Spain: IMF Staff Concluding Statement of the 2020 Article IV Mission
IMF News, March 11, 2020
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- Published: March 11, 2020
Economic outlook and near-term risks
- In 2019 the Spanish economy continued to grow faster than the euro area average.
- The outlook for 2020 is highly uncertain due to the global coronavirus outbreak.
- Temporary disruptions from the outbreak to supply chains, trade, tourism, and domestic consumption are expected to slow economic growth further in 2020; the magnitude depends on the scope and duration of the outbreak.
- Over the medium term, GDP is forecast to expand in line with potential growth of about 1.6 percent, constrained by low productivity growth.
- Spain has experienced five years of strong—above euro average—growth, job creation, and sustained current account surpluses.
- Unemployment halved from its post-crisis peak and has almost reached its estimated structural rate; it is forecast to decline only marginally going forward.
- Households began rebuilding record-low savings in 2019, and investment was weighed down by domestic and external uncertainty.
Fiscal policy: near-term response and medium-term strategy
- Near-term: Fiscal policy needs to ensure the health sector has sufficient resources and provide well-targeted temporary support for the most affected sectors and vulnerable groups during the coronavirus outbreak.
- The fiscal stance in 2020 can be broadly neutral with automatic stabilizers operating freely, complemented by temporary measures in response to the coronavirus.
- Any temporary delay in fiscal consolidation should be accompanied by a credible commitment to future adjustment.
- Additional discretionary spending initiatives in the 2020 budget, including already legislated pension and wage measures, should be sustainably financed by new revenue measures or changes in the composition of spending.
- Medium-term: Determined fiscal efforts are needed to reduce elevated public debt and address the persistent deficit in the pension system.
- To rebuild fiscal buffers, a gradual pace of consolidation should be pursued over the medium term until a balanced budget is reached, provided the economy grows with or above its potential.
- Fiscal policy should focus on mobilizing additional revenues and enhancing spending efficiency as recommended in recent expenditure reviews.
- Spain’s tax-to-GDP ratio is relatively low compared with regional peers; potential measures include 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.
Social inclusion and labor market reforms
- Socio-economic disparities remain large, mainly reflecting high structural unemployment.
- Reducing the prevalence of temporary contracts must be the cornerstone for greater equity.
- Policy directions and recommendations:
- Duality: Deepen efforts to address abuse of temporary contracts; consider minimizing employment protection gaps between fixed-term and open-ended contracts and creating an employer-based separation fund to reduce labor market duality without necessarily raising overall dismissal costs or lowering employment protection for most workers.
- Flexibility: Preserve sufficient flexibility in labor market institutions to set wages and working conditions that reflect firm-specific needs; consider adopting “short work schemes” to allow enterprises to cut working hours while preserving jobs with the government making up some lost wage income.
- Collective bargaining: Improve coordination between sectoral and firm-level bargaining through more effective use of higher-level agreement guidelines.
- Hours worked and in-work poverty: Identify labor legislation factors contributing to reduced duration of temporary contracts and potential abuse of part-time flexibility; consider an earned income tax credit program as a targeted tool to support low-income households and tackle in-work poverty.
- Skills mismatch: Focus active labor market and education policies on employability for young people, the low-skilled, and the long-term unemployed; build on recently adopted action plans and expand vocational training and lifelong learning programs.
- Social assistance spending: Increase coverage and adequacy of programs for the most disadvantaged (especially minimum income schemes, family and housing), lower administrative access hurdles, improve coordination across government levels, and realize efficiency gains highlighted in recent spending reviews.
- Rental affordability: Reduce supply-side rigidities (e.g., simplify land use regulation, accelerate rezoning), improve access to rent support for the neediest, increase social rental housing stock in some locations, and ensure good transport infrastructure linking fast-growing cities to more affordable areas.
- Gender equality: Boost family and childcare support and promote flexible working arrangements to reduce employment and wage inequality by gender.
Pension sustainability
- The contributory pension balance shows a persistent deficit that requires long-term commitment to contain pressure from population ageing.
- Policy options and recommendations:
- Implement the sustainability factor (discount factor linked to life expectancy at the start of pension payments), noting its prior announcement nearly a decade ago.
- Raise the effective retirement age by incentivizing longer work lives.
- Increase revenues without raising already high contribution rates.
- Encourage supplementary savings.
Productivity, innovation, and structural reforms
- A boost to productivity is needed to sustain higher economic growth rates.
- Recommendations to raise productivity and innovation:
- Complement the government’s digitalization plan with measures that enable Spain’s predominantly small firms to absorb new technologies.
- Modify size-contingent regulations to incentivize firm growth.
- Reduce regulatory fragmentation and improve market access to enhance competition.
- Boost private-public innovation collaborations and enhance take-up of R&D incentives.
Financial sector resilience and macroprudential stance
- Banks have continued selling impaired asset portfolios, improving asset quality, but average return on equity remains low amid the low interest rate environment.
- The build-up of macro-financial risk appears manageable but warrants continued monitoring; new reputational and legal risks may further pressure profitability.
- Housing market recovery continues in major cities and coastal areas; no indications of significant house price overvaluation yet and signs of moderation have emerged.
- Consumer lending is growing swiftly from a low level.
- Policy recommendations for the banking sector:
- Continue building up high-quality capital; raise the CET1 capital ratio, which for the banking system as a whole is still among the lowest in the euro area.
- Consider preemptive activation of the countercyclical capital buffer should near-term risks clearly dissipate and the projected credit gap close after sustained deleveraging; a positive countercyclical capital buffer would increase resilience and its release during a downturn should mitigate credit supply tightening.
- Continue addressing low bank profitability, further reduce non-performing assets, and rigorously manage lending standards as well as reputational, cybersecurity, and liquidity risks.
- Finalize secondary regulations for some macroprudential tools.
- Supervisors should closely monitor any financial stability risks stemming from the impact of the coronavirus.
IMF Staff Concluding Statement of the 2020 Article IV Mission (March 11, 2020).