Spain: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, December 13, 2016
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- Published: December 13, 2016
Economic outlook and risks
- Recovery described as "impressive" with strong job creation; private consumption, exports, and investment are the main drivers.
- Tailwinds supporting growth: European Central Bank’s accommodative monetary policy, fiscal relaxation.
- Real GDP and employment growth remain well above the euro area average despite prolonged domestic political uncertainty.
- Current account is projected to record its fourth consecutive annual surplus.
- Private sector balance sheets—including those in the banking system—have continued to strengthen; access to credit has improved; real estate prices have edged up.
- Remaining vulnerabilities and structural weaknesses:
- Unemployment is "still very high," especially long-term and youth joblessness.
- Widespread use of temporary contracts for new jobs.
- Elevated public debt, lingering private sector debt overhang, and a large negative net international investment position.
- Growth trajectory and projections:
- Spain expanded at a vigorous 3.2 percent rate in 2015 with "the same growth rate expected for 2016."
- Real GDP growth is projected to moderate to 2.3 percent next year.
- Over the medium term, prospects are expected to slow further due to feeble productivity growth and high structural unemployment.
Fiscal policy: Resuming growth-friendly and inclusive consolidation
- Assessment:
- Headline fiscal deficits have continued to narrow, but for the second consecutive year the deficit will likely be higher than originally planned, implying a structural loosening of the fiscal stance in 2015–16.
- Building on large fiscal measures adopted over 2010-13, adjustment can be more measured but should be steady and underpinned by well-defined policy actions.
- Recommendation:
- An annual fiscal adjustment of the structural primary balance of about 0.5 percent of GDP is recommended to balance preserving the recovery and ensuring long-term sustainability of public finances.
- The fiscal measures adopted for 2017 are described as an important step toward reaching the deficit target and public debt reduction.
- Revenue-side options:
- Gradually reduce value-added tax exemptions to bring collection more in line with other EU countries.
- Scope to raise excise duties and environmental levies—especially given low energy prices.
- Tackle inefficiencies and special treatments in the tax system.
- Shift from direct to indirect taxation in combination with earlier reductions in corporate and personal income tax rates.
- Expenditure-side options:
- Conduct thorough expenditure reviews—particularly in health and education—to gauge efficiency gains.
- Properly shield vulnerable groups and enhance efficiency of programs that directly support employment and growth, such as active labor market policies (ALMP) and public research and development spending.
- Regional finances:
- Regional financing framework remains a risk to fiscal targets.
- Recommended reforms: improve regions’ incentives to comply with fiscal targets, more automatic and stricter enforcement, provide regions greater power to mobilize own revenues.
- Consider introduction of performance-based transfers to strengthen incentives for reforms (e.g., Market Unity Law implementation and ALMP).
Labor market: Tackling long-term unemployment and labor market rigidities
- Recent performance:
- Employment growing at more than 3 percent annually.
- Almost 1.1 million jobs created over the past two years, supported by wage moderation and labor market reforms.
- Unemployment has come down about 8 percentage points from its peak but remains very high at around 19 percent.
- Almost 60 percent of the unemployed have been jobless for more than a year; a large share are low-skilled and previously occupied in construction.
- Key problems:
- Temporary contracts still make up the largest share of new jobs, exacerbating labor market duality and inhibiting human capital investment and productivity.
- Active labor market programs (ALMP) have had limited impact for long-term unemployed and low-skilled youth.
- Policy priorities:
- Promote job creation for the long-term unemployed and low-skilled youth as an immediate priority.
- Urgent improvements to ALMPs, particularly through better coordination with regional governments.
- Consolidate the range of hiring subsidies into better-targeted subsidy schemes.
- Make permanent contracts more attractive for employers; provide greater legal and administrative certainty over dismissals; allow firms more control and flexibility over working conditions.
Structural reforms: Boosting firm productivity and growth
- Core challenge: weak productivity tied to a corporate landscape dominated by small firms that are less productive, innovative, and export-oriented than European peers.
- Impact of prior reforms:
- Earlier labor and product market reforms are estimated to boost productivity growth by about 0.5 percentage point annually over the next five years.
- Despite this, productivity growth would need to be raised to sustain real GDP growth above 2 percent over the medium term.
- Recommended reforms:
- Adjust public policies to foster good regulation and competition (expedite implementation of the Market Unity Law; advance liberalization of professional services).
- Support innovation by enhancing private R&D investment and increasing efficiency of public R&D spending.
- Revisit regulations that have created a "small business trap."
- Improve access to non-bank (typically equity) financing for frontier innovation.
- Timing note: These reforms tend to have particularly high payoff when implemented during a cyclical recovery.
Financial sector: Continuing to strengthen the capacity to support growth
- Current position:
- Banking system stronger due to better asset quality, stronger capital and funding positions, and reduced debt overhangs.
- Banks have progressed at different speeds; overall NPLs and foreclosed assets remain sizeable though much lower than in some EU countries.
- Banks face challenges from low profitability and new regulatory initiatives.
- Policy recommendations:
- Sustain a job-rich economic recovery to strengthen domestic demand and private sector balance sheets.
- Ensure adequate provisioning and further improve efficiency—possibly through mergers.
- Boost non-interest income and further increase high-quality capital to enhance resilience and support sufficient credit provision as demand picks up.
Toward a comprehensive medium-term strategy
- Summary assessment:
- Reforms undertaken during the crisis have increased resilience and enabled a strong recovery.
- Remaining challenges are mostly structural and call for a comprehensive medium-term strategy.
- Priority areas with potentially high payoff and broad-based political support:
- Enhance active labor market policies (ALMP) to lower long-term and youth unemployment.
- Reform regional public finances to safeguard public finances.
- Strengthen innovation and education policies to lift productivity.
- Additional measures:
- Go further with labor and product market reforms to complement the medium-term strategy.
Source: Spain: Staff Concluding Statement of the 2016 Article IV Mission (December 13, 2016).