Spain: IMF Staff Concluding Statement of the 2020 Article IV Mission

March 11, 2020

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

  • In 2019 the Spanish economy continued to grow faster than the euro area average. But the outlook for 2020 is now highly uncertain with the impact of the coronavirus evolving. To mitigate this impact, policies should ensure that the health sector has sufficient resources and provide well-targeted support for the most affected sectors and vulnerable groups.
  • Socio-economic disparities in Spain remain large, mainly reflecting high structural unemployment. Reducing the prevalence of temporary contracts must be the cornerstone for greater equity. This should be bolstered by more targeted and modernized active labor market and education policies. Improved social assistance programs, an earned income tax credit scheme, and enhanced supply of affordable rental units would support the poorest.
  • Determined fiscal and structural efforts are needed to unleash new public and private resources for more economic resilience, social inclusion, and innovation. Sustainable fiscal measures are crucial for reducing elevated public debt over the medium term and addressing the persistent deficit in the pension system. Intensified structural policies should aim to boost productivity, thereby lifting the economy’s potential and improving public debt dynamics.
  • Banks need to continue building up high-quality capital to enhance their resilience against shocks. Although balance sheets in the banking system have continued to strengthen, low profitability remains a challenge amid the low interest rate environment in the euro area.

The economic outlook is highly uncertain in the near term due to the global coronavirus outbreak

Spain has experienced five years of strong—above euro average—growth, job creation, and sustained current account surpluses. But in 2019 domestic, and especially external, uncertainty weighed on confidence, leading households to start rebuilding their record-low savings and taking a toll on investment. On top of some anticipated deceleration as the business cycle matures, temporary disruptions from the global outbreak of the coronavirus to supply chains, trade, tourism, and domestic consumption are now expected to slow economic growth further in 2020. The magnitude of the slowdown hinges on the scope and the duration of the outbreak, which is highly uncertain at this moment. Over the medium term, GDP is forecast to expand in line with potential growth of about 1.6 percent, constrained by low productivity growth as the policy standstill during recent years did not provide new impetus. Unemployment, which halved from its post-crisis peak, has almost reached its estimated structural rate and is forecast to decline only marginally going forward.

Fiscal policy needs to protect people during the coronavirus outbreak

Against the backdrop of the coronavirus outbreak, it is understood that the government must ensure sufficient resources for the health sector as well as targeted support to the most affected, and that these temporary one-off measures would have to be stepped up as needed to prevent and contain the virus and mitigate the economic impact. Beyond these needs, additional discretionary spending initiatives in the 2020 budget, including the already legislated pension and wage measures, should be sustainably financed by new revenue measures or changes in the composition of spending. Overall, the fiscal stance in 2020 can be broadly neutral with automatic stabilizers operating freely in support of economic activity in addition to temporary measures adopted in response to the coronavirus. A temporary delay in fiscal consolidation should be accompanied by a credible commitment to future adjustment.

Comprehensive policies are needed to narrow social inclusion gaps

The job-rich recovery has helped to mitigate inequality and the risk of poverty, but both remain higher than in other EU countries, especially for the young. Rising pressure on rental affordability in some urban centers has added to the social challenges. The government’s medium-term economic agenda, centered on the objective of lowering socio-economic disparities, is well placed. However, this is a complex task against the backdrop of the uncertain economic outlook and elevated public debt. Supporting the social objectives requires a comprehensive approach to promote a more inclusive labor market. In particular:

  • Labor market policies:

Duality: Persistent labor market segmentation has important economic and social costs. In the short term, the ongoing efforts to address abuse of temporary contracts should be deepened as these have already paid some dividends in supporting conversion of temporary to permanent hiring. Over the medium term, a structural shift is needed that reduces the incentives for employers to overly rely on temporary contracts. Shifting to a higher share of permanent jobs could be achieved, for example, by minimizing the employment protection gaps between fixed-term and open-ended contracts while creating an employer-based separation fund. This would reduce labor market duality without necessarily raising the overall dismissal costs for employers or lowering employment protection for most workers.

Flexibility: Labor market institutions should continue to provide sufficient flexibility to set wages and working conditions that take into account firm-specific needs,especially in light of the rising downside risks to the economy. To limit the social consequences from temporary shocks, such as the coronavirus, “short work schemes” could be adopted, which would allow enterprises to cut working hours while preserving jobs with the government making up some of the employees' lost wage income. Moreover, there is room for better coordination of collective bargaining between the sectoral and firm levels through more effective use of the guidelines set in the higher level of agreements.

Hours worked and in-work poverty: As in many advanced economies, the share of labor has declined over the past two decades, driven largely by technological progress and global integration. Moreover, average hours worked have fallen and in-work poverty has increased in recent years. Efforts should be made to explore and address specific aspects of the labor legislation that may have caused these inadvertent developments. In particular, there is a need to identify factors that contribute to the reduction in the duration of temporary contracts and potential abuse of the greater flexibility in part-time contracts. In addition, to support low-income households and tackle in-work poverty, the introduction of an earned income tax credit program could be considered, which is a more targeted and efficient tool than the minimum wage in addressing poverty and income inequality.

Skills mismatch: Active labor market and education policies should focus on improving the employability of young people, the low-skilled, and the long-term unemployed. The recently adopted action plans are important steps toward promoting youth employment and reducing long-term unemployment. Moreover, enhanced vocational training and lifelong learning programs need to ensure timely acquisition of new skills against the fast-paced change in skill demand.

  • Social assistance spending: The redistributive effects of social assistance programs in Spain are relatively weak, since few measures support those most in need and protection is tilted toward pensioners. Making social spending more effective and equitable will entail increasing the coverage of the most disadvantaged groups and the adequacy of several social assistance programs (especially spending on minimum income schemes, family and housing). This requires not only additional resources but also lowering the administrative access hurdles to increase participation, improve coordination of benefits across all levels of government, and realize efficiency gains as highlighted in the recent spending reviews.
  • Policies for greater rental affordability : Though homeownership remains high, demand for rental housing has increased, especially among young and low-income households, contributing to a steep rise in rental prices in many cities and arguably compounding intergenerational inequality. To support rental affordability and foster access to areas of strong job creation, policies could focus on reducing supply-side rigidities (e.g., by simplifying land use regulation and accelerating rezoning processes), improving access to rent support for the neediest (e.g., improving regional processes for granting tenant allowances), increasing in some locations the stock of social rental housing for low-income groups, and ensuring good transport infrastructure between fast growing cities and more affordable locations.
  • Policies for more gender equality: Despite significant progress in recent decades, gender inequality persists in a number of areas, leaving still sizeable inequality in employment and wages. Policies to enhance gender equality in the labor market should focus on boosting family and childcare support and promoting working arrangement flexibility.

Over the medium term, lowering fiscal vulnerabilities remains a key policy priority

Over the medium term, reducing public debt and the fiscal deficit remains critical, particularly given rising social spending pressure. Despite strong economic growth during the past five years, Spain has made limited progress in lowering public debt. The reductions in fiscal deficits were largely driven by robust economic activities and lower interest payments. As a result, public finance is still quite some distance away from the goal of a structurally balanced budget. To rebuild fiscal buffers, a gradual pace of consolidation should be pursued over the medium term until a balanced budget is reached, provided that the economy grows with or above its potential.

To meet growing social and investment demands in support of technological advancements, fiscal policy should focus on mobilizing additional revenues and enhancing spending efficiency along the lines recommended in the recent expenditure reviews. Spain’s tax-to-GDP ratio is relatively low compared with regional peers, indicating potential room for structural improvement, especially by strengthening VAT collection, raising excise duties and environmental levies, and reducing tax system inefficiencies while protecting the most vulnerable. The adoption of measures to create fiscal space should be a precondition for further expansion of public spending.

The persistent deficit in the contributory pension balance requires a long-term commitment to contain the pressure on pension spending arising from population ageing. Implementing the sustainability factor (discount factor linked to life expectancy at the start of pension payments) would be one important contribution, especially since its announcement nearly a decade ago has given future pensioners some time to prepare for its impact. Specific measures to balance pension sustainability and social acceptability could include: (i) raising the effective retirement age by incentivizing longer work lives; (ii) increasing revenues without raising the already high contribution rates; and (iii) encouraging supplementary savings.

A boost to productivity is needed to sustain higher economic growth rates

In addition to overcoming labor market segmentation and enhancing skill levels, which would both contribute to higher productivity, efforts should focus on promoting the economy’s innovative capacity. In that respect, the government’s plan to promote digitalization and its associated new employment opportunities is welcome. But to ensure its success, Spain’s business community, which is dominated by small firms, needs to be in a position to absorb new technologies and innovate. Thus, innovation policies need to be complemented by incentives for firms to grow, such as modifying size-contingent regulations, reducing regulatory fragmentation, improving market access to enhance competition, boosting private-public innovation collaborations and enhancing the take-up of R&D incentives.

The financial system needs to safeguard its resilience against risks

Spanish banks have continued to sell impaired asset portfolios which has improved asset quality. However, banks’ average return on equity remains low and profitability challenges persist, as for many European banks, amid the low interest rate environment.

The build-up of macro-financial risk appears still to be manageable but warrants continued monitoring. New reputational and legal risks may put additional pressure on bank profitability. Therefore, there is a need to keep strengthening high-quality capital positions. The recovery in the housing market continues, particularly in major cities and coastal areas, but as yet there are no indications of any significant house price overvaluation, and signs of moderation have emerged. Consumer lending is still growing swiftly though from a low level.

Banks need to raise their CET1 capital ratio, which for the banking system as a whole is still among the lowest in the euro area. A preemptive activation of the countercyclical capital buffer could be eventually considered should near-term risks clearly dissipate and the projected credit gap—the difference between the stock of credit and its estimated equilibrium level—close after sustained deleveraging. A positive countercyclical capital buffer would help increase banks’ resilience against shocks, and its release during an economic downturn should mitigate the potential tightening of credit supply.

Continued efforts are needed to address low bank profitability; further reduce non-performing assets; and rigorously manage lending standards as well as reputational, cybersecurity, and liquidity risks. It is also critical to finalize secondary regulations for some of the macroprudential tools. Finally, supervisors should closely monitor any financial stability risks stemming from the impact of the coronavirus.


The IMF mission team would like to thank the Spanish authorities, the ECB, and other counterparts for the open and constructive discussions.

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