Spain: Staff Concluding Statement of the 2024 Article IV Mission

April 12, 2024

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.

Washington, DC:

Recent Economic Developments and Outlook

The Spanish economy has shown strong resilience amid weaker euro area growth and tighter financial conditions. Economic activity grew by 2.5 percent in 2023, underpinned by enhanced household purchasing power, higher public consumption, and solid services export performance in both tourism and non-tourism. The labor market continued to perform strongly, with a 3.2-percent employment growth fueled by large migration inflows and increased labor force participation, while the unemployment rate recently stabilized below 12 percent. Inflation fell sharply from its 2022 highs amid lower energy and food prices, while wage pressures remained moderate following the national wage agreement reached in May 2023. Nevertheless, private investment remains weak, and consumption has only recently recovered to end-2019 levels, indicating subdued domestic demand overall since the pandemic.

Growth is projected to remain robust at 1.9 percent in 2024 and 2.1 percent in 2025. The average quarterly growth rate of about 0.5 percent observed in 2023 is expected to persist in the coming quarters, driven by domestic demand. Moderate real income gains and a gradual normalization of the household saving rate should support consumption growth, while continued disbursements of Next Generation EU (NGEU) grants and easier financial conditions should lead to some pickup in private investment. Inflation is projected to keep declining throughout 2024-25 against the backdrop of lower global energy prices and contained wage pressures. The withdrawal of energy and food support measures will generate one-off price increases, but inflation should resume its downward trend thereafter, nearing the ECB’s target by mid-2025. Employment growth is forecast to moderate as migration inflows normalize and the unemployment rate slowly falls towards its medium-term structural level of about 11 percent.

Risks to the outlook have become more balanced, but they remain tilted to the downside for growth and the upside for inflation. Protracted domestic political fragmentation could hinder the implementation of structural reforms and fiscal consolidation, which could eventually worsen business confidence, investment, and growth, particularly if financial conditions were to tighten. Other risks include weaker- or less-effective-than-expected use of NGEU funds, deepening geo-economic fragmentation, and an abrupt euro area or global slowdown. Key upside risks to inflation include a rebound in global energy prices and more persistent increases in unit labor costs due to sustained wage pressures or weaker productivity growth.

Fiscal Policies

Public finances continued to improve in 2023, albeit at a slower pace than in previous years, but debt remains high. The cost of temporary measures to protect households and hard-hit industries against high energy and food prices was more than offset by buoyant tax revenues and the withdrawal of Covid-related expenditures. The resulting improvement in the fiscal balance, together with inflation and economic growth, brought down the public debt ratio. However, at over 107 percent of GDP, debt remains elevated, and fiscal space is limited. Over the medium term, as growth moderates, inflation normalizes, and the tax revenue boom wanes, the fiscal deficit and public debt are projected to stabilize at around 3 and 104 percent of GDP, respectively, in the absence of additional discretionary fiscal consolidation. Furthermore, growing aging-related spending is expected to exert strong additional pressure on public finances during the next decade.

Looking forward, a multi-year consolidation effort is needed to keep debt on a clear downward path and rebuild fiscal space. With the economy operating at close-to-full capacity and benefiting from NGEU grants, a sustained restrictive fiscal stance is warranted to restore appropriate fiscal policy room against future crises and lower elevated debt over the medium term. Staff recommend a cumulative reduction in the structural primary deficit of 3 percentage points of GDP over 2024-2028, achieved through an average yearly fiscal adjustment of around 0.6 percentage points. While official figures from the reformed EU economic governance framework are yet to be finalized, this recommended path is expected to be more than sufficient to meet the requirements set out by the revamped fiscal rules. The authorities’ envisioned consolidation of this order of magnitude in 2024—achieved through temporary windfall levies and by phasing out energy support measures—is appropriate. However, this consolidation pace needs to be sustained over subsequent years, which requires additional measures of more structural nature.

A growth-friendly consolidation should be centered around strengthening the efficiency of the tax system and broadening the tax base, and embedded in an explicit medium-term fiscal plan. Together with the scheduled phasing out of the remaining anti-inflationary measures, staff’s recommended fiscal adjustment could be delivered by eliminating VAT exemptions, harmonizing VAT rates across products, and raising environmental taxation towards levels in EU peers. The potential impact on lower-income households could be addressed through other targeted policies, including an in-work tax credit, scaled-up active labor market policies (ALMPs), and increased affordable housing supply. Should the authorities decide to turn the temporary levies on banks and energy companies into permanent taxes, their bases should be aligned to a clearer definition of exceptional profits to minimize their distortionary effects, and they could be redesigned to achieve other key policy objectives. For instance, banks’ liability to a revamped levy could be reduced through a tax credit proportional to the magnitude of a positive neutral counter-cyclical capital buffer (CCyB), should the latter be introduced. Finally, publishing a detailed medium-term fiscal plan underpinned by specific measures would signal commitment, foster a healthy public debate on taxation and spending priorities and, ultimately, increase the likelihood of a successful consolidation. Enhancing the role of AIReF—the independent fiscal council—in evaluating the impacts of fiscal policy proposals could strengthen the plan’s credibility.

Over the longer run, revenue-based adjustments should be complemented with improvements in public expenditure efficiency and, critically, with policies to address growing aging-related spending pressures. Additional measures to ensure the financial sustainability of the pension system will very likely be needed in the future. The safeguard clause introduced in 2023 is an important tool to correct potential imbalances. If triggered, a balanced set of reforms should be considered, avoiding excessive reliance on the last-resort option of increasing contribution rates, which would raise labor costs and could affect employment. Consideration could be given to lowering replacement rates, which stand significantly above those in peer countries, by lengthening to a full career the contributory period considered in the benefit calculation. Another option would be to further raise the effective labor market withdrawal age through actions on a broader front, including reforming unemployment assistance for workers aged 52 and above, strengthening ALMPs, and introducing in-work tax credits for low-wage workers.  

Financial Policies

The financial system has weathered well the tightening of monetary and financial conditions. Spain’s significant banking institutions (SIs) have ample liquidity buffers and their capital ratios have improved moderately due to robust profitability, which has been boosted by higher net interest margins in recent quarters. Strong economic performance and continued deleveraging have supported the resilience of private sector balance sheets to higher interest rates and ensured soundness of banks’ asset quality. Regarding non-financial corporate exposures, while it is still early to assess the full impact of the new legislation on private debt resolution, early evidence that viable firms may opt for restructuring rather than liquidation seems encouraging; decisive success will hinge crucially on appropriate court resources. Despite higher interest rates and declining transaction volumes, house prices have increased moderately, likely driven by a combination of increased household formation and housing supply shortages. Nonetheless, there are no significant signs of systemic risks building up in the residential or commercial real estate markets.

The ongoing Financial Sector Assessment Program (FSAP) found that the financial system would be resilient to major adverse shocks, but strengthening SIs’ capital buffers would permit them to better satisfy credit demand and limit overall economic costs should downside tail risks materialize. Under IMF staff’s baseline projections, SIs’ aggregate capital ratio is projected to rise amid continued solid profits in 2024-25. Banks’ robust liquidity performance under stress reflects the high share of retail deposits in their funding and their large reserves of high-quality liquid assets. The FSAP’s solvency stress tests indicate that SIs display resilience in the aggregate under an adverse macroeconomic scenario, though with substantial credit deleveraging and heterogeneity across banks. Therefore, the authorities should deploy policies to ensure that banks capitalize on current high profitability to accumulate more buffers, which are lower than their euro area peers. Systemic risks from the small nonbank financial intermediation sector and from interconnections among banks appear low.

Introducing as soon as feasible a positive neutral CCyB rate would further enhance banking system resilience. IMF staff concur with the Bank of Spain’s decision to maintain the CCyB at a neutral stance, given the absence of cyclical imbalances. However, a positive neutral rate for the CCyB would better position banks to meet credit demand in a severe downturn. Therefore, staff also welcome that the Bank of Spain may consider introducing a positive neutral CCyB rate and recommend that a decision be made as soon as feasible, given that banks could withstand such buffer comfortably in light of their projected profits under the current baseline.

The FSAP mission also identified further targeted enhancements of the already strong financial system oversight and policy framework that will serve to preserve and promote financial stability, including:

  • Supervision and oversight. Increasing the transparency, impact, and accountability of the national macroprudential authority. Strengthening the Bank of Spain’s operational independence in relation to banking supervision. Granting full autonomy to the National Securities Market Commission over its recruitment process. Ensuring that supervisory authorities are well resourced to address emerging risks and challenges, such as cyber security risks. Increasing further the effectiveness of the risk-based supervisory approach for less significant institutions.
  • Financial safety net. Enhancing the operational capacity of the resolution regime and clarifying arrangements for funding in resolution.

Labor Market Policies

The 2021 labor market reform was successful in lowering the share of temporary employment by over 10 percentage points to average EU levels, but additional policies are needed to achieve broader employment stability. The reform reduced long-standing labor market dualism, but its overall impact on transitions from employment to unemployment is less clear. Looking forward, easing employment protection legislation, including by reducing uncertainty around dismissal costs, would provide additional incentives for employers to create regular permanent contracts. Introducing higher unemployment insurance contributions for employers with higher turnover could discourage excessive shifts between activity and inactivity under fixed-discontinuous contracts, which should in turn be monitored more accurately with additional statistical information. Curbing the use of temporary contracts in the public sector, as planned, would also help further bring down the overall temporary employment share.

Cutting still high structural unemployment requires boosting ALMPs and strengthening job take-up incentives. The 2023 Employment Law is a step in the right direction, but decisive progress requires strengthening activation requirements and better integrating active and passive policies by further converging towards a “one-stop shop” model. There is also room to increase spending on ALMPs, particularly on job placement activities, and to improve the effectiveness of regional Public Employment Service agencies by tightening the link between their resources and job placement performance. Increasing incentives for job take-up, as envisioned in the proposed unemployment assistance reform by making benefits compatible with work earnings, would also speed up transitions out of unemployment.

Going forward, labor market policy initiatives should be carefully designed to avoid unintended effects on employment and growth. After rising by over 50 percent in the past five years, the minimum wage has reached the government’s target of 60 percent of the average wage; any further increases should be mindful of possible adverse effects on low-skilled employment and be guided by the recommendations of the Minimum Wage Commission, which should in turn be granted more autonomy and greater institutional weight. If not well-designed, the planned working week reduction in the private sector could increase labor costs and reduce output and workers’ incomes in the long term. To contain these adverse effects, the reform should be accompanied by wage moderation, accommodate heterogeneity across sectors through collective bargaining, allow for flexibility—such as through annualization of the hours reduction—to maximize possible productivity gains, and take into account the interplay with the minimum wage. If a working week reduction in the public sector were to be eventually considered, it would have to be commensurate with the small gap between current effective working time and the new proposed legal norm.

Other Structural Policies

Continued reform efforts and effective NGEU investment execution are needed to revive anemic productivity growth—the key to improving living standards and resuming stalled income convergence towards the highest-income euro area economies. Implementation of the recovery plan, including execution of NGEU funds, has proceeded steadily. Several reforms—in areas such as innovation, digitalization, business growth, education, vocational training and public sector efficiency—have been carried out successfully. However, it will take time, continued implementation efforts, and a revival of the broader reform agenda—whose momentum has slowed lately—for some productivity gains to materialize. The upcoming National Productivity Council could help develop new, well-informed productivity-enhancing policies which should include, among others, regulatory reforms to help the most productive firms grow. As regards NGEU-funded investments, while accelerating execution might be needed to spend all available funds by the established deadline, project selection—targeting productivity-enhancing projects—should remain the priority. Improving coordination across all government levels and further enhancing the collection and reporting of data on investment execution, building upon recent efforts, could also maximize the productivity payoff from the funds.

To improve housing affordability, the authorities should prioritize boosting supply over distortive support to demand. The government is making progress increasing housing supply, leveraging NGEU grants to fund the development of affordable housing on public land and the expansion of the currently small social housing stock. The ongoing streamlining of urban planning, including by reducing red tape in the concession of licenses at the regional and local levels, is also welcome. The 2023 Housing Law introduced rental caps in stressed areas, which so far have been only implemented in parts of Catalonia. Past experiences suggest that rent controls can reduce rental housing supply and limit access among disadvantaged groups, undermining the very objectives of the law. Therefore, an evaluation of the early impact of rental caps in Catalonia is warranted, which should inform the future course of policy.

We are most grateful to the Spanish authorities and other interlocutors in Spain for generously giving their time to the mission, and for the frank and open discussions.


IMF Communications Department


Phone: +1 202 623-7100Email: