Spain: Staff Concluding Statement of the 2026 Article IV Mission
IMF News, March 20, 2026
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- Published: March 20, 2026
Overview
- The Spanish economy has continued to perform strongly, expanding significantly faster than euro area peers.
- Notwithstanding the adverse effect and heightened uncertainty from the conflict in the Middle East, growth is expected to stay solid this year, before slowing gradually as immigration inflows moderate and demographic aging intensifies.
- Risks are on the downside, including from a lengthy Middle East conflict, an escalation of other geopolitical tensions and trade measures, and domestic political fragmentation.
- Given the favorable cyclical position and still strong and resilient growth under staff’s baseline projection, the authorities should speed up the pace of discretionary consolidation to rebuild fiscal space more rapidly ahead of the looming sharp rise in aging-related spending pressures.
- Any fiscal measures to mitigate the adverse impacts of the energy price shock on households and firms should not distort energy prices, be well targeted, and remain temporary.
Recent Economic Developments and Outlook
- Growth and components:
- Growth declined from 3.5 percent in 2024 to 2.8 percent during 2025, still significantly outpacing the rest of the euro area.
- Private consumption accelerated due to solid employment underpinned by continued net migration inflows, steady real wage gains, and some decline in the still high household saving rate.
- Investment also picked up, supported by more favorable financial conditions and Next Generation EU (NGEU) funds.
- A slowdown in tourism growth was largely offset by stronger growth in non-tourism service exports—such as business and ICT services—while goods exports remained subdued, and those to the United States fell following US tariff hikes.
- Inflation:
- Headline inflation has hovered between 2.5 and 3.0 percent since mid-2025 as wage growth and core inflation remained sticky.
- Staff baseline projections and medium-term outlook:
- Staff’s baseline assumes oil and gas prices that are broadly consistent with future prices by mid-March 2026.
- Under these assumptions:
- GDP growth would be about 2.1 percent in 2026 and 1.8 percent in 2027.
- Year-on-year headline inflation would reach about 3.0 percent by end-2026 before falling to 2.2 percent by end-2027.
- Domestic demand is expected to remain the main source of growth.
- Looking beyond 2027, annual GDP growth is projected to stabilize around its medium-term potential of about 1.7 percent.
- Risks:
- Downside risks: a lengthy Middle East conflict (higher-for-longer energy prices, tighter financial conditions, deeper uncertainty), escalation of other geopolitical tensions and trade measures, and domestic political fragmentation that could impair delivery of fiscal consolidation.
- Upside risks: more resilient tourism growth, net migration inflows above staff baseline, and stronger consumption if households reduce saving rate faster than expected.
Fiscal Policies
- Recent fiscal performance:
- General government deficit expected to fall to 2.5 percent of GDP in 2025 from 3.1 percent in 2024.
- Excluding reconstruction costs related to the 2024 DANA floods, this improvement exceeds the authorities’ projection under the MTFSP.
- Staff projections and fiscal gap:
- Under staff’s current-policies baseline, the deficit is projected to stabilize above 2 percent of GDP by 2031, compared to 0.8 percent envisaged in the MTFSP.
- This implies that measures of almost 1.5 percent of GDP have to be implemented to achieve the authorities’ MTSFP deficit path.
- Debt is projected to decline further over the next five years but would rise sharply starting from the early 2030s due to aging-related spending—of about 4 percent of GDP between 2030 and 2050, according to AIReF.
- Fiscal policy recommendations:
- Deliver the cumulative improvement in the cyclically-adjusted primary balance (CAPB) of 2.5 percentage points of GDP during 2025-2031 envisaged in the MTFSP by 2030, implying a yearly adjustment of 0.5 percentage points in 2026-2030.
- Save any future revenue surprises rather than spend them.
- Allow automatic stabilizers to play out if downside risks materialize; consider temporary and targeted discretionary support only in the event of a severe shock and provided sovereign funding costs remain low.
- Bolster the role of a fully independent and well-resourced AIReF in the preparation of future MTFSP and Annual Progress Reports (APRs).
- Medium-term adjustment strategy:
- The MTFSP and APR should include projections of the main components of revenues and expenditures and the government’s tax increase and spending reduction priorities.
- Growth-friendly consolidation should primarily address the low efficiency of indirect taxation.
- Staff estimate that harmonizing value added tax (VAT) rates by removing reduced rates on a wide range of products, combined with compensating transfers to lower-income households, could deliver much of the remaining consolidation envisaged by the MTFSP at a small GDP growth cost.
- For pensions, employment-friendly measures—including alternatives to raising social security contribution rates, such as lengthening the period over which benefits are computed—will eventually be needed.
- Subnational fiscal rule and regional finances:
- Overhaul the subnational fiscal rule to reduce complexity and pro-cyclical spending, aligning the national definition of net primary spending growth with the EU rule.
- A viable solution: a rule centered on expenditure growth that ensures debt sustainability for individual regions, with a clear corrective arm enforced by the Ministry of Finance.
- Central government’s one-off partial acquisition of communities’ debt should be conditional on credible consolidation plans.
- Planned increases in central government transfers to autonomous communities should be phased in gradually and accompanied by offsetting tax increases and/or spending cuts at the central level.
- Requirement for regions to present multi-year debt strategies to access concessional borrowing schemes in 2026 can help return to market-based issuance.
- Streamlining financing facilities, including elimination of the Facilidad Financiera and reform of the Fondo de Liquidez Autonómico (FLA), is welcome; the FLA should operate as a true lender of last resort with interest rates that strongly discourage borrowing outside emergency situations.
Housing and Financial Policies
- Financial sector soundness:
- Household indebtedness has continued to decline and remains low in international comparison.
- Corporate leverage has fallen with fewer firms exhibiting weak debt-servicing capacity.
- Banks remain resilient with strong profitability, historically low non-performing loans, and capital, leverage, and liquidity ratios comfortably above regulatory requirements.
- The non-bank financial sector is relatively small (about half that of the euro area), only moderately connected to banks, and largely unleveraged.
- Housing market pressures:
- Rapid house price growth has pushed annual house price growth into double digits, eroding affordability and reducing worker mobility.
- Strong demand drivers: population growth, net immigration, and declining interest rates, combined with rigid housing supply.
- Policy recommendations to boost supply and address affordability:
- Accelerate urban development plans, release more land for construction, and streamline permitting procedures—including disseminating best practices from certain regions and municipalities such as streamlined licensing and the use of AI.
- Reduce legal uncertainty around projects by reviving the Land Law reform.
- Unless a thorough evaluation disproves early evidence that rent controls have significantly reduced rental housing supply, rent controls should be discontinued after their initial three-year term.
- Amend the Housing Law governing the declaration of “stressed areas” to make it conditional on regions implementing concrete and measurable actions to boost supply.
- Continue government initiatives to boost affordable rental housing, including the new public housing company (Casa 47) and the new public fund (España Crece).
- Mortgage-related borrower-based measures (BBMs) and financial stability:
- Introduce mortgage-related BBMs in the coming year, at least in the form of supervisory guidance.
- Collateral-based BBMs—such as loan-to-price or loan-to-value ratios—would help pre-empt a buildup of housing-related financial sector risks and could be implemented through supervisory guidance or mandatory limits.
- If house price growth keeps rising rapidly and lending standards ease materially, Bank of Spain should turn supervisory guidance into mandatory limits.
- BBMs would complement the ongoing phasing in of the positive neutral countercyclical capital buffer, which will reach 1 percent by October 2026.
- Completing the remaining 2024 Financial Sector Assessment Program (FSAP) recommendations would further reinforce the financial stability framework, notably a comprehensive approach to addressing liquidity needs in resolution for all banks and granting the Comisión Nacional del Mercado de Valores (CNMV) greater autonomy over hiring.
Structural Policies
- Labor market:
- A new wave of labor market reforms is needed to further raise the employment rate.
- Enhance active labor market policies by relying on outcome-based indicators to guide allocation of bonuses to better-performing regional public employment services.
- Strengthen the 2024 reform of unemployment assistance—if evaluated positive—by extending the period during which recipients aged 52 and above can combine labor earnings and benefit receipt, with some benefit phasing out over time.
- Minimum wage policy:
- Minimum wage increases should remain guided by the government’s target of 60 percent of the net average wage—using the same definition for the minimum and average wages—and avoid de facto inflation indexation.
- The minimum wage advisory committee could be granted independence, more resources for evaluation, and consider equally employment and in-work poverty objectives.
- Introduce an in-work tax credit to support low-income households while safeguarding employment, integrating existing benefits.
- Address temporary disability:
- A recent sharp increase in the incidence and duration of temporary disability increased related fiscal expenditure to over 1 percentage point of GDP and reduced total hours worked by over 1.5 percent between 2019 and 2024.
- Implement AIReF’s recent recommendations, including early monitoring and support during the first year of the temporary disability spell.
- Job stability and contracts:
- Amplify gains from the 2021 labor reform by introducing experience rating—higher social security contributions for firms that lay off more frequently—and consider extending the permanent construction sector contract to other sectors after evaluation.
- Productivity and innovation:
- Boosting productivity requires addressing insufficient human capital, financial constraints, red tape, and an overly complex R&D tax credit system.
- On financing, advance EU capital markets integration and build on the Competitiveness Lab initiative to improve access to venture capital and finance.
- On red tape, accelerate the implementation of the Regime 20 initiative to harmonize regulations and reduce administrative barriers across regions with clear milestones and deliverables.
- Streamline and better target the R&D tax credit toward young and innovative firms to support innovation.
- Staff analysis suggests that reforms addressing firms’ financing constraints, cutting administrative burdens, streamlining size-dependent thresholds, and enhancing the R&D tax credit could together raise Spain’s trend annual productivity growth by about a quarter of a percentage point.
Key Risks and Scenarios
- Downside risk scenarios:
- A lengthy Middle East conflict could cause higher-for-longer energy prices, tighter financial conditions, deeper uncertainty, weaker investment and consumption, and larger second-round effects on wages and core inflation, keeping headline inflation above 3 percent for a while.
- Escalation of other geopolitical tensions and trade measures could hurt exports and growth.
- Domestic political fragmentation could undermine delivery of the sizeable fiscal consolidation measures needed to meet MTFSP commitments and to reassure markets in the event of financial stress.
- Upside scenarios:
- Tourism growth could remain more resilient due to diversification across regions, reduced seasonality, and diversion of tourists towards Spain.
- Spain’s pro-immigration policy could keep net migration inflows above staff baseline projection.
- Consumption could grow more than projected if households reduce their saving rate toward its pre-COVID level faster than expected.
Mission Closing
- The mission team thanks the authorities and all counterparts for their warm hospitality, frank and open discussions, and collaboration.
Spain: Staff Concluding Statement of the 2026 Article IV Mission