Spain: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, April 10, 2025
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- Published: April 10, 2025
Recent Economic Developments and Outlook
- Growth and drivers
- Economic activity grew by 3.2 percent in 2024, underpinned by a continued expansion of services exports and a pickup in domestic demand.
- Private consumption accelerated, supported by real income gains from steady disinflation, solid nominal wage increases, and continued employment gains fueled by immigration.
- Investment was more subdued, held back by multiple factors since the pandemic including elevated domestic policy uncertainty.
- Much of the post-pandemic expansion relied on labor accumulation; income per capita gains have been more modest but have picked up recently as hourly labor productivity accelerated.
- Inflation
- Headline inflation declined from 3.4 to 2.9 percent between 2023 and 2024, driven by a slowdown in energy and food prices and a decline in core inflation.
- Both headline and core inflation are projected to decline further and return close to the ECB’s target by end-2025, underpinned by a gradual moderation of nominal wages and energy price disinflation.
- Growth projections and labor market
- Annualized growth of over 3 percent observed since mid-2023 is expected to decline gradually, reducing GDP growth from 2.5 percent in 2025 to 1.8 percent in 2026.
- Demographic aging would keep growth close to its medium-term potential of around 1.7 percent.
- Consumption growth is projected to remain solid with continued real wage increases and a gradual decline in household saving rates.
- Investment should pick up on lower interest rates, progress with the execution of Next Generation EU (NGEU) funds, and a rise in housing construction.
- As growth slows, the unemployment rate will remain stable at around 11 percent over the medium term.
- Risks
- Most risks are to the downside, notably: a further escalation of trade measures (particularly those directly involving the EU), domestic political fragmentation that could hamper fiscal response, continued subdued investment, and more-persistent-than-expected increases in unit labor costs.
Fiscal Policies
- Recent fiscal performance
- Excluding the costs of the emergency response to the catastrophic DANA floods, the 2024 deficit fell below the authorities’ 3 percent of GDP target.
- Revenues benefited from PIT and social security contributions due to labor market expansion, non-indexation of PIT brackets, and higher contribution rates following the 2021-23 pension reforms.
- Fiscal vulnerabilities
- Debt-to-GDP ratio of 101.8 percent as of end-2024.
- Projected long-term rise in aging-related expenditures in pensions, health, and long-term care—of about 4 percent of GDP by 2050 according to AIReF.
- Increasing defense spending to the authorities’ 2 percent of GDP target would require further resources.
- Staff recommendations on adjustment and timing
- Staff recommend frontloading the authorities’ planned 3 percent of GDP adjustment over 2025-2029 rather than 2025-2031.
- Under staff’s baseline (no further measures beyond those implemented or approved), the deficit is projected to stabilize around 2 percent of GDP by 2030 versus 1.2 percent projected by the authorities based on the expenditure path included in their Medium-Term Fiscal and Structural Plan (MTFSP).
- This implies measures of almost one percent of GDP have to be implemented to achieve the authorities’ MTFSP deficit path.
- Fiscal policy should remain flexible: let automatic stabilizers play out and restrict temporary discretionary support to severe shocks provided sovereign funding costs remain low.
- Revenue and spending measures
- The MTFSP would benefit from a clearer strategy with well-identified tax increases and spending reduction priorities, including harmonizing VAT rates and enhancing green taxation—starting with equalizing diesel and gasoline excise duties.
- The revamped bank tax should be discontinued at the end of its 3-year duration.
- Strategic public spending efficiency reviews could identify budget savings.
- Any increase in defense spending should be mostly budget-neutral and not compromise growth-enhancing spending, such as public investment.
- Pension system and safeguard clause
- Fiscal pressures from the projected growing gap between pension expenditures and social security contributions should be addressed, prioritizing employment-friendly measures.
- Alternatives to raising contribution rates include further lengthening the period over which benefits are computed; complement with measures to encourage longer working lives (health, flexible work arrangements).
- The recent introduction of delayed retirement incentives and more gradual retirement options are welcome.
- The safeguard clause is currently triggered if average pension expenditures over 2022-2050 net of revenue measures taken over that same period exceed 13.3 percent of GDP.
- Staff suggest the rule should instead focus on the future evolution of the gap between expenditures and revenues under a no-policy-change scenario, or at least clearly define ex ante a narrow set of direct revenue measures to enter the computation of net future spending, and consider a 25-year-ahead projection period rather than the currently fixed 2022-2050 window.
- Fiscal framework for regions
- Strengthen the fiscal framework of autonomous communities to ensure discipline.
- Proposed partial relief of regions’ outstanding debt with the central government could facilitate their gradual return to bond markets, but relief should be conditional on credible consolidation plans.
- Update and strictly enforce the national fiscal rule to align with the new EU governance framework and transposition of EU Directive 2024/1265; yearly fiscal target should focus on primary spending growth net of revenue measures.
- Reform the Fondo de Liquidez Autonómico (FLA) so it functions only as a last-resort borrowing source; strengthen lending conditionality and pair with enforcement of regional consolidation plans.
Financial Policies
- System health and resilience
- Banks are resilient with comfortable capital and liquidity buffers, though CET1 ratios are somewhat below euro area peers.
- Bank profitability has been strong, provisioning prudent, and asset quality solid; low and stable non-performing loans.
- Households have maintained low debt levels; firms have continued to deleverage with comfortable interest coverage ratios.
- Corporate insolvencies have stayed low; monitor risk of court congestion from rising individual filings after insolvency reform.
- Countercyclical capital buffer (CCyB)
- The phased introduction of the positive neutral CCyB is welcome.
- Two-step CCyB implementation: 0.5 percent introduced in October 2024, with another 0.5 percent planned for October 2025.
- Given current capital levels and profitability, banks are expected to meet the new buffer without restricting lending.
- Banks should be encouraged to maintain adequate voluntary buffers through prudent dividend distributions as the CCyB is phased in.
- FSAP and other measures
- Authorities are making good progress on 2024 IMF FSAP recommendations, though further actions are needed on items requiring inter-agency coordination or legislative changes.
- Follow-through is essential to keep systemic financial risks at bay.
- Housing market and macroprudential policy
- Rapid housing price growth is not posing financial stability risks at this stage: in real terms prices remain significantly below 2007 levels, household leverage is low, and no material loosening of lending standards observed.
- Close monitoring warranted; preemptive borrower-based macroprudential measures should be considered if early signs of riskier lending emerge.
- Affordability has eroded due to price and rent increases and still high borrowing costs.
- Government’s package of measures announced in January is broadly welcome, with priority on boosting supply: advance amendments to the Land Law, address red tape in licensing, and expand social housing stock.
- In areas with less acute land scarcity, narrowly-targeted demand-side measures (e.g., public guarantees for young first-time homeowners) could improve access.
- Rent controls should be reevaluated and discontinued if found to reduce regular rental supply or hinder access for lower-income households.
Structural Policies
- Employment and productivity challenges
- Spain’s employment rate remains among the lowest in the euro area; the productivity shortfall is still as wide as in the early 2000s.
- Fostering income-per-capita convergence requires raising the employment rate and boosting productivity.
- Active labor market policies (ALMP) and benefits
- Enhance ALMP and financial incentives for jobseekers.
- Expand unemployment assistance reform by strengthening activation requirements, allowing longer combination of work income with benefits, and eventually replacing non-employment benefits with an integrated in-work tax credit.
- Give greater weight to job placement improvements when distributing funds to regional Public Employment Service agencies.
- Conditional on improved performance, increase the ALMP budget (currently significantly below successful European countries) to strengthen intermediation via staffing, digitalization, and private-sector collaboration.
- Working time and minimum wage considerations
- Government’s planned reduction of the working week in the private sector should be carefully designed to mitigate adverse effects on output and workers’ incomes.
- Implementation would raise the cumulative increase in the minimum wage since 2018 to over 70 percent, raising concerns about potential adverse impacts on disadvantaged groups.
- Preserve the strong role of collective bargaining to accommodate cross-sectoral heterogeneity in hours distribution and overtime remuneration.
- Scaling up firms and innovation ecosystem
- Priorities to lift productivity include facilitating firms’ scaling up, expanding financing for young innovative firms, and strengthening the university system.
- Facilitating scaling up: advance Regime 20 to harmonize and simplify regulation and administrative burdens; streamline size-dependent policies that disincentivize growth.
- Expanding financing: strengthen domestic tax incentives for young firms and address lack of information about them among institutional investors to promote venture capital.
- Strengthening universities: build on the 2023 reform by increasing autonomy in recruitment/promotion/remuneration of professors, make curricula more responsive to labor market demands, strengthen research collaboration with businesses, and increase performance-based public funding.
Mission closing
- The mission team thanks the authorities and all counterparts for their hospitality, frank and open discussions, and collaboration.
- Note: This statement incorporates the impact of trade measures announced up to April 8, 2025.
Source: Spain: Staff Concluding Statement of the 2025 Article IV Mission (April 10, 2025).