Spain: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, April 12, 2024
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- Published: April 12, 2024
Recent Economic Developments and Outlook
- Economic activity grew by 2.5 percent in 2023, supported by enhanced household purchasing power, higher public consumption, and solid services export performance in tourism and non-tourism.
- Employment growth was 3.2 percent in 2023, driven by large migration inflows and increased labor force participation.
- The unemployment rate recently stabilized below 12 percent.
- Inflation fell sharply from its 2022 highs amid lower energy and food prices; wage pressures remained moderate following the national wage agreement reached in May 2023.
- Private investment remains weak; consumption only recently recovered to end-2019 levels.
- Growth projections:
- 1.9 percent in 2024.
- 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.
- Employment outlook: 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.
- Inflation outlook: projected to keep declining throughout 2024-25; 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.
- Risks:
- Downside to growth and upside to inflation.
- Protracted domestic political fragmentation hindering reforms and fiscal consolidation.
- Weaker or less-effective-than-expected use of NGEU funds.
- Deepening geo-economic fragmentation or abrupt euro area/global slowdown.
- Upside inflation risks from a rebound in global energy prices or more persistent unit labor cost increases.
Fiscal Policies
- 2023 fiscal developments:
- Temporary measures to protect households and industries were more than offset by buoyant tax revenues and withdrawal of Covid-related expenditures.
- Public debt ratio fell but remains over 107 percent of GDP.
- Medium-term projection in absence of additional discretionary consolidation:
- Fiscal deficit stabilizes at around 3 percent of GDP.
- Public debt stabilizes at around 104 percent of GDP.
- Demographic pressures: growing aging-related spending expected to exert strong additional pressure on public finances during the next decade.
- Staff recommendation:
- A multi-year consolidation effort to keep debt on a clear downward path.
- A cumulative reduction in the structural primary deficit of 3 percentage points of GDP over 2024-2028.
- Achieve this through an average yearly fiscal adjustment of around 0.6 percentage points.
- The authorities’ envisioned consolidation in 2024—via temporary windfall levies and phasing out energy support measures—is appropriate but must be sustained with more structural measures in subsequent years.
- Growth-friendly consolidation options:
- Strengthen efficiency of the tax system and broaden the tax base.
- Eliminate VAT exemptions, harmonize VAT rates across products, and raise environmental taxation towards levels in EU peers.
- Protect lower-income households via targeted policies: in-work tax credit, scaled-up ALMPs, increased affordable housing supply.
- If temporary levies on banks and energy companies become permanent, align bases to a clearer definition of exceptional profits and consider redesigns to meet policy objectives (e.g., bank tax credit proportional to a positive neutral CCyB).
- Publish a detailed medium-term fiscal plan and enhance AIReF’s role in evaluating fiscal policy impacts.
- Pension and long-run fiscal sustainability:
- Revenue-based adjustments should be complemented with improvements in public expenditure efficiency and policies to address aging-related spending.
- The safeguard clause introduced in 2023 is an important corrective tool; if triggered, a balanced set of reforms should be considered.
- Options include lowering replacement rates by lengthening the contributory period to a full career and further raising the effective labor market withdrawal age through measures including reforming unemployment assistance for workers aged 52 and above, strengthening ALMPs, and introducing in-work tax credits for low-wage workers.
- Avoid excessive reliance on increasing contribution rates.
Financial Policies
- Banking sector resilience:
- Spain’s significant institutions (SIs) have ample liquidity buffers and moderately improved capital ratios due to robust profitability and higher net interest margins.
- Private sector deleveraging and strong economic performance supported asset quality.
- House prices increased moderately despite higher interest rates and declining transaction volumes; no significant signs of systemic risks in residential or commercial real estate markets.
- FSAP findings:
- The financial system would be resilient to major adverse shocks, but strengthening SIs’ capital buffers would better position banks to satisfy credit demand and limit economic costs under downside tail risks.
- Under IMF staff’s baseline, SIs’ aggregate capital ratio is projected to rise amid continued solid profits in 2024-25.
- Solvency stress tests show aggregate resilience under an adverse macroeconomic scenario, though with substantial credit deleveraging and heterogeneity across banks.
- Systemic risks from the small nonbank financial intermediation sector and from interconnections among banks appear low.
- Policy recommendations:
- Ensure banks capitalize current high profitability to accumulate more buffers; Spanish SIs’ buffers are lower than euro area peers.
- Introduce as soon as feasible a positive neutral counter-cyclical capital buffer (CCyB) rate to enhance resilience and better enable banks to meet credit demand in a severe downturn.
- The IMF staff welcome the Bank of Spain’s consideration of introducing a positive neutral CCyB rate and recommend a decision be made as soon as feasible.
- Strengthening oversight and framework (FSAP recommendations):
- Supervision and oversight: increase transparency, impact, and accountability of the national macroprudential authority; strengthen Bank of Spain’s operational independence in banking supervision; grant full autonomy to the National Securities Market Commission over recruitment; ensure supervisory authorities are well resourced for emerging risks (including cyber security); increase effectiveness of risk-based supervision for less significant institutions.
- Financial safety net: enhance operational capacity of the resolution regime and clarify arrangements for funding in resolution.
Labor Market Policies
- 2021 labor market reform outcomes:
- Reduced the share of temporary employment by over 10 percentage points to average EU levels.
- Overall impact on transitions from employment to unemployment is less clear.
- Recommended measures to improve employment stability:
- Ease employment protection legislation to reduce uncertainty around dismissal costs and incentivize creation of permanent contracts.
- Introduce higher unemployment insurance contributions for employers with higher turnover to discourage excessive shifts under fixed-discontinuous contracts; improve monitoring with additional statistical information.
- Curb the use of temporary contracts in the public sector as planned.
- Reducing structural unemployment:
- Boost ALMPs and strengthen job take-up incentives.
- Strengthen activation requirements and better integrate active and passive policies via a “one-stop shop” model.
- Increase spending on ALMPs, particularly job placement activities.
- Improve effectiveness of regional Public Employment Service agencies by linking resources to job placement performance.
- Increase incentives for job take-up via proposed unemployment assistance reform that makes benefits compatible with work earnings.
- Minimum wage and working time considerations:
- The minimum wage rose by over 50 percent in the past five years and has reached the government’s target of 60 percent of the average wage; any further increases should consider adverse effects on low-skilled employment and follow Minimum Wage Commission recommendations, which should be granted more autonomy.
- Planned working week reduction in the private sector could increase labor costs and reduce output and workers’ incomes if poorly designed; to contain adverse effects, accompany with wage moderation, sectoral flexibility through collective bargaining, annualization of hours reduction, and consideration of interplay with the minimum wage.
- If a working week reduction in the public sector is considered, it must be commensurate with the small gap between current effective working time and the new proposed legal norm.
Other Structural Policies
- Productivity and NGEU execution:
- Anemic productivity growth needs revival; key to improving living standards and resuming income convergence.
- Implementation of the recovery plan and NGEU fund execution has proceeded steadily; reforms in innovation, digitalization, business growth, education, vocational training, and public sector efficiency have been carried out.
- Productivity gains will take time; momentum of the broader reform agenda has slowed.
- The upcoming National Productivity Council could help develop productivity-enhancing policies, including regulatory reforms to help the most productive firms grow.
- For NGEU investments: prioritize productivity-enhancing project selection over accelerating execution; improve coordination across government levels and enhance data collection/reporting on investment execution.
- Housing affordability:
- Authorities should prioritize boosting supply over distortive demand support.
- Progress includes leveraging NGEU grants to develop affordable housing on public land and expand the small social housing stock, and streamlining urban planning by reducing red tape in license concessions.
- The 2023 Housing Law introduced rental caps in stressed areas; implementation so far limited to parts of Catalonia.
- Past experiences suggest rent controls can reduce rental housing supply and limit access among disadvantaged groups; an evaluation of early impacts of rental caps in Catalonia is warranted to inform future policy.
Closing
- The mission expresses gratitude to the Spanish authorities and other interlocutors for their time and frank discussions.
Spain: Staff Concluding Statement of the 2024 Article IV Mission