Spain: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, December 22, 2021
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- Published: December 22, 2021
Economic Outlook
- Spain is recovering from the deep recession caused by the COVID pandemic; timely and decisive policy support helped protect jobs, household incomes, and firm balance sheets.
- Vaccination: "almost 90 percent of the target population now fully vaccinated" helped limit impacts on hospitalizations, mobility, and economic activity in 2021.
- Employment: "Employment has rebounded robustly and is already above pre-crisis levels."
- 2020 contraction: "falling by 10.8 percent in 2020."
- Growth projections:
- "Economic activity is projected to grow at 4.6 percent in 2021 and 5.8 percent in 2022."
- Drivers of near-term growth:
- Private consumption underpinned by strong labor market recovery and normalization of households’ savings.
- Investment to strengthen in 2022 due to robust demand, favorable financing, easing supply bottlenecks, and higher pace of NGEU fund deployment.
- "The cumulative impact of the NGEU funds on output could reach 1½ to 2 percent by the end of 2022."
- External demand and international tourism expected to recover as global vaccination rates increase.
- Inflation: Headline inflation likely to remain elevated in early 2022 due to high energy prices and supply-chain disruptions but should moderate in the second half of the year.
- Risks and uncertainty:
- Evolution of the pandemic (including new variants) and duration/magnitude of supply disruptions.
- Upside: faster unwinding of accumulated household savings could strengthen domestic demand.
- Importance of wage-setting negotiations to "internalize the transitory nature of the current drivers of inflation" and avoid wage–inflation spirals.
Fiscal Policies
- Pandemic support: Unprecedented public support and ECB actions cushioned the shock; ERTE and self-employed support covered "about 25 percent of total employment at the peak of the crisis."
- State-backed loan guarantees: Spain had "the highest in Europe" number of firms benefitting; solvency support aimed to prevent liquidity shocks becoming solvency problems.
- Public debt: "high level of public debt (at 120 percent of GDP in 2021) is a source of vulnerability."
- Near-term stance:
- Fiscal policy "should remain broadly supportive next year, in line with the authorities’ 2022 draft budgetary plans," becoming more targeted and focused on the most vulnerable.
- Fiscal deficit decline in 2021 and 2022 driven mainly by recovery, automatic stabilizers, and downscaling of emergency measures.
- High investment weight in government spending, facilitated by EU funds, is welcomed.
- Advice: Any positive surprises to the fiscal balance from faster-than-expected recovery "should be saved"; judicious use of limited fiscal space if downside risks materialize; policy response should remain agile and flexibly extend targeted support if needed.
- Medium-term debt strategy:
- "A sustained gradual fiscal consolidation process should be initiated once the output gap is closed"—under the baseline, conditions met by 2023.
- Consolidation should be growth-friendly, preserve space for public investment and education, and be accompanied by growth-enhancing structural reforms.
- At EU level, "complete the reform of the fiscal framework prior to the deactivation of the general escape clause, or to have a transitional arrangement until a reform becomes effective."
- Fiscal plan components:
- Medium-term plans should include revenue measures and greater spending efficiency while protecting investment in climate mitigation/adaptation.
- Possible revenue measures: broadening tax bases and increasing environmental taxes to bring tax-to-GDP ratio closer to regional peers.
- Expenditure rationalization via efficiency improvements and spending reviews; creation of permanent division within AIREF to provide continuity to spending reviews is welcome.
- Pensions:
- Under current reform, pensions "will be permanently indexed to CPI inflation and the sustainability factor will be repealed starting in 2021."
- Result: "This would raise annual pension outlays by 3½ percent of GDP by 2050, compared to a full implementation of the previous pension legislation."
- Some offset expected from measures in phase one (incentives to increase effective retirement age; temporary increase in social security contributions).
- Recommendation: Additional measures needed to preserve sustainability, e.g., mechanisms to restrain expenditure (further extending work lives) and raise revenues (increase maximum earnings subject to contributions). Some measures expected in phase two in 2022.
Financial Policies
- Support outcomes: Social transfers, ERTE, minimum vital income, and debt moratoria partly offset crisis impact on labor markets and household incomes; household leverage and debt service ratios increased only moderately.
- Corporate sector: Significant drop in earnings in 2020; increased debt for liquidity needs; state-backed loan guarantees accounted for "about a third of new lending to non-financial corporates."
- Banking sector resilience:
- Recent stress tests indicate "banking sector capital buffers are broadly adequate," but "close monitoring is needed to ensure continued resilience."
- Recommendation for banks: maintain prudent forward-looking provisions as borrower distress may lag support phase-out; assess dividend payouts and share buybacks case-by-case; encourage using buffers if downside risks materialize to avoid tightening lending.
- EU-level recommendation: "Completing the banking union with a common deposit insurance scheme would foster resilience."
- Insolvency and debt resolution:
- Strengthen private debt resolution frameworks and ensure sufficient court capacity to handle insolvency procedures.
- Ongoing transposition of EU Directive on restructuring and insolvency, increase opportunities for a "fresh start," and introduce special procedure for micro enterprises.
- Macroprudential toolkit:
- Planned expansion by Bank of Spain is timely; tools include sectoral countercyclical capital buffers, sectoral concentration limits, and others.
- Residential market: Transactions picked up in 2021 and prices accelerated; "no evidence of significant misalignment in housing prices" but close monitoring warranted.
Structural Policies
- NGEU funds:
- Spain to receive "€69.5 billion in grants as part of the recovery and resilience mechanism."
- European Commission endorsed Spain’s recovery plan and first disbursement request; emphasis now on implementation.
- Critical success factors: selection of projects with high social returns, efficient coordination, transparency, accountability, and regular data-based evaluation of reforms.
- Well-designed structural reforms will amplify investment impact; success could help build political support for future EU fiscal collaboration.
- Productivity and human capital:
- Reforms target low education completion rates, skills mismatches, limited digital adoption by SMEs, and low R&D investment.
- Education reforms aim to modernize the system, expand vocational training, and build digital skills.
- Planned expansion in connectivity and digitalization of public administration and SMEs; strengthen public–private collaboration in R&D.
- Labor market reforms:
- Spain faces high unemployment historically, elevated youth and long-term unemployment, and high shares of temporary and involuntary part-time employment.
- Priority objectives: address labor market duality, enhance flexibility and job mobility, and improve active labor market policies.
- Recent inclusion-focused reforms welcome: reduce gender wage gaps, promote gender equality plans by large firms, regulate platform work and teleworking.
- Proposed Employment Law measures: national digital job market platform, individualized employment services; importance of effective implementation and ex-post evaluation.
- Recommendations to reduce duality: discourage use of temporary contracts for permanent needs; make open-ended contracts more attractive by reducing legal uncertainty costs of dismissal; use well-designed short-time work schemes while ensuring fiscal sustainability; support worker reallocation through effective active labor market policies; collective bargaining reforms should preserve flexibility and allow firm-level agreements within sectoral parameters.
- Housing:
- Draft housing law and national plan introduce measures to improve affordability, including targeted rent support for vulnerable groups, taxes on empty properties, and expansion of social housing.
- Caution: rent caps for stressed areas "may introduce inefficiencies and restrict the availability of properties for future renters"; further evaluation recommended.
- Additional supply measures: simplify land use regulations and accelerate licensing at regional level.
- Climate objectives:
- Spain’s Law on Climate Change and the Energy Transition: goal of carbon neutrality by 2050 and intermediate requirement "to reduce emissions by 23 percent relative to 1990 levels by 2030 (about a one third reduction compared to 2018 levels)."
- Carbon price coverage is comprehensive, but "effective tax rates are low relative to estimates of emission damages" and lower than other euro area economies.
- Recommendations: carbon price increases should be gradual and predictable, complemented with distributive policies to protect vulnerable households; complementary sector-specific policies and public investment/financial support where market failures constrain private investment.
- Authorities plan to leverage NGEU funds to support green investments in clean energy, sustainable mobility, and building efficiency renovations.
Source: Spain: Staff Concluding Statement of the 2021 Article IV Mission (December 22, 2021).