMV autonomy over hiring, integrate resolution functions, improve statutory resolution regime for FROB, await Eurosystem-wide framework for SIs’ resolution liquidity. ### Labor market, employment, and productivity - Key indicators and dynamics - Unemployment rate stabilized around 11 percent; highest in the EU. - Employment (percent change): 2024 = 2.2; 2025 = 1.3; 2026 = 0.9. - Labor force (percent change): 2024 = 1.3; 2025 = 1.1; 2026 = 0.8. - Migration: large net migration flows supporting working-age population growth. - Labor market tightness: vacancies-to-unemployment ratio at a record high. - Policy recommendations - Enhance activation policies and financial incentives for jobseekers to durably reduce unemployment to single digits. - Carefully design planned workweek reduction (from 40 to 37.5 hours) to mitigate adverse effects; preserve role of collective bargaining to allocate hours and set overtime pay. - Consider experience-rating unemployment insurance contributions as alternative to raising firing costs. - Strengthen ALMPs, digitalize and professionalize regional PES, link funding more to placement performance, and conditionally increase ALMP budgets. - Promote measures to facilitate older workers staying in labor market: combine pension reforms with actions on health, flexible work arrangements, and phased retirement options. - Productivity and innovation priorities - Spain’s R&D and innovation lag: public R&D expenditure 0.53 percent of GDP and overall R&D 1.41 percent of GDP in 2022 (EU averages 0.65 and 2.11 percent). - Targets under 2022 Law on Science, Technology and Innovation: public R&D 1.25 percent of GDP and overall R&D 3 percent of GDP by 2030. - Policy priorities: complete Spanish and EU single markets, promote venture capital and progress toward CMU, reduce debt bias in corporate taxation, streamline size-dependent thresholds, strengthen higher-education autonomy and performance-based funding, improve insolvency framework. ### Additional macro projections and selected indicators (Table 1 highlights) - Real GDP growth (annual percent change): 2021 = 6.7; 2022 = 6.2; 2023 = 2.7; 2024 = 3.2; 2025 = 2.5; 2026 = 1.8; 2027 = 1.7; 2028 = 1.6; 2029 = 1.6; 2030 = 1.6. - Headline inflation (average): 2021 = 3.0; 2022 = 8.3; 2023 = 3.4; 2024 = 2.9; 2025 = 2.2; 2026 = 2.0. - Unemployment rate (percent): 2021 = 14.9; 2022 = 13.0; 2023 = 12.2; 2024 = 11.3; 2025 = 11.1; 2026 = 11.0. - Household saving rate (percent of gross disposable income): 2021 = 14.3; 2022 = 9.0; 2023 = 12.0; 2024 = 13.6; 2025 = 13.5; 2026 = 13.0. - Nominal GDP (Billions of euros): 2024 = 1,591.6; 2025 = 1,671.5; 2030 = 2,035.6. - Net international investment position (percent of GDP): 2024 = -44.0; 2025 = -38.5; 2030 = -21.0. ### Implementation and reform priorities (concise) - Frontload a growth-friendly fiscal consolidation of 3 percentage points of GDP over 2025-29, anchored in VAT harmonization and environmental taxation and complemented by spending-efficiency measures. - Strengthen AIReF’s role and formal engagement in MTFSP preparation and require AIReF opinion prior to submission. - Accelerate NGEU grant execution as assumed: staff assumes full grant execution by August-2026 and 30 percent of loan component execution over 2025-27 in the baseline. - Prioritize housing supply measures (Land Law reform, simplifying permits), expand social housing, and target demand-side measures where appropriate. - Phase in the 1-percent positive neutral CCyB while maintaining banks’ voluntary buffers; pause phase-in if downturn with tightening credit conditions materializes. - Enhance ALMPs, improve PES performance metrics, and design labor reforms (workweek reduction, EPL changes) with strong collective bargaining safeguards. - Address long-term pension and health fiscal pressures with employment-friendly pension options, safeguard-clause improvements, and transparent accounting of central government transfers to social security. *Source: IMF staff report excerpt from 1espea2025001-print-pdf* ### 2.5 percent in 2025, before slowing as its recent drivers normalize. The disinflation ### SPAIN — Staff Report (May 16, 2025) ### Recent developments - Growth and labor - The economy has been growing steadily at an average annualized rate of over 3 percent since end-2023. - Immigration contributed around 75 percent of the 5 percent increase in aggregate employment in 2024. - Per-capita income gap vis-à-vis high-income euro area economies narrowed by over 3 percentage points during 2022-24 but remains about 29 percent in 2024 (17 percent relative to the euro area overall), and over 3 percentage points wider than 20 years ago. - Gross fixed capital formation (GFCF) only returned to pre-pandemic levels in 2024, implying a cumulative capital formation shortfall of over 15 percent since the pandemic. - Inflation and wages - Disinflation proceeded steadily: headline inflation declined throughout 2024, rebounded close to 3 percent in early 2025 due to higher energy prices. - Nominal wage growth per employee remained close to 5 percent in 2024, above collectively bargained increases (3.7 percent in agreements signed in 2024 and 3 percent at the national level). - Recent signs of slowdown in bargained wage growth: 3.2 percent in collective agreements signed in Q1 2025. - Core inflation has been slowly declining, broadly aligned with historical relationships with main drivers. - Credit, housing, and financial conditions - Financial conditions are close to long-term average and easier than in 2022. - Household credit growth recovered from about 0 percent in 2022 to 1 percent in 2024; credit to corporates contracted by 0.2 percent in 2024. - House price growth has been accelerating; looser financial conditions and excess housing demand sustain upward pressure on real estate values. - Public finances and external sector - Overall fiscal deficit declined by 0.3 percentage points to 3.2 percent of GDP in 2024, meeting the government’s 3-percent deficit target when excluding the DANA emergency response amounting to 0.35 percent of GDP. - Primary spending (excluding DANA) grew by 5.1 percent, driven by rising wages and social transfers. - Debt-to-GDP ratio declined to 101.8 percent from 105 percent in 2023. - Trade balance reached a surplus of 4.3 percent of GDP in 2024; services balance amounted to 6.3 percent of GDP; goods balance was -2 percent of GDP. Current account surplus was 3 percent of GDP. Net international investment position improved to -44.0 percent of GDP by end-2024. ### Outlook and risks - Growth projections and drivers - Growth projected to decline to 2.5 percent in 2025 before slowing to 1.8 percent in 2026. - Unemployment projected to stabilize at around 11 percent. - Growth to be sustained by private domestic demand amid weaker external support; consumption expected to remain solid due to real wage gains and gradual decline in household saving rate. - Investment expected to pick up on lower interest rates, progress with NGEU funds, and pent-up housing demand. - Inflation outlook - Inflation expected to return close to the ECB’s target by end-2025. - Core and headline inflation projected to converge near 2 percent by year-end, with sticky services inflation slowing only gradually due to a still tight labor market (vacancy-to-unemployment ratio at a record high) and partial compensation for inflation plus social security contribution increases. - Risk assessment - Most risks are to the downside, including from further escalation of trade measures and domestic political fragmentation. - Trade policy uncertainty and US tariffs announced in early April project to have an adverse impact, though contained by Spain’s limited direct and indirect trade exposure to the US. ### Policy recommendations and priorities - Fiscal consolidation and sovereign risk - Seize growth momentum to more swiftly rebuild fiscal space and reduce sovereign debt risks. - A cumulative adjustment of 3 percent of GDP over 2025-29 would achieve the goal of rebuilding fiscal space. - To preserve growth, adjustment should hinge on reducing tax system distortions, including through VAT rate harmonization, complemented by spending efficiency improvements. - Additional measures to address fiscal pressures from rising future pension expenditures and to improve the pension system’s safeguard clause are recommended. - Reform of the regional financing system should aim at harmonizing the national fiscal rule with the new EU fiscal framework and strengthen regions’ incentives to comply. - Financial sector resilience - Systemic risks in the financial sector remain low, unchanged from the 2024 FSAP. - Household and corporate balance sheets are sound; banking system is adequately capitalized, liquid, profitable and resilient, though capital ratios remain somewhat below euro area peers. - To strengthen resilience, staff supports the ongoing phasing in of a (one percent) positive neutral countercyclical capital buffer. - Labor market, employment, and productivity - A renewed reform impetus is needed to raise the overall employment rate and productivity toward the euro area’s best performers. - Further enhance activation policies and financial incentives for jobseekers to durably reduce unemployment to single digits. - The planned workweek reduction should be carefully designed to mitigate adverse effects on output and workers’ incomes; a major role for collective bargaining (including on overtime) is advised. - Productivity-enhancing reforms should facilitate firms’ scaling-up and strengthen innovation by: - Completing both the Spanish and EU single markets. - Increasing access to venture capital. - Promoting excellence through greater autonomy in higher education. - Expand housing supply, complemented with targeted demand-side measures tailored to local market circumstances, to improve affordability. ### Financial stability and structural reform priorities (concise) - Maintain vigilance on accelerating house price growth; warrants close monitoring. - Complete NGEU grant execution and disbursement as assumed to support investment; staff assumes full grant component execution by August-2026 and 30 percent of loan component execution over 2025-27 in the baseline. - Address investment shortfalls: domestic policy uncertainty may account for at least a fifth of the cumulative post-COVID investment gap. *May 16, 2025. INTERNATIONAL MONETARY FUND.* ### 9. The current account surplus is expected to decline. The projected decline in 2025 by ### 1espea2025001-print-pdf - 9. The current account surplus is expected to decline. The projected decline in 2025 by ### Current account outlook - The projected decline in 2025 by 0.5 percentage points to 2.5 percent of GDP reflects two forces: - Deterioration of the international environment—including higher trade policy uncertainty, restrictive trade measures, and weaker trading partners’ growth prospects—will weigh on exports. - Shift in the growth drivers toward domestic demand—particularly investment, which has a high import content—will stimulate imports. - Further normalization of tourism and non-tourism services exports over the medium term, together with the above forces, are projected to result in a further gradual weakening of the current account surplus to 1.5 percent by 2030. ### Risks to the outlook - Most risks to the outlook are to the downside. - Key global downside risks: - An escalation of trade measures, particularly those involving the EU. Simulations suggest that each 10 percentage points rise in US tariffs on the EU could lower Spain’s GDP by about 0.1 percent in the short and medium term (leaving aside potential non-linearities, any further spikes in uncertainty, and disruptions in global value chains). - Higher import prices from intensified regional conflicts or heightened commodity price volatility would deteriorate terms of trade, lower real incomes, and raise inflation. - Further repricing of still richly-valued financial assets could tighten global financial conditions and weaken growth. - Domestic downside risks: - Political fragmentation could hamper a fiscal response if Spain’s deficit reduction fell short of its commitments under the EU governance framework or market concerns about sovereign risks were to emerge. - Further fiscal pressures from a more persistent or larger-than-planned rise in defense spending that would not be fully offset by spending cuts or tax increases. - Continued subdued investment due to persistent supply bottlenecks in construction, prolonged domestic and global uncertainty, or slower-than-expected execution of NGEU funds. - Upside possibilities: - Immigration could remain high for longer or rise again, lifting potential growth. - Tourism momentum could remain stronger in the short term. - A larger unwinding of household savings from COVID could boost consumption. - Inflation risks: - More-persistent-than-expected increases in unit labor costs from sustained wage pressures, or disappointing productivity growth, could slow the disinflationary process. ### Scenario considerations and recommended policy flexibilities - In a global downside scenario (such as in the 2025 April WEO), potential output would contract and actual output would fall even more, opening up a negative output gap, increasing unemployment, pushing down inflation and deteriorating the fiscal position. - Policy responses: - Accelerate structural reforms to dampen adverse impact on potential growth, with a focus on labor market policies to facilitate the reallocation of workers across sectors. - Allow automatic stabilizers to operate to stabilize the economy and mitigate the rise in unemployment. - Given limited fiscal space, discretionary stimulus should be considered only in case of major and temporary negative shocks and provided government funding costs remain low enough. - If a downturn is accompanied by significant tightening of credit conditions, the ongoing phasing-in of the positive neutral countercyclical capital buffer (CCyB) could be paused. ### Authorities’ views (as reported) - Authorities broadly shared staff’s views on the outlook and main risks, emphasizing Spain’s robust economic performance and prospects. - Government concerns focused on trade policy uncertainty and restrictive trade measures’ impact on specific sectors (chemical products/pharmaceuticals, machinery and equipment, and agrifood). - Over the medium term, the authorities see room for migration to continue supporting growth, complemented by an acceleration of investment—particularly in construction—and stronger productivity growth following its recent uptick. - On inflation, authorities concurred that the disinflation process will continue, supported by reduced profit margins last year. - The Bank of Spain projects a higher medium-term current account surplus than staff, in part because it expects the household saving rate to stay higher. ### Fiscal framework, projections, and measures - Authorities’ Medium-Term Fiscal Structural Plan (MTFSP): - Net primary spending growth target path implies a reduction in the fiscal deficit to 2.5 percent of GDP for 2025—excluding DANA-related one-offs of 0.3 percent of GDP—and a gradual decline to 0.8 percent by 2031. - Committed to a 7-year fiscal adjustment backed by growth-enhancing reforms. - MTFSP entails a steady improvement in the structural primary balance of 0.4 percent of GDP per year on average over 2025-31 (3 percent overall), underpinned by average yearly growth in net primary expenditure of 3 percent. - Tax and revenue actions approved in November 2024: - Introduction of a minimum corporate income tax (CIT) rate of 15 percent for multinational firms. - Increase in the top bracket on personal capital earnings. - Rise of excise taxes on tobacco and e-cigarettes. - Bank levy extended for 3 years and converted into a tax with a revamped design. - Temporary energy company levy was not renewed. - April 2025 preemptive support package for firms potentially affected by US tariffs: - Approximately 0.9 percent of GDP of credit lines and loan guarantees, partly financed through the repurposing of pre-existing instruments. - New initiatives amount to 0.5 percent of GDP while the remaining 0.4 percent are repurposed existing financing facilities. - Measures include approximately €6 billion of credit lines/guarantees, a €2 billion increase to an existing credit insurance program for exporters, and €0.7 billion of additional financing for the Fund for Firms’ Internationalization. - Staff baseline fiscal projections: - Overall deficit forecast to stabilize at 2 percent of GDP, and the debt-to-GDP ratio to decline to about 93 percent, by 2030. - Interest payments expected to increase gradually from 2.5 to 2.8 percent of GDP over the projection period. - Increase in public defense spending to 2 percent of GDP for 2025 is assumed to add about 0.2 percentage points to the deficit this year once offsetting measures are factored in. - Structural primary balance expected to improve by approximately 1 percentage point over the medium term. - To meet the primary deficit path set out in the authorities’ MTFSP, staff estimate additional measures of about 1 percent of GDP by 2029, and 2 percent by 2031, will be needed. - Debt risk assessment: - Overall risk of sovereign stress assessed as moderate, but the risk of an adverse debt scenario is higher than pre-COVID-19. - Medium-term debt risk viewed as moderate as gross financing needs and debt are projected to remain slightly above 14 percent and 93 percent of GDP by 2030, respectively. - Long-term debt risk assessed as high in the absence of additional reforms to address fiscal pressures in health expenditures and pensions outlays related to aging demographics. - Staff assess fiscal space to be “at risk” under the baseline as well as under the reinstated EU economic governance framework. ### Staff fiscal recommendations and consolidation strategy - Staff recommend frontloading consolidation given current cyclical position: - Recommend a reduction in the primary structural fiscal deficit of 0.6 percentage point of GDP each year, for a cumulative adjustment of 3 percentage points over 2025-29 (about 2 percentage points more than under the baseline). - Historical estimates of fiscal multipliers for Spain of 0.6 suggest the faster rebuilding of fiscal space would come at a small growth cost of around 0.1 percentage points per year. - Consolidation should be anchored in measures that reduce tax distortions and are growth-friendly: - VAT harmonization and enhanced environmental taxation could deliver the recommended consolidation measures of 2 percent of GDP with respect to the baseline. - Scope to raise revenues by 1.5 percent of GDP while enhancing efficiency by broadening the VAT base, limiting exemptions, and harmonizing rates across goods and services, with full compensation of lower-income households through targeted labor tax wedge cuts or transfers as needed. - Press ahead with the proposal to equalize diesel and gasoline excise duties. - Increasing the scope and level of carbon pricing would reduce emission-intensity heterogeneity and help meet Spain’s ambitious 2030 greenhouse gas emissions (GHG) target. - Measures already implemented (minimum 15 percent CIT on multinational firms) and proposed measures (standard VAT rate for short-term vacation rental homes) would further reduce distortions. - The revamped banking sector tax should remain a temporary measure and be discontinued at the end of its 3-year duration. - Announced below-the-line liquidity support for firms affected by US tariffs should be well targeted, temporary, and aimed at facilitating adjustment via reallocation of exports to other markets or addressing externalities/market failures. ### Spending efficiency and prioritization - Primary spending as a share of GDP has grown by about 2.5 percentage points since COVID-19, about 1 percentage point more than in peer EU countries; almost half of this rise reflects higher social transfers and salaries. - Recommendations: - Rebalance spending informed by cross-country benchmarking and in-depth sector-specific studies (e.g., AIReF reviews). - Expand the Spending Review Monitoring Unit within the Ministry of Finance to identify areas for review and assign quantified savings goals aligned with yearly budget process and medium-term fiscal targets. - Enhance AIReF’s reviews by providing assessment of budgetary implications and political feasibility of recommendations. ### Pension system recommendations - AIReF’s recent review (Informe 2/25) did not trigger the system’s safeguard clause, but its independent opinion (Opinión 2/25) highlighted a widening gap between pension expenditures and social security contributions over the coming decades, partly as a result of the 2021-2023 reforms. - Participation rate of workers aged 55-69 increased by almost 2 percentage points since 2019 due to incentives for late retirement. - Policy guidance: - Prioritize employment-friendly pension options; additional increases in social security contributions would raise the labor tax wedge and adversely affect employment. - Consider further lengthening the contributory period used in pension calculation to better align with workers’ average career earnings. - Combine pension reform with actions on health, flexible work arrangements, and social benefits to help older workers stay in the labor market. - Amend the safeguard clause to be more forward-looking and better focus on the prospective evolution under a no-policy-change scenario of the gap between pension expenditures and system revenues; at a minimum, define ex ante a narrow set of direct revenue measures to enter the computation of net future spending ahead of AIReF’s next review. *Source: IMF staff report excerpt from 1espea2025001-print-pdf* ### 20. Improving the MTFSP and strengthening the role of AIReF would further strengthen ### 20. Improving the MTFSP and strengthening the role of AIReF would further strengthen ### Strengthening the MTFSP and AIReF - Findings and rationale: - The MTFSP would benefit from grounding the consolidation strategy in well-identified tax increase and spending reduction priorities to serve as a fully-fledged medium-term fiscal plan. - Reduced fiscal policy uncertainty, via clearer priorities, would anchor firms’ and households’ expectations and support investment and macroeconomic activity. - AIReF’s role should be bolstered, following recommendations from the recent evaluation by the European Commission. - Policy recommendations: - Establish an official technical engagement between the authorities and AIReF when preparing MTFSP updates. - Require AIReF to opine on the MTFSP prior to submission. ### Regional financing system and national fiscal rule reform - Findings and rationale: - The ongoing debate on the regional financing system should be accompanied by reform of the national fiscal rule, linking it to the new EU governance framework and strengthening enforcement. - Partial reduction of regions’ outstanding debt with the central government should be conditional on individual regions committing to credible consolidation plans to minimize moral hazard. - Policy recommendations: - Reform the national fiscal rule as part of the transposition of EU Directive 2024/1265 and feature an enhanced corrective arm. - Reformulate yearly targets for the collective of autonomous communities in terms of the same fiscal variables as the MTFSP, with a focus on net primary spending growth. - Differentiate yearly spending limits by community depending on their capacity to withstand adjustment given their macroeconomic situation and debt level. - Reform the centralized Fondo de Liquidez Autonómico (FLA) so it supports regions’ return to public debt markets and eventually functions only as a last-resort borrowing instrument; strengthen its conditionality and pair it with enforcement of regions’ consolidation plans. ### Authorities’ views on fiscal policy - Authorities’ stance: - Reiterated commitment to fiscal discipline, guided by their announced path for net primary expenditure growth. - View the medium-term adjustment path in the MTFSP as striking the right balance between short-term growth and medium-term fiscal sustainability and do not see the need to frontload adjustment as staff suggested. - Noted political fragmentation impeded consensus on some revenue measures (example: equalizing diesel and gasoline excise duties), but several key initiatives (redesigned bank tax and minimum CIT on multinationals) were passed. - Expect to achieve medium-term fiscal targets without additional revenue measures, though prepared to take action if needed. - Confident they could accommodate future defense spending commitments beyond 2025 while complying with the EU fiscal rules. - Viewed AIReF’s review of the pension system under the safeguard rule as confirmation of the positive effects of the 2021-2023 reforms; consider the rule subordinate to the EU governance framework. - Emphasized that central government absorption of part of autonomous communities’ debt will provide fiscal space while spending growth limits under the national fiscal rule will contain potential spending increases. ### Banking sector: resilience and risks - Overall assessment: - Spain’s banking sector has remained healthy; systemic risks remain low and unchanged from the 2024 FSAP and Article IV. - Significant institutions (SIs) are resilient, with stable capital and liquidity buffers at comfortable levels, although CET1 ratios are below those of euro area peers. - Profitability strong, supported by robust net interest margins, recovery in credit growth, and sustained asset quality. - Systemic risks from nonbank financial institutions (NBFIs) appear limited due to relatively small exposures of Spanish banks to domestic and foreign NBFIs. - Projections and specific figures: - Under staff’s baseline, banking sector profitability is expected to decline due to lower interest rates but remain above pre-COVID levels. - Revenues from the revised banking sector tax in 2024 amounted to just about 3 percent of 2024 bank pre-tax profits. - The potential adverse implications of the BBVA-Sabadell merger for competition and financial stability should be carefully assessed; competition concerns could be mitigated through behavioral and structural remedies proposed by the competition authority. ### Asset quality, debt, and insolvencies - Households and firms: - Household balance sheets are healthy with low and broadly stable outstanding debt levels and one of the lowest household debt-to GDP ratios across euro area peers. - Only 7.7 percent of households have a debt service-to-income ratio exceeding 40 percent. - Corporate debt ratio held at around 48 percent in 2024, close to pre-COVID levels. - The share of firms with an interest coverage ratio below one stood at 13.2 percent in 2023, below its pre-COVID level. - Insolvencies and judicial capacity: - Recent rise in insolvency filings modest among firms; sharper increase among individuals reflects new proceedings from the insolvency law enacted in September 2022. - Need to continue increasing court resources; preliminary evidence points to a decline in duration of proceedings, but more time is needed to assess full impact. ### Housing market: prices, affordability, and policy guidance - Recent developments: - Housing transactions have grown steadily since mid-2022 alongside a rise in new mortgage lending. - House price growth accelerated since early 2023, reaching double-digit growth year-on-year in 2024Q4. - Commercial real estate prices rebounded, returning to positive growth in 2024 after a contraction in 2023. - Average prices remain below 2007 levels in real terms and are only slightly above their fundamental value based on price-to-rent ratios and house price equilibrium model estimates. - Household leverage has only inched up; no noticeable relaxation of lending standards. - Risks and recommended monitoring: - Continued acceleration in housing prices could entail risks to the financial system; warranting close monitoring of mortgage credit growth and lending standards. - If signs of easing lending standards emerge, consider pre-emptive borrower-based measures, which take time to affect lending behavior and are politically easier to adopt early on. - Affordability and policy responses: - Housing affordability has worsened and may entail financial stability implications if left unchecked. - In January 2025, the government proposed a package of supply- and demand-side measures to address housing affordability. - Priority should be on boosting housing supply, especially in areas constrained by land scarcity: advance Land Law reform and simplify construction permit procedures to expand developable land. - Increase social housing stock, including measures in the Recovery and Resilience Plan. - In areas where land scarcity is less acute and house price overvaluation is not a concern (mid-sized or smaller inland cities), targeted demand-side measures can support access to homeownership for creditworthy but liquidity-constrained households. - The new Official Credit Institute (ICO) guarantees program is a step in this direction but should retain stringent price caps on eligible housing units. - Rent caps should be further evaluated and discarded if found to reduce the quantity and/or quality of rental market supply and to undermine lower-income households’ access to housing. - Tenure-cost indicator: - The total housing cost overburden rate is defined as the percentage of the population living in households where the total housing costs ('net' of housing allowances) represent more than 40 percent of disposable income ('net' of housing allowances). ### Countercyclical Capital Buffer (CCyB) and capital guidance - CCyB timeline and impact: - Bank of Spain set the CCyB at 0.5 percent, effective October 1, 2025. - Planned increase to 1 percent from October 1, 2026. - The full CCyB amounts to just over 15 percent of annual (2024) pre-tax profits. - Any adverse impact on credit supply is expected to be small given banks’ capital ratios comfortably exceed regulatory requirements. - Policy guidance: - Until CCyB is phased-in, and particularly in an uncertain global environment, banks should be encouraged to maintain comfortable voluntary buffers above minimum requirements, including through prudent dividend distribution. ### Follow-up on 2024 FSAP recommendations and supervisory actions - Progress and remaining gaps: - BdE and CNMV are hiring specialists (e.g., on cybersecurity) to address staffing constraints. - Progress made in enhancing BdE’s independence via an amendment under parliamentary discussion to remove the Ministry of Economy’s appeal powers against BdE supervisory decisions and sanctions. - Remaining actions include granting CNMV autonomy over hiring processes, integrating preventative and executive resolution functions for banks, and improving the statutory resolution regime to strengthen the resolution powers of the Fund for Orderly Bank Restructuring (FROB). - BdE has largely completed national-level preparations for addressing liquidity needs in resolution for less significant institutions (LSIs) but awaits implementation of a harmonized Eurosystem-wide framework for SIs. - Authorities’ view: - Authorities concurred with staff’s assessment that cyclical systemic risks are contained and reaffirmed commitment to implement 2024 FSAP recommendations, noting varying degrees of responsiveness due to agency-level action, inter-agency coordination, and legislative requirements. ### Labor market: unemployment and dualism - Key indicators: - Labor market is tight, indicated by a high vacancies-to-unemployment ratio. - Unemployment rate recently stabilized at around 11 percent—still the highest level across the EU. - Public sector retains a close-to -30-percent share of temporary contracts. - The share of fixed discontinuous (FD) contracts remained broadly stable through 2024; transition rate of FD employment into unemployment or inactivity has declined recently. - Policy implications: - Remaining unemployment is mostly structural; structural reforms are needed to bring it further down. - Further progress towards reducing dualism could be achieved if the public sector curbed its close-to -30-percent share of temporary contracts. - Better high-frequency data on FD workers’ inactivity periods (particularly duration and recall frequency) are required to assess job stability associated with FD contracts. - Limited access to affordable housing may have hampered labor market functioning and contributed to structural unemployment, as suggested by the positive relationship across provinces between vacancies-to-unemployment ratios and price-to-rent ratio growth. *SPAIN INTERNATIONAL MONETARY FUND* ### 32. Planned labor market policy initiatives are not expected to make progress toward ### 1espea2025001-print-pdf - 32. Planned labor market policy initiatives are not expected to make progress toward ### Labor market reforms and risks - A draft bill to reduce the workweek from 40 to 37.5 hours without loss of pay was approved by the Council of Ministers in early February and is ready to start its parliamentary process, though with uncertain political support. - Past experiences in other countries with workweek reductions point to an ambiguous effect on unemployment and adverse impacts on output and post-reform wage growth (Staff Report of the 2024 Article IV Consultation for Spain). - The combined effect of a workweek reduction and the recent 4.4 percent increase in the minimum wage would effectively raise the minimum wage by over 10 percent in 2025 and put its cumulative increase since 2018 at over 70 percent, raising concerns regarding potential adverse impacts on disadvantaged groups. - The reform should preserve the strong role of collective bargaining to accommodate cross-sectoral heterogeneity, including: - distributing total hours throughout the year, and - setting the level and remuneration of overtime. - The government is considering higher compensation for unfair dismissals tailored to individual circumstances. Such employment protection legislation (EPL) reform, while still at inception, could potentially discourage firms from hiring disadvantaged groups of workers. - To discourage excessive layoffs, a superior alternative to increasing firing costs would be to introduce higher unemployment insurance contributions for employers with higher turnover (so-called experience rating). ### Active labor market policies (ALMPs) and unemployment assistance - Further enhancing ALMPs and financial incentives for jobseekers is key to durably reducing unemployment to single digits. - Recent effort: adoption of the unemployment assistance (UA) reform in November 2024, which: - improved scheme generosity and beneficiaries’ work incentives by reducing the benefit amount over time, - made benefit receipt temporarily compatible with work, and - established personalized activation itineraries. - Possible expansions of the UA reform include: - strengthening activation requirements for recipients, - allowing them to combine work income with benefit receipt for a longer period, and - eventually replacing non-employment benefits by an integrated in-work tax credit. - The Public Employment Service (PES) has recently strengthened the link between regional offices’ funding and job placement performance; giving greater weight to actual job placement when distributing funds would enhance ALMP effectiveness. - Conditional on improved performance metrics, the ALMP budget—which remains significantly below successful European countries—could be increased to strengthen regional PES intermediation via increased staffing, digitalization, and private-sector collaboration. ### Older workers and retirement transitions - Strengthening ALMPs and job-take-up incentives is key to decreasing the gap between the average age at which older workers exit the labor market and the age they collect a pension. - Pension incentives to delay retirement were strengthened through the 2023 reform; these incentives are likely behind: - a fall in the share of early retirements with reduced benefits from 27.8 percent to 20.2 percent, and - a rise in the share of delayed retirements from about 5 to almost 10 percent among new pensioners between 2020 and 2024. - Changes to partial (early) retirement and “active” (delayed) retirement schemes introduced in 2024 could help older workers combine pension benefits with a reduced working schedule, allowing more gradual transitions out of employment. - Further flexibility could be achieved by loosening the requirement for firms to make up for lost hours worked by hiring new employees on open-ended contracts. - Broader actions beyond financial incentives are needed, including addressing worsening health trends since COVID-19 and facilitating telework or alternative schedules to support work-life balance and caregiving responsibilities. - Recent proposal: allow a voluntary gradual return to employment for recipients of temporary disability benefits. ### Authorities’ views on labor policy - Authorities concur with staff on the need to continue enhancing ALMPs and reiterated commitment to reducing the workweek and tailoring EPL to individual circumstances. - They emphasized positive impacts of the 2021 labor reform (which brought down temporary employment to average EU levels) and the 2023 Employment Law (revamping the institutional framework for ALMPs). - Authorities focus on: - digitalizing regional PES agencies, - professionalizing PES staff, and - refining performance indicators for fund distribution across regional PES agencies. - They are evaluating further UA improvements, including longer periods combining work income with benefit receipt. - The Ministry of Labor noted the actual workweek is already fairly close to the proposed 37.5 hours and that flexibility mechanisms exist to adapt distribution of hours through the year. - Guided by the European Social Charter, the Ministry intends to adjust severance pay for unfair dismissals according to individual circumstances and believes reform, if implemented appropriately, could reduce legal uncertainty. ### Boosting productivity growth: findings and priorities - Spain’s persistent productivity shortfall vis-à-vis higher-income economies stems from less innovation-oriented leading firms and a smaller footprint of young high-growth firms; no Spanish firm is among the world’s top 50 R&D spenders. - Key constraints: insufficient effective market size and lack of access to equity financing for young high-growth firms. - Top policy priorities: - complete the Spanish single market for goods and services, - promote venture capital domestically and at the EU level, - support the EU Competitiveness Compass and progress toward the EU Capital Markets Union (CMU). - Domestic measures: - the government’s “Regime 20” initiative to cut administrative barriers across Spanish regions is welcome but may take sustained effort, - consider reducing the debt bias in the corporate tax system and incentivizing institutional investors to invest in Spanish venture capital funds via information provision or regulatory and tax incentives, - streamline size-dependent thresholds (notably labor regulation kicking in at 50 employees and tax monitoring at over 6 million euros in annual operating revenue), - ensure tax, spending and regulatory policies support young high-growth firms rather than just SMEs, - continue improving insolvency proceedings to favor restructuring of viable firms. ### Innovation, R&D, and tertiary education - Spain lags on R&D expenditure and innovation outcomes. In 2022: - public R&D expenditure was 0.53 percent of GDP, - overall R&D expenditure was 1.41 percent of GDP, - EU averages were 0.65 and 2.11 percent of GDP, respectively. - Targets under the 2022 Law on Science, Technology and Innovation: 1.25 percent and 3 percent of GDP by 2030 for public and overall R&D expenditures, respectively—meeting these targets will require doubling the R&D spending share in GDP. - Tertiary education: 52 percent of people aged 25-34 had completed tertiary education in 2023, versus the EU average of 43 percent, but skill mismatch is elevated (e.g., declining share of university graduates in STEM). - The 2023 Reform on University Education (Law 2/2023 on the University System - LOSU) sets a minimum public spending target of one percent of GDP; further actions needed include strengthening university autonomy in recruitment, promotion and remuneration, making curricula more responsive to labor market demands, enhancing research collaboration with businesses, and increasing performance-based public funding. ### Governance and anti-corruption - Spain is committed to addressing transnational aspects of corruption, but further advancements are encouraged. - The OECD Phase 4 Evaluation Report (2022) highlighted scope for stronger foreign bribery enforcement and enhanced use of anti-money laundering tools to tackle foreign proceeds of corruption. ### Staff appraisal: macro outlook and fiscal recommendations - Recent performance: - Spain continued to outperform the euro area, though per-capita income gains were more modest. - Unemployment remains the highest in the euro area at about 11 percent. - Growth projections: - 2.5 percent in 2025, - about 1.8 percent in 2026 (declining gradually thereafter toward medium-term potential). - Risks: downside risks predominate, including an escalation of trade measures and domestic political fragmentation. - Fiscal policy recommendations: - Rebuild fiscal space and reduce sovereign debt risks via a more swift medium-term fiscal plan. - Staff projects that, absent further consolidation measures besides social security contribution increases from the 2021-2023 pension reforms and the non-indexation of PIT brackets (about 1 percent of GDP overall over 2025-29), the deficit would stabilize above 2 percent of GDP by 2030, while the debt-to-GDP ratio would remain above 90 percent before rising again in the longer term. - Staff recommends frontloading the authorities’ planned 3 percent of GDP adjustment over 2025-2029 rather than 2025-2031. This effort would require about 2 percentage points of GDP in new measures and should be underpinned by an enhanced medium-term fiscal plan with well-identified tax increases and spending reductions. - Harmonizing VAT and enhancing environmental taxation are suggested to deliver the recommended effort while reducing economic distortions. - Given the widening projected gap between pension expenditures and social security contributions over coming decades, pension reforms should prioritize employment-friendly options. - If downside risks materialize, fiscal policy should remain flexible, letting automatic stabilizers play out and considering temporary discretionary support only in the event of a severe shock and provided sovereign funding costs remain low. ### Financial system and housing - Systemic financial risks remain low; banks are well-capitalized, liquid, and profitable, though capital ratios are somewhat below euro area peers. - Household and corporate balance sheets are sound, supported by low debt and rising incomes. - Rapid growth in house prices has eroded affordability and should be primarily addressed through measures that stimulate housing supply; pre-emptive borrower-based measures should be considered if lending standards ease. - Staff supports phasing-in the one-percent positive neutral CCyB and continued implementation of 2024 FSAP recommendations to enhance resilience. *Source: IMF staff report excerpt.* ### 45. Fostering income-per-capita convergence toward higher-income advanced economies ### 1espea2025001-print-pdf - 45. Fostering income-per-capita convergence toward higher-income advanced economies ### Key findings on labor market and productivity - Spain still has one of the lowest employment rates in Europe. - The (hourly labor) productivity gap vis-à-vis the euro area remains about as wide as it was 25 years ago. - The euro area has itself been falling behind the US in productivity. - Durably reducing unemployment to single digits requires enhancing activation policies and financial incentives for jobseekers. ### Considerations on working-time policy - The planned reduction of the working week in the private sector should be carefully designed to mitigate adverse effects on output and workers’ incomes. - Collective bargaining should play a major role, including in setting the level and remuneration of overtime. ### Reforms to close the productivity gap - Facilitate firms’ scaling-up and innovation through reforms such as: - Completing both the Spanish and EU single markets for goods and services. - Streamlining firm size-related tax and regulatory thresholds. - Boosting venture capital through progress toward the CMU complemented by domestic incentives. - Promoting excellence in higher education, including through greater autonomy and performance-based funding of universities. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1espea2025001-print-pdf.pdf* ### 46. It is recommended that the next Article IV consultation takes place on the standard ### It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Real sector and inflation - Spain’s economy has outperformed euro area peers since 2022; GDP growth repeatedly surprised on the upside, most recently due to the pick-up in domestic demand. - Real GDP growth (Table 1, annual percent change projections): - 2021: 6.7 - 2022: 6.2 - 2023: 2.7 - 2024: 3.2 - 2025: 2.5 - 2026: 1.8 - 2027: 1.7 - 2028: 1.6 - 2029: 1.6 - 2030: 1.6 - Contributions to growth and surprises: - Growth surprises by demand component are documented (private consumption, public consumption, investment, exports, imports). - Consumption and saving: - Household saving rate (percent of gross disposable income): 2021: 14.3; 2022: 9.0; 2023: 12.0; 2024: 13.6; 2025: 13.5; 2026: 13.0; 2027: 12.5; 2028: 11.7; 2029: 11.0; 2030: 10.3. - Capacity utilization and investment goods: - Capacity utilization recently fell slightly below its historical average due to deterioration of investment goods’ capacity utilization. - Inflation: - Headline inflation (average): 2021: 3.0; 2022: 8.3; 2023: 3.4; 2024: 2.9; 2025: 2.2; 2026: 2.0; 2027: 2.1; 2028: 2.0; 2029: 2.0; 2030: 2.0. - Headline inflation (end of period): 2021: 6.5; 2022: 5.5; 2023: 3.3; 2024: 2.8; 2025: 1.9; 2026: 1.9; 2027: 2.1; 2028: 2.0; 2029: 2.0; 2030: 2.0. - Core inflation (average): 2021: 0.7; 2022: 5.2; 2023: 5.8; 2024: 3.0; 2025: 1.9; 2026: 2.0; 2027: 2.0; 2028: 2.0; 2029: 2.0; 2030: 2.0. - Disinflation continued for both headline and core despite an uptick toward the end of the year. ### Labor market - Employment and participation: - Employment and participation rates broadly stabilized after sharp post-COVID recovery. - Employment (percent change): 2021: 3.3; 2022: 3.6; 2023: 3.1; 2024: 2.2; 2025: 1.3; 2026: 0.9; 2027: 0.7; 2028: 0.6; 2029: 0.5; 2030: 0.5. - Labor force (percent change): 2021: 2.5; 2022: 1.4; 2023: 2.1; 2024: 1.3; 2025: 1.1; 2026: 0.8; 2027: 0.6; 2028: 0.6; 2029: 0.5; 2030: 0.5. - Migration: - Large net migration flows supporting working-age population growth; net migration flows series shown with projection basis described in notes. - Unemployment: - Unemployment rate (percent of total labor force): 2021: 14.9; 2022: 13.0; 2023: 12.2; 2024: 11.3; 2025: 11.1; 2026: 11.0; 2027: 11.0; 2028: 11.0; 2029: 11.0; 2030: 11.0. - Spain’s unemployment rate has declined significantly since its COVID peak but remains the highest in the euro area. - Young (15-24) and old (55-74) workers account for nearly 40 percent of the pool of jobseekers. - Labor market tightness and costs: - Market tightness (vacancies-to-unemployment ratio) has risen markedly. - Labor compensation and unit labor costs growth were persistently high through late 2023. ### External sector - Current account and trade: - Current account balance (percent of GDP): 2024: 3.0 (Table 4 shows current account 2024 = 3.0 percent of GDP). - Trade balance of goods and services (percent of GDP): 2024: 4.3. - Exports of goods and services (percent of GDP): 2024: 36.8. - Imports of goods and services (percent of GDP): 2024: 33.0. - Goods, services, tourism: - After falling in 2023, nominal goods imports broadly stabilized during 2024 alongside energy prices. - Strong momentum in services exports continued; tourist arrivals and spending reached record highs. - Financial account and NIIP: - Financial account surplus associated with net outflows of non-portfolio investments, partly offset by net inflows from the Bank of Spain’s balance sheet. - Net international investment position (NIIP) continues to gradually improve, albeit at a lower pace. - External real exchange rate: - ULC-based REER remained broadly stable in 2024 and significantly below its pre-GFC peak. ### Credit developments and financial cycle - Private sector deleveraging: - Households have continued to deleverage; non-financial corporations have also deleveraged. - Bank lending: - Bank lending to the private sector turned positive in the last quarter of 2024 (Bank Lending to Private Sector, yoy percent change series). - Interest rates: - Benchmark interest rates have declined; Euribor 12m and new lending rates plotted with declining trend into 2025. - Credit demand and lending standards: - Credit demand recovering across corporates, housing, and consumer lending. - Lending standards stopped tightening most recently for corporates and households. ### Households and non-financial corporations - Household debt and risk: - Debt-service-to-income (DSTI) ratios edged up in 2024 due to higher interest rates, particularly among lower-income households. - Households at risk (DSTI > 40) are mainly concentrated in the lowest income quintile. - Broader indicator including housing/community/utilities expenses shows risk concentrated in lowest income quintile. - Corporate sector: - Corporate profitability recovered since the pandemic and stabilized recently amid higher interest expenses. - Corporates’ total debt-to-asset ratio declined steadily but edged up in 2024 as new borrowing resumed. - Liquidity ratios have remained broadly stable for both large and small corporates. ### Real estate developments - House prices: - House prices have been rising steadily; prices for new dwellings increased faster than existing dwellings. - House Prices Index (2007=100) shows total, new dwellings, existing dwellings rising through 2024Q4. - Valuation metrics: - Price-to-rent and price-to-income ratios have risen but remain below pre-GFC peaks. - Lending metrics: - Average Mortgage Loan-to-Value (LTV) ratio remained stable; share of loans with LTV > 80 percent remains below pre-COVID level. - Supply: - Housing supply shortages cited as key source of upward price pressure since COVID. - Commercial real estate: - Commercial real estate prices have rebounded with prime market prices surpassing pre-COVID levels. ### Banking sector performance - Asset quality and provisioning: - Non-performing loans (NPLs) remained stable following monetary tightening. - Stage 2 and 3 loans have been declining, moving toward pre-COVID levels (loans in Stage 2 and 3 series). - Cost of Risk (CoR) series shown; provisioning stabilized after peaking during the pandemic. - Profitability and capitalization: - Banking sector profitability continued to increase, supported primarily by higher net interest income. - CET1 ratio (risk-weighted) 2019Q4 to 2024Q4 series indicates Spain below peers on a risk-weighted basis; leverage ratio is comparable to peers. - Liquidity: - Spanish banks retain strong liquidity ratios despite declines following ECB shift from QE to QT; LCR and loan-to-deposit ratios plotted for 2024Q4. - Profitability components: - Profitability decomposition shows net interest income as the primary support to net income (before taxes). ### Public finances - Debt dynamics: - Public debt has been declining steadily with both private and public (Bank of Spain-ECB) holdings shrinking. - General government debt (Maastricht, percent of GDP) projections (Table 1): - 2021: 115.6 - 2022: 109.4 - 2023: 105.0 - 2024: 101.8 - 2025: 100.7 - 2026: 99.1 - 2027: 97.7 - 2028: 96.2 - 2029: 94.6 - 2030: 93.0 - Fiscal balances: - General government balance (percent of GDP) (Table 1): 2021: -6.7; 2022: -4.6; 2023: -3.5; 2024: -3.2; 2025: -2.8; 2026: -2.4; 2027: -2.3; 2028: -2.2; 2029: -2.1; 2030: -2.0. - Primary balance (percent of GDP): 2021: -4.7; 2022: -2.5; 2023: -1.7; 2024: -1.3; 2025: -0.6; 2026: 0.1; 2027: 0.1; 2028: 0.3; 2029: 0.5; 2030: 0.5. - Structural balance and primary structural balance series provided in Table 1. - Revenues and expenditures (Tables 2a and 2b): - Revenue (billions of euros): 2022: 574.1; 2023: 628.3; 2024: 672.7; 2025: 708.2; 2026: 747.7; 2027: 763.3; 2028: 796.5; 2029: 830.4; 2030: 865.5. - Expenditure (billions of euros): 2022: 637.8; 2023: 681.0; 2024: 722.8; 2025: 755.5; 2026: 789.1; 2027: 805.6; 2028: 837.6; 2029: 870.7; 2030: 906.2. - Interest expenditure (billions of euros): 2022: 31.8; 2023: 35.7; 2024: 39.0; 2025: 43.3; 2026: 47.3; 2027: 49.1; 2028: 51.4; 2029: 53.8; 2030: 56.2. - Fiscal composition: - Taxes (percent of GDP): 2022: 24.1; 2023: 23.7; 2024: 23.9; 2025: 23.8; 2026: 23.8; 2027: 23.9; 2028: 23.9; 2029: 24.0; 2030: 24.1. - Social contributions (percent of GDP): 2022: 13.1; 2023: 13.2; 2024: 13.2; 2025: 13.5; 2026: 13.7; 2027: 13.9; 2028: 14.0; 2029: 14.0; 2030: 14.1. - Fiscal policy note: - The contribution of real growth to debt reduction has remained sizable while that of real interest rates waned; financing costs fell mildly but GDP deflator growth declined even more. - The fiscal balance improvement since the pandemic has been driven by a persistent rise in personal income tax revenues and social security contributions. - “There is room to mobilize further VAT revenues.” ### Social indicators - Inequality and poverty: - Income inequality (Gini) continued to decline and is broadly in line with euro area peers; Gini index points plotted for 2019 and 2023 with Spain among listed countries. - In-work at-risk-of-poverty rates improved for young, low-skilled, and temporary workers but remain above the euro area average. - Youth and education: - Share of young people neither working nor studying has declined to historical lows but remains among highest in euro area. - Spain remains euro area country with highest share of early leavers from education and training (percent of 18-24 population, 2024). - Gender gaps: - Gender gap scores by dimension show improvements over 2006, 2013, and 2024 but scope for progress remains on political empowerment and economic participation/opportunity. - Demographics: - Population projected to age more rapidly in Spain than in any other euro area country in coming decades; projected change in old-age dependency ratio (percentage points, 2024-2050) shows Spain highest among listed countries. ### Selected financial soundness and external debt indicators - Financial soundness (Table 3, 2024): - Regulatory capital to risk-weighted assets: 17.5 (2024). - Nonperforming loans to total loans (consolidated): 2.9 (2024). - Return on assets (consolidated): 1.3 (2024). - Return on equity (consolidated): 14.1 (2024). - Loans to deposits: 77.3 (2024). - External debt (Table 5): - Gross External Debt (billions of euro): 2019 Q4: 2,136.3; 2020 Q4: 2,265.2; 2021 Q4: 2,362.1; 2022 Q4: 2,372.4; 2023 Q4: 2,485.0; 2024 Q4: 2,498.2. - Net External Debt (billions of euro): 2019 Q4: 941.6; 2020 Q4: 984.0; 2021 Q4: 949.8; 2022 Q4: 835.7; 2023 Q4: 789.8; 2024 Q4: 780.6. - Gross External Debt (percent of GDP) series and net external debt (percent of GDP) series provided across years and quarters. ### Key macroeconomic projections and memo items (Table 1 highlights) - Potential output (percent): 2021: 1.3; 2022: 2.1; 2023: 2.7; 2024: 2.6; 2025: 2.6; 2026: 2.3; 2027: 2.1; 2028: 2.0; 2029: 1.8; 2030: 1.7. - Output gap (percent of potential output): 2021: -2.8; 2022: 1.1; 2023: 1.1; 2024: 1.6; 2025: 1.6; 2026: 1.1; 2027: 0.7; 2028: 0.3; 2029: 0.1; 2030: 0.0. - Net international investment position (percent of GDP): 2021: -69.4; 2022: -57.7; 2023: -51.3; 2024: -44.0; 2025: -38.5; 2026: -33.5; 2027: -29.7; 2028: -26.5; 2029: -23.5; 2030: -21.0. - Nominal GDP (Billions of euros, memo): 2021: 1,235.5; 2022: 1,373.6; 2023: 1,498.3; 2024: 1,591.6; 2025: 1,671.5; 2026: 1,742.1; 2027: 1,813.8; 2028: 1,884.9; 2029: 1,958.9; 2030: 2,035.6. *Source: IMF staff calculations and tables and figures contained in the Spain country chapter.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - The external position in 2024 is assessed to be stronger than the level implied by medium-term fundamentals and desirable policies. - The large negative NIIP continued to shrink in 2024, but strengthening it further will require sustaining relatively high CA surpluses in coming years. - The CA balance will exceed the norm in the near term, but the gap is projected to shrink in the medium term as: - tourism flows normalize; - non-energy imports regain strength supported by the shift in growth drivers toward domestic demand, particularly investment which has a high import content; - private saving slowly declines toward pre-COVID levels. ### Potential Policy Responses - The projected CA surplus path will continue reducing the still sizeable negative NIIP; policies that would divert the CA from this path, including any that would weaken competitiveness and the CA, should be avoided. - A better policy mix could keep the savings-investment balance and the projected CA path broadly unchanged while better supporting growth and fiscal sustainability. Key elements: - Sustained fiscal consolidation efforts to rebuild fiscal space and raise aggregate savings. - Accelerate domestic structural reforms to boost productivity and facilitate diversification of export products and destinations, including: - complete the single Spanish market; - invest in innovation; - enhance education outcomes; - reduce energy dependence. - Policies to facilitate reallocation of workers across sectors while providing an adequate social safety net. - Fiscal support to firms and sectors most adversely affected by trade restrictions should remain temporary and narrowly targeted, addressing externalities or market failures. - Industrial policies should be coordinated at the EU level and avoid favoring domestic producers over imports to minimize trade and investment distortions. ### Foreign Asset and Liability Position and Trajectory - Background findings: - The NIIP continued to improve in 2024 and reached −44.0 percent of GDP by end-2024. - This trajectory reflects a larger increase in gross assets compared to liabilities (as a percentage of GDP, between 2023 and 2024). - Gross liabilities increased to 245.2 percent of GDP by end-2024, of which 67 percent corresponded to external debt. - Most of the negative NIIP is attributed to the general government and the central bank, with TARGET2 liabilities amounting to 27.3 percent of GDP by December 2024. - The NIIP is projected to continue improving in the medium term, supported by sustained CA surpluses and the positive—though temporary—impact of Next Generation EU funds disbursements on the capital account. - Assessment: - Despite projected improvement, the still large negative NIIP carries external vulnerabilities from large gross financing needs and potential adverse valuation effects. - Mitigating factors: - rather long maturity of outstanding sovereign debt (averaging almost eight years); - limited share of debt denominated in foreign currency (11.4 percent of total external debt). - Key 2024 stock figures (% GDP): - NIIP: −44.0 - Gross Assets: 201.2 - Debt Assets: 94.4 - Gross Liab.: 245.2 - Debt Liab.: 144.5 ### Current Account - Background findings: - The CA surplus continued to rise in 2024, reaching 3.0 percent of GDP, although at a slower pace than in 2023. - Strength in services exports (tourism and non-tourism) more than offset a modest increase in imports; import weakness largely reflected broadly stable energy prices. - Higher public saving and subdued private investment—partly due to high uncertainty and tight financial conditions—more than offset a rise in public investment and a decline of private saving. - In 2025, the CA surplus is forecast to shrink by 0.5 percentage points of GDP amid a deterioration of the international environment and a strong rebound of imports driven by a pickup in domestic demand. - In the medium term, the CA surplus is projected to continue shrinking gradually as tourism inflows normalize and non-energy imports regain strength; the negative impact of somewhat lower energy prices is expected to be offset by the shift toward domestic-demand-driven growth, particularly investment with high import content. - Assessment (2024 figures and model results): - 2024 CA: 3.0 percent of GDP - 2024 Cyclically-Adjusted CA: 3.5 percent of GDP - IMF staff assess the CA norm to be between 0.6 and 2.4 percent of GDP, with a midpoint of 1.5 percent of GDP (EBA CA model). - The CA gap is in the range of 1.2 to 2.9 percent of GDP, with a midpoint of 2.0 percent of GDP. - The overall estimated contribution of identified policy gaps is −0.4 percent of GDP, reflecting: - high health spending: −0.3 percent of GDP; - credit growth relative to the rest of the world: −0.1 percent of GDP. - Staff adjustment: 0.0 percent of GDP - Staff gap: 2.0 percent of GDP ### Real Exchange Rate - Background findings: - In 2024, Spain’s CPI- and ULC-based REER remained broadly stable, with changes relative to the 2023 average of 0.6 percent (CPI-based) and −0.5 percent (ULC-based). - This followed a period of sustained REER depreciation since 2009, which almost fully reversed the large appreciation during 1999–2008. - As of March 2025, the CPI and ULC-based REER were 1.1 percent above and 0.2 percent below the 2024 average, respectively. - Assessment: - The IMF staff CA gap implies a REER gap of −7.3 percent in 2024 (with an estimated elasticity of 0.28 applied). - The EBA REER index and level models suggest instead an overvaluation for 2024 of 4.9 and 20.4 percent, respectively, mostly driven by large unexplained residuals. - Consistent with the staff CA gap, staff assesses the REER to be moderately undervalued, with a midpoint of 7.3 percent and a range of uncertainty of ±3.1 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background findings: - The capital account surplus has remained high due to flows associated with Next Generation EU funds. - The financial account balance increased slightly by 0.4 percent of GDP to 4.4 percent in 2024, following a more significant improvement of 2.4 percent of GDP in 2023. - The increase in the financial account surplus is largely driven by “Other Investment” flows. - The shrinking of the Bank of Spain’s net liability position continued, although it was smaller in 2024 compared to 2023. - Assessment: - Despite recent improvements, still large external financing needs leave Spain vulnerable to sustained market volatility and tighter global financial conditions. ### FX Intervention and Reserves Level - Background: - The euro has the status of a global reserve currency. - Assessment: - Euro area economies typically hold low reserves relative to standard metrics, but the currency is free floating. *Annex I. External Sector Assessment — IMF staff assessment as presented in the source document.* ### 4. Other Factors. The amortization profile of public debt is tilted towards the long term, with ### 4. Other Factors. ### Amortization profile and debt holders - Average residual maturity of public debt: 7.9 years. - Low share of short-term debt mitigated the impact of rising borrowing costs on public finances during 2022-2024. - Bank of Spain share of total debt: - Peaked at 28.5 percent in mid-2022. - Fell to 24.4 percent by late 2024. - Note: The Bank of Spain’s holdings include monetary policy operations on behalf of the ECB. - Share held by other residents (domestic financial institutions and non-financial sector creditors): rose from 29.3 to 31 percent (period: mid-2022 to late-2024). - Share held by non-residents: increased from 42.3 to 44 percent (same period). ### B. Baseline Scenario — projections and drivers - Debt projections: - 2025: 100.6 percent of GDP. - End of forecast horizon (2030 reference in prose): 93 percent of GDP. - Drivers of the trajectory: - Positive nominal growth. - Mild improvement in the primary balance: from -1 .3 to 0.4 percent of GDP over 2024-2030. - Gradual rise in interest expenditures from 2.5 to 2.8 percent of GDP. - Gross financing needs: - Projected decline from 16.8 percent of GDP to 14.2 percent of GDP by 2030. - From the Baseline Scenario table (selected figures, percent of GDP unless indicated): - Public debt: 2024 = 101.8; 2025 = 100.7; 2026 = 99.1; 2027 = 97.7; 2028 = 96.2; 2029 = 94.6; 2030 = 93.0; 2031 = 91.6; 2032 = 90.3; 2033 = 89.2; 2034 = 88.2. - Change in public debt: 2024 = -3.2; 2025 = -1.1; 2026 = -1.6; 2027 = -1.4; 2028 = -1.5; 2029 = -1.6; 2030 = -1.6; 2031 = -1.4; 2032 = -1.3; 2033 = -1.1; 2034 = -1.0. - Primary deficit: 2024 = 1.3; 2025 = 0.6; 2026 = -0.1; 2027 = -0.1; 2028 = -0.3; 2029 = -0.5; 2030 = -0.5; 2031 = -0.5; 2032 = -0.5; 2033 = -0.5; 2034 = -0.5. - Interest expenditures (memo: Effective interest rate percent): 2024 = 2.5; 2025 = 2.7; 2026 = 2.8; 2027 = 2.8; 2028 = 2.9; 2029 = 3.0; 2030 = 3.0; 2031 = 3.2; 2032 = 3.4; 2033 = 3.6; 2034 = 3.7. - Gross financing needs: 2024 = 16.8; 2025 = 15.7; 2026 = 15.2; 2027 = 15.0; 2028 = 14.6; 2029 = 14.3; 2030 = 14.1; 2031 = 14.2; 2032 = 14.2; 2033 = 14.2; 2034 = 14.2. - Real GDP growth (percent): 2024 = 3.1; 2025 = 2.5; 2026 = 1.8; 2027 = 1.7; 2028 = 1.6; 2029 = 1.6; 2030 = 1.6; 2031 = 1.6; 2032 = 1.6; 2033 = 1.6; 2034 = 1.6. - Inflation (GDP deflator; percent): 2024 = 3.0; 2025 = 2.4; 2026 = 2.4; 2027 = 2.4; 2028 = 2.3; 2029 = 2.3; 2030 = 2.3; 2031 = 2.2; 2032 = 2.2; 2033 = 2.2; 2034 = 2.2. - Nominal GDP growth (percent): 2024 = 6.2; 2025 = 5.0; 2026 = 4.2; 2027 = 4.1; 2028 = 3.9; 2029 = 3.9; 2030 = 3.9; 2031 = 3.9; 2032 = 3.9; 2033 = 3.9; 2034 = 3.9. ### Baseline assumptions - No additional fiscal measures beyond those already approved or clearly identified. - Gradual rise in PIT revenues of 0.5 percentage points of GDP over 2024-2030 due to assumed non-indexation of central government PIT brackets and only gradual updating of some autonomous communities’ brackets. - Phasing in of higher social security contributions following the 2021-2023 reforms. - Disbursement of grants and loans from the EU Recovery and Resilience Fund: - Grants: about 5.5 percent of GDP disbursed over 2021–26; fiscally neutral. - Loans: Approximately €26 billion assumed drawn over 2025–28 (31 percent of the total available amount). - Of which approximately €6 billion used for spending; the remainder for credit guarantee and lending programs. - Loan component increases debt-to-GDP ratio by approximately 1.5 percentage points by 2028, which subsequently shrinks gradually as repaid. - Interest expenditures projected to grow from 2.5 to 2.8 percent of GDP, reflecting rise in the 10-year bond yield in early 2025. ### C. Risk Assessment — overall and by horizon - Overall assessment: Staff assess the overall risk of debt distress to be moderate. - Rationale: - Steady and significant debt reduction since 2020, but still high debt levels and gross financing needs imply sensitivity to tightening credit conditions, lower GDP growth, and weakening fiscal position. - Long-term ageing-related expenditures will exert significant fiscal pressures, entailing high debt distress risk. - Mitigating factors: high share of debt held by the ECB and domestic investors, and maturity profile tilted towards longer durations. - Realism of baseline assumptions: - Past forecast errors for public debt, the r-g differential, and other macro variables do not show systematic bias. - The projected 3-year reduction in debt and the improvement in the cyclically adjusted primary balance are high but not unrealistic — both just below the 75th percentiles of historical distributions among peer countries. - Medium-term risk: - Fan chart exercise points to high distress risk at the 2030 horizon due to still high debt level and high probability of non-stabilization under the baseline fiscal path. - Gross financing needs (GFN) exercise signals only moderate medium-term risk: under stress, financing needs rise further from already high baseline but not to pandemic levels. - Long-term risk: - Main source: fiscal pressures from population ageing (falling fertility, increased life expectancy). - Outlays for pensions, healthcare, and long-term care expected to rise as a share of GDP, particularly between 2030 and 2050; only minor offset from lower education spending. - Independent estimates of rise in expenditures (share of GDP) between 2023 and 2050 under a no-policy-change scenario: - AIReF: 3.9 percentage points. - Ageing Report 2024: 5 percentage points. - Staff estimate: If unaddressed, these pressures would lead to a rise in the debt-to-GDP ratio of about 45 percentage points in 2050 relative to a scenario in which they are fully offset by additional revenues, lower spending elsewhere, or policy changes. ### Pension-specific findings and safeguard clause - Gap between pension expenditures and social security contributions: - Expected to rise by 2.4 percent of GDP by 2050 according to AIReF. - Impact of 2021-2023 pension reforms (AIReF analysis, pension review published in March 2025): - Increased projected pension expenditures in 2050 by 2.7 percent of GDP. - Increased revenues by 1 percent of GDP. - Safeguard clause (introduced by the 2023 law): - Establishes tri-annual review by AIReF. - Triggers parliamentary corrective actions if average projected expenditures net of introduced revenue measures exceed 13.3 percent of GDP over 2022-2050; higher social security contributions as default option. - March 2025 AIReF first review result: projected expenditures net of revenue measures will average 13.2 percent of GDP over 2022-2050 — did not trigger the clause. - AIReF highlighted limitations of the rule: - High sensitivity to underlying assumptions. - Uncertainty quantifying indirect revenue effects from reforms (e.g., 2021 labor market reform). - Lack of clarity on which central government transfers to social security should be considered. - Narrow parametric focus that does not serve as a comprehensive assessment of long-term fiscal impact. - Suggested improvements: - Focus on prospective evolution of the gap between pension expenditures and revenues under a no-policy-change scenario. - Define ex ante a narrow set of direct revenue measures to enter computation of net future spending. - Make the clause more forward-looking (e.g., focus on next 25 years rather than fixed 2022-2050 window). ### Central government transfers to social security and fiscal visibility - The organic law of the social security administration lists central government transfers among revenue sources. - Royal Decree 100/2025: AIReF shall include in the computation of revenue measures for the safeguard rule all direct income sources defined in the General Law of the Social Security, including government transfers. - Observations and risks: - Transfers rose by 1.3 percent of GDP between 2020 and 2024. - Absent additional measures, transfers would be expected to grow further to fill the widening gap between pension expenditures and contributions. - If transfers are counted as revenues for the pension rule but are not explicitly financed by new government revenues, this may not preserve broader public finance sustainability. - Under the EU economic governance framework, long-term fiscal pressures from aging are internalized; failure to address pension-originating fiscal pressures via the safeguard clause could require offsetting, income-reducing increases in taxes or cuts in expenditures to meet EU fiscal rules. - Policy option noted: If transfers remain in the pension rule’s revenue computation, introduce a net spending growth target for the social security administration in the national fiscal rule, aligned with the EU framework’s definition of net spending growth. ### Additional structural and disclosure notes (from Annexes) - Debt coverage in the DSA is at the general government level; a large fraction of autonomous communities’ debt is held by the central government through the Fondo de Liquidez Autonómico. - Debt characteristics: - Predominantly issued in domestic currency, under domestic law, and marketable. - Domestic creditors and the central bank own more than half of issued debt. - Average residual maturity: 7.9 years. *Source: IMF staff analysis in the provided content unit.* ### Annex III. Figure 5. Spain: Realism of Baseline Assumptions ### Annex III. Figure 5. Spain: Realism of Baseline Assumptions ### Forecast track record and realism indicators - Comparator group: Advanced Economies, Non-Commodity Exporter, Surveillance. - Forecast vintages used: October and April WEO vintage (Projections made in the October and April WEO vintage). - Color code references: > 75th percentile; 50-75th percentile; 25-50th percentile; < 25th percentile. - Key metric notes: - The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio. - Calculated as the percentile rank of the country's output gap revisions (defined as the difference between real time/period ahead estimates). - Commentary summary: - "The realism analysis does not show systematic bias in past forecasts." - In the last five years, a large primary deficit from the fiscal response to the pandemic and the energy crisis was the main driver of rising debt levels. - Over the forecast horizon, a smaller but persistent deficit together higher interest expenditures are offset by positive real growth. - "The projected 3-year changes in debt and the cyclically-adjusted primary balance are not particularly high compared to historical experience." ### Public debt–creating flows and financing structure - Components shown and labels: - Change in public sector debt (bars, percent of GDP). - Primary deficit. - Real interest rate and relative inflation. - Real GDP growth. - Exchange rate depreciation. - Residual. - Debt issuance maturity structure (percent of GDP) shown for term buckets: 5+ yr term; 1-5 yr term; <1 yr term. - Spread information: - Spread vs 10-yr US Treas. - Implied spread, Laubach rule. - Historical indicators and distribution notes: - Distribution 3/ (percent of sample on vertical axis) for 3-year reduction and 3-year adjustment. - "3-year debt reduction above 75th percentile (5.9 ppts of GDP)" (explicit label preserved). - Percentile ranks shown (example values: 70; 71). - Time series reference years visible in figure: 2014, 2016, 2018, 2020, 2022, 2024, 2026, 2028, 2030, and annual labels 2020–2027 for fiscal adjustment bars and growth scenarios. ### Fiscal adjustment, multipliers, and growth scenarios - Scenario labels shown in figure: - Baseline - Multiplier=0.5 - Multiplier=1 - Multiplier=1.5 - Fiscal adjustment axis labels preserved: "Fiscal Adjustment (rhs)" and "Real GDP Growth (lines, real growth using multiplier (LHS); bars, fiscal adj. (RHS)) (in percent)". - Example axis scales visible: - In percentage points of GDP: -2, -1, 0, 1, 2. - In percent: 0, 2, 4, 6, 8, 10, 12. - Larger debt change axis: -28 to 28 (increments shown). - Historical vs baseline comparisons: - Baseline real growth (lhs), Baseline real potential growth (lhs), 10-yr avg. real growth (lhs), Output gap (rhs). - Time series references: 5y hist; 2025–2030. ### Medium-term risk analysis (Fanchart and GFN modules) - Debt fanchart module values (as presented): - Fanchart width77.81.1 (percent of GDP) (preserve exact text). - Debt fanchart index (DFI)2.2 - Terminal debt-to-GDP x37.60.8 (preserve exact text). - Probability of debt non-stabilization (percent) 28.30.2 (preserve exact text). - Gross Financing Needs (GFN) module values (as presented): - Average baseline GFN14.85 .1 (percent of GDP) (preserve exact text). - Initial Banks' claims on the gen. govt (pct bank assets) 9.73 .1 (preserve exact text). - Chg. In banks' claims in stress (pct banks' assets) 4.81.6 (preserve exact text). - GFN financeability index (GFI)9.8 - Risk signal thresholds and interpretation notes (as shown): - DFI signal: low risk if DFI < 1.13; high risk if DFI > 2.08; otherwise moderate risk. - GFI signal: low risk if GFI < 7.6; high risk if DFI > 17.9; otherwise moderate risk. - Final medium-term index signal: low/moderate/high thresholds described (preserve original wording). - Final assessment statistics (explicitly preserved): - "Prob. of missed crisis, 2025-2030, if stress not predicted: 18.2 pct." - "Prob. of false alarms, 2025-2030, if stress predicted: 21.6 pct." - Overall qualitative takeaway: - "The Fanchart exercise points to high medium-term risk of debt distress, due to a high debt level, adjusted for institutional quality, and a high probability of non-stabilization relative to comparator countries." - "The GFN exercise signals moderate medium-term risk." - "However, even under the stress scena[rio] GFN would not rise above levels experienced during the pandemic." - "No stress tests were triggered." ### Key quantitative flags and percentile indicators shown - Percentile scales and normalization markers shown in figures: 0, 25, 50, 75, 100 (percentile in peer group normalized). - Medium-term index qualitative legend: Low risk / High risk shading across time series. - Distribution labels preserved: "3-year adjustment above 75th percentile (2 ppts of GDP)" and related percentile rank numbers (e.g., 71). *Source: IMF Staff.* ### 2026. While accelerating execution will be needed to meet ### 1espea2025001-print-pdf - 2026. While accelerating execution will be needed to meet ### Housing affordability and recovery-plan measures - Key government package announced in January 2025, including: - creation of a state-owned housing company with priority access to acquire homes and land for public housing development; - incentives to convert vacant homes into affordable rental properties; - introducing a 100-percent personal income tax exemption to landlords who rent their properties below a rental cap to be set by the government; - implementing VAT and stricter regulations on tourist rentals in selected areas; - doubling the tax rate on non-resident property purchases; - combating fraud in seasonal rentals through stricter regulation and enforcement. - Legislative uncertainty: several measures require parliamentary approval and remain uncertain. - Rental-cap developments: - Extended to more municipalities in Catalonia, Navarre, and the Basque Country. - Other regions either considering or have applied (examples: Madrid, Canary Islands, Asturias, Galicia). - Land Law amendments have not received enough parliamentary support despite being a step in the right direction. - ELISA tool: improved data reporting on NGEU execution, but gaps remain—particularly linking awarded calls to investment in national accounts. ### Structural reforms and the National Productivity Council - Efforts to converge towards a Single Market include “Regime 20” to unify business regulations across autonomous communities. - National Productivity Council: - Has been formed and is preparing its first report. - First report scheduled for presentation to Parliament once complete (expected in end-2025). ### Implementation status of 2024 FSAP recommendations — systemic risk, data, and macroprudential policy - Data and monitoring: - Recommendation 1: Enhance data collection and monitoring of foreign investments in the real estate market. Addressees: BdE, CNMV, DGSFP. Horizon: NT. Status: hampered by lack of access to data on investors domiciled out of Spain; increased use of ECB Securities Holdings Statistics and ANACREDIT (use of ANACREDIT not yet fully operational). - Recommendation 2: Create infrastructure for more granular cash-flow analysis and report regular stress testing results. Addressee: BdE. Horizon: NT. Status: Bank of Spain established data infrastructure; similar analyses to FSAP being carried out; summary to be included in a box in the Spring 2025 Financial Stability Report. - Macroprudential buffers: - Recommendation 5: Deploy policies including introduction of a positive neutral countercyclical buffer. Addressees: BdE, AMCESFI. Horizon: I. Status: On October 1, 2024, Bank of Spain approved framework for CCyB and set the rate at 0.5 percent, effective from October 1, 2025. If cyclical systemic risk remains at a standard level, the buffer is expected to increase to 1.0 percent in the fourth quarter of 2025, becoming effective on October 1, 2026. - Governance and transparency of macroprudential body: - Recommendation 6 (AMCESFI meeting frequency and transparency). Horizon: I. Status: No action. - Recommendation 7 (appoint external members to AMCESFI). Horizon: I. Status: No action. - Recommendation 8 (address remaining data and reporting gaps). Addressees: BdE, CNMV, DGSFP, AMCESFI. Horizon: NT. Status: BdE working with AMCESFI to address gaps (e.g., cross-holdings between financial institutions and NBFIs); coordination to initiate systemic sector-wide stress testing; linked to housing-related data enhancements. - Bank of Spain independence and supervisory resourcing: - Recommendation 9: Remove MINECO appeal powers against BdE supervisory decisions and limit government role in BdE Governing Council. Addressee: MINECO. Horizon: NT. Status: Amendment under parliamentary discussion as part of Law for the Creation of the Independent Administrative Authority for Financial Consumer Protection. - Recommendation 3: Ensure alignment of resources of supervisory authorities to workload. Addressees: Government, BdE, CNMV, DGSFP. Horizon: I. Status: - Bank of Spain expanded IT risk staff in 2024; additional hires planned for 2025 to support DORA implementation; an assessment of staffing needs related to DORA to be concluded. - CNMV expects 80 new hires by 2025Q1, mainly for cybersecurity, operational resilience, and crypto assets. - In June 2024, DGSFP created the Technology and Digital Innovation Supervision Division. - Recommendation 4: Grant full autonomy to CNMV over recruitment and retention. Addressees: Government, CNMV. Horizon: I. Status: Beyond planned hiring of 80 specialists for 2025, no concrete action currently planned. - Supervision of LSIs and SREPs: - Recommendation 10: Streamline offsite monitoring and apply proportionality in SREPs. Addressee: BdE. Horizon: I. Status: Progress reported. From 2025 (until 2027 as part of a 3-year cycle) a multi-year approach will adjust SREP depth/frequency by impact and risk. High-priority/high-risk LSIs to remain subject to annual full scope SREP. Assessment focus: - 2025: 1st set of risks - 2026: 2nd set of risks - 2027: remaining risks and SREP elements - Recommendation 11: Strengthen BdE onsite inspection activities on governance and risk management. Addressee: BdE. Horizon: I. Status: Enhanced targeted inspections on governance, climate, interest rate and liquidity risks in 2024; included in 2025 supervisory plan; five new staff hired in 2024 (including two in IT); additional resources under consideration for 2025. - Targeted review activity: periodic horizontal analysis included a sample of six LSIs; onsite visits at 10 SIs and 6 LSIs were carried out between October and December of 2024. - Financial market infrastructures and international coordination: - Recommendation 12: Ensure supervisory coordination reflects interconnectedness of BME Clearing, Iberclear and foreign parent. Addressee: CNMV. Horizon: MT. Status: BME Clearing designing creditworthiness models (HVaR and internal model); authorities considering enhanced international supervisory coordination. - Recommendation 13: Ensure timely implementation of CNMV’s recommendations. Addressee: CNMV. Horizon: NT. Status: No action. - Cybersecurity and FMI oversight: - Recommendation 14: Conduct onsite FMI examinations, more thematic reviews, and adopt TIBER-ES-based red-teaming. Addressees: CNMV, BdE, MINECO. Horizon: NT. Status: BdE recognizes need to strengthen IT and onsite supervisory capacity; one expert to be hired and team expansion underway; coordination with CNMV ongoing. The Directorate General Banking Supervision has begun thematic reviews including six LSIs; onsite visits at 10 SIs and 6 LSIs between October and December of 2024. - Recommendation 15: Involve BdE and CNMV in critical infrastructure designation and compliance assessments. Addressee: Government. Horizon: NT. Status: No action. - Fintech and sandbox flexibility: - Recommendation 16: Delegate powers to Coordination Commission and regulators for sandbox operation and administrative streamlining. Addressees: Government, BdE, CNMV, DGSFP. Horizon: NT. Status: Legislative proposal submitted under a broader legal package; BdE awaiting parliamentary debate outcome. - Financial integrity and AML-CFT: - Recommendation 17: Complement National Risk Assessment, ensure accuracy of centralized beneficial ownership register, and extend AML-CFT supervisory activities to professional enablers and virtual asset providers. Addressees: SEPBLAC, Treasury, BdE, The Registrars’ AML Centre, Ministry of Justice. Horizon: NT. Status: No action. - Crisis management and resolution: - Recommendation 18: Integrate preventative resolution authority functions and FROB’s executive resolution functions for banks. Addressee: MINECO. Horizon: I. Status: No action. - Recommendation 19: Improve statutory resolution regime so FROB can override shareholders rights, update insolvency creditor hierarchy, and enable liquidators to transfer deposit accounts. Addressee: MINECO. Horizon: NT. Status: Amendments to be assessed as part of upcoming transposition of the Crisis Management and Deposit Insurance (CMDI) package requiring thorough revision of domestic resolution framework (Law 11/2015 and Royal Decree 1012/2015) and legislation for the Spanish Deposit Guarantee Scheme (FGD). - Recommendation 20: Establish and operationalize approach to address liquidity needs in resolution. Addressee: BdE. Horizon: I. Status: - For LSIs: current framework in place; enhanced monitoring of liquidity needs and resource planning (regular reviews e.g., on Monday mornings); existing framework published; no further changes until Eurosystem guidance. - For SIs: BdE awaiting common Eurosystem-wide approach; active contribution to discussions; strengthening liquidity monitoring and collateral availability during stress, building on Emergency Liquidity Assistance (ELA). ### Public Spending Efficiency Review — institutional framework and outcomes - Timeline and institutional steps: - Starting with the 2016 Stability Program Update, Spain has taken formal steps toward improving public expenditure efficiency through structured spending reviews. - 2017: Cabinet commissioned AIReF to conduct first set of reviews over 2018-2021; second set over 2023-2026. - 2020: Component 29 of the National Recovery, Transformation, and Resilience Plan established a permanent Spending Review Monitoring Unit (SRMU) within the Ministry of Finance. - 2021: AIReF’s review function included in its mandate by Royal Decree Law. - AIReF’s first set of reviews (completed in 2022): - Areas analyzed included prescription drug procurement, hospital spending on equipment and medicines, ALMPs, and transport infrastructure. - Exercise generated 357 recommendations; aim was to improve spending quality rather than achieve savings. - 2023-2026 review topics include state-owned financial vehicles, healthcare provision for public sector employees, and social safety net programs. - SRMU role and reporting: - SRMU assigns AIReF recommendations to government entities and tracks implementation aligned with the yearly budget cycle via a “comply or explain” process during budget proposal meetings. - Entities must provide detailed and verifiable information on actions taken to comply or a detailed explanation motivating rejection of each recommendation. - Every March, SRMU publishes a report compiling explanations and tracking progress. - Implementation status as of March 2024: - Of AIReF’s 357 recommendations: - 203 have been fully implemented, - 79 rejected, - 75 still “in process.” - Institutional strengths: - Independent review by AIReF enshrined in legal mandate. - Cabinet guidance and Ministry of Finance monitoring provide political traction. - SRMU permanent staffing and regular reporting provide stability and continuity. - Synchronization with the budget cycle aligns reviews with fiscal policy. - Publication of AIReF recommendations and government implementation reports ensures transparency. - Line ministries have been highly collaborative, providing data and information, with a very high share of recommendations followed. *International Monetary Fund* ### 5. Several aspects of the process, however, could be strengthened to deliver larger public ### 5. Several aspects of the process, however, could be strengthened to deliver larger public ### Strengthening the spending review process — core recommendations - Include a quantitative assessment of the medium-term savings (for given outcomes) from implementing the recommendations to enable the process to play a significant fiscal policy role, particularly in the context of Spain’s committed adjustment under the MTFSP. - The assessment could be done by AIReF itself—in which case this may need to become an explicit mandate of the review—or by the line ministries once the recommendations have been received. - Ensure that recommendations inform the setting of spending limits at the line ministry level. - Implementing efficiency measures in some areas of a line ministry’s mandate while leaving its spending limit unchanged might allow inefficient spending to be shifted to other areas. - Upon quantification of the savings from the measures, a mechanism could be put in place to allow line ministries to retain some of the savings to incentivize implementation of measures that deliver the largest efficiency gains. - Conduct more comprehensive overviews of functional areas of spending (e.g., education, health, social protection), benchmarking Spain vis à vis peer countries to prioritize and direct future spending reviews toward areas with the largest potential fiscal savings from efficiency gains. - Create a coordination mechanism to ensure autonomous communities and local governments actively participate and have equal incentives to implement recommendations, because many spending areas fall under their purview and compliance risks being segmented and partial. - Example mechanism: link transfers to autonomous communities in specific areas to progress on implementing recommendations from the review (drawing on recent experience with the rise in performance-related central government transfers in the area of ALMPs). ### Strategic roles, governance, and institutional responsibilities - Clarify and assign strategic and decision-making roles more explicitly. - The SRMU currently serves an oversight role but does not prioritize measures, set savings targets, or have authority to compel line ministries to comply. - Cabinet currently selects topics for the multi-year review, but key functions could be more clearly spelled out (e.g., identified priority areas and savings targets could be included in the Annual Order of Elaboration of the Budget Law). - Consider assigning these functions to a dedicated strategy unit—such as a SRMU with strengthened responsibilities and powers. - Strengthen AIReF’s role by following the European Commission’s recent external evaluation recommendations. - AIReF could publish a framework to provide transparency on how it prioritizes the government’s suggestions on topics to review. ### Linking reviews to medium-term fiscal planning and SRMU investigative role - Build on the SRMU and AIReF institutional structure and human capital to strengthen strategic guidance and link spending reviews with medium-term fiscal planning. - SRMU could acquire a more investigative role by conducting its own comprehensive reviews, collaborating with line ministries and guided by government spending priority areas. - SRMU-led reviews would identify general scope for savings or output improvements in each spending area, prioritizing requests for more detailed supportive reviews by AIReF on individual areas. - Provide quantified estimates of the budgetary impact of AIReF’s individual recommendations to link spending reviews to a fully-fledged medium-term fiscal framework. - Implementation of recommendations would inform each area’s projected multi-year expenditure path and the annual budget envelopes for individual ministries. - Reviews could create fiscal space to meet government spending priorities while ensuring fiscal sustainability and reducing policy uncertainty. ### Sectoral focus — Health - Rationale for a comprehensive health review: - Given rising ageing-related fiscal pressures and Spain’s pronounced ageing trends (some of the largest among peer countries), further efficiency gains in health services and long-term care provision are warranted. - A data envelopment analysis shows Spain scores better than most Euro Area countries and Advanced Economies in healthy life expectancy given its total (public and private) health expenditure per capita and achieves a higher score than the EU average in WHO’s universal health coverage score. - Past AIReF health reviews and scope for widening: - AIReF’s 2018-2022 review covered selected items: subsidies for prescription drugs and the procurement of medicines and medical equipment in hospitals. - Together, these areas accounted for approximately €18 billion in 2017-2018. - Key AIReF recommendations included centralizing drug procurement to reduce heterogeneity in costs across regions and hospitals, revising the co-payment structure to ensure equity across households, and enhanced investment plans and management systems for efficient use and maintenance of medical equipment. - It could be helpful to widen the scope of AIReF’s health spending reviews to identify broader efficiency gains in the future. ### Sectoral focus — Education - Rationale for a comprehensive education review: - Spain achieves a high enrollment rate in secondary schooling with relatively low spending per capita, but its distance from the efficiency frontier with respect to standardized test scores is larger than that of many peer Euro Area and OECD countries, indicating scope to raise productivity and foster human capital. - Past coverage and additional recommendations: - AIReF’s review so far has covered selected items in university education, such as undergraduate, doctoral, and post-doctoral scholarships. - Other institutions (e.g., OECD) have conducted comprehensive assessments and provided recommendations on primary, secondary, and post-secondary education, including measures requiring minimal to no additional budget that would count as efficiency improvements: - Better focusing support programs on disadvantaged schools and students to tackle drop-out rates. - Reducing socio-economic segregation in schools. - Increasing teachers’ contractual stability and establishing a nationwide teacher appraisal system. - On tertiary education, scope exists for quality-improving increases in university governance, accountability, autonomy, and realignment of curricula and funding to better match labor market needs. *Source: Excerpt from IMF staff report chapter on spending review process and sectoral reviews.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1espea2025001-print-pdf.pdf_