The OECD’s recipes for the Spanish economy

Spanish flag reflected in the windows of a building in the Cuatro Torres Business Area in Madrid (Spain)
Spanish flag reflected at the Cuatro Torres Business Area, Madrid. Photo: Nacho Rascón (CC BY-NC-ND 2.0 Deed)

The OECD’s latest economic survey of Spain coincides with the Socialist-led minority government winning parliamentary support for a third term, four months after July’s inconclusive snap election, with the hard-left Sumar as its junior partner again and backing from Catalan and Basque separatist parties.

These surveys, produced every two years or so by the Paris-based think tank that embraces 37 countries, known as the rich countries’ club, though Mexico, a member, can hardly be called wealthy, provide a comprehensive analysis of economic developments and challenges and set out policy recommendations.

Spain’s economy, one of the hardest hit in the EU by the COVID-19 pandemic (GDP plummeted 11.2% in 2020), recovered its pre-pandemic level of output in the middle of 2022 and since then has grown relatively strongly, fuelled by a rebound in tourism and commerce and strong exports. The Bank of Spain forecasts GDP growth this year of 2.3%, well above the euro zone average of 0.7%. Headline inflation is comparatively low and unemployment is below 12%, the lowest rate since 2008 when the global financial crisis burst.

But public debt stands at 111.2% of GDP, up from 95.5% in 2019 (39.7% in 2008), the structural fiscal deficit (ie, as opposed to the cyclical one) is around 4% of GDP, and despite more reforms doubts remain about the sustainability of the pensions system in its current form.

The OECD makes a series of recommendations (see Figure 1), including ending the support measures introduced in 2021: a temporary cut in VAT on natural gas and electricity from 21% to 5%, a one-off payment of €200 million for 4.2 million households and direct support worth €1.8 billion for companies in the transport, agriculture, fishing and energy-intensive sectors, among other measures. Other recommendations concern raising revenue from taxes, alleviating child poverty, improving the education system (the early school-leaving rate is still high at close to 14%) and increasing the stock of social rental housing. In an unusual move, half of the report is devoted to the long overlooked plight of young people who have ‘a difficult transition to an independent, productive, and happy adult life’.

Figure 1. The OECD’s main findings and key recommendations

Main findingsKey recommendations
Support measures to alleviate the impact of high energy and food prices have been sizeable and only partly targeted towards the most vulnerable.End the support measures.
Public debt at 113% of GDP is high, the fiscal deficit is still sizeable and pension and health-related expenditures are set to rise in the longer term.Adopt a medium-term fiscal plan, step up the pace of deficit reduction from 2024, and ensure all extra spending is fully financed over the medium term.
Spending is tilted towards social spending, mostly pensions and unemployment benefits, with too little allocated to growth-enhancing items including education and training. Young people benefit less from public spending than others.Based on spending reviews and sound cost-benefit analysis, set longer-term spending priorities more geared to growth-enhancing items, notably skill-building measures such as education.
Tax revenues are low by EU standards, and there is scope to improve the design of the tax system: the VAT base is narrow; marginal personal income tax rates climb quickly already at modest levels of income, discouraging labour supply; and the tax system is not well geared to achieving environmental goals.Mobilise additional tax revenues by gradually broadening the VAT base, imposing higher excise duties on alcohol and tobacco and raising environment-related taxes, while reducing some capital taxes and the tax burden on labour for low-income households with children.
Promoting strong, inclusive and sustainable growth, and pursuing efforts to raise productivity and fight corruption
Social spending is titled towards contributory benefits favouring people with a job and a stable financial situation. Social assistance programmes do not adequately protect vulnerable groups. Child poverty is high.Increase the amount and coverage of cash benefits for poor families with children.
The legal framework to fight corruption has been enhanced over the past decade, but the level of corruption is still perceived as rather high by citizens.Continue efforts to reduce corruption in the public sector.
Despite improvements, Spain remains heavily reliant on fossil fuels, favoured by tax exemptions, modest fuel taxes and considerable subsidies in agriculture and fishing.Broaden the base for environment-related taxation by phasing out exemptions and gradually increasing the tax rate on non-ETS emissions and compensate partially and temporarily the most vulnerable.
Current policy efforts are unlikely to be sufficient to reach stated goals, notably net zero carbon emissions by 2050 and a cleaner energy mix through greater renewables.Install more electric vehicle charging points and provide more support for the retrofitting of buildings.
Water quality is poorer with toxic levels of nitrates concentrations spreading because of intensive agriculture production. Securing water is also a worsening problem in parts of the country afflicted by persistent drought.Promote a more efficient use of fertilisers by increasing taxes or improving their regulation. Encourage a better use of water through more efficient irrigation, reusing and recycling water or increasing water pricing for irrigation.
Tackling difficulties facing youth in the labour market, education, entrepreneurship and housing
Expanding access to early childhood education has been a government priority since 2021, but spending on early childhood education is lower than in other OECD countries and poorer families face challenges to access early childhood education and care, while access to childcare seems a barrier to female labour force participation.Continue expanding access to quality early childhood education and care to children under the age of three prioritizing disadvantaged children.
Early school-leaving and repetition rates in compulsory education are very high, curbing educational advancement and job prospects.Train teachers to identify and support students at risk of leaving education early and address their learning needs.
Enrolment in vocational education and training programmes is growing but remains comparatively low, despite graduates’ good labour market outcomes.Foster collaboration between SMEs to provide apprenticeships to students, training to teachers or share managerial duties.
Despite recent efforts to reform vocational education and training, skill mismatches hamper school-to-work transitions. Close to 40% of 15-34-year-olds report that their highest level of education did not help them in their current jobs, one of the highest rates in the EU.Encourage collaboration between education institutions and businesses in designing and updating university degrees and in student counselling to promote a better alignment between studies and labour market needs. Publicise data on the success of students’ labour market placements.
Recent rises in minimum wages have been rapid and large, which could potentially lower employment for vulnerable groups.Make the recently established expert commission independent with a mandate to advise on minimum wage changes in line with labour market conditions and productivity and ensure their access to data.
Entrepreneurship is low, and Spanish entrepreneurs lack training on how to start a business and on financial literacy more generally.Extend entrepreneurship education to more young people who are out of the formal education system.
Rental housing is expensive. The stock of rental housing is stagnant and, at 1%, one of the lowest in the OECD. Many young people involuntarily delay living independently. Rent control regulations are among the most stringent in the OECD and further increases would risk curbing housing supply.Encourage rental supply in stressed areas by increasing the stock of rental housing, relaxing rent controls, and making taxation less distortive (eg, by updating property values more regularly and reducing property transfer taxes).
Source: OECD Economic Survey Spain, October 2023.

The OECD’s report comes at a time when the EU is close to a deal on restoring and revising its fiscal rules, suspended since 2020, which limit budget deficits to 3% of GDP and public debt to 60% of GDP, limits that Spain, and other countries, long ago broke. The new rules might give Spain more flexibility in correcting its imbalances, but even so the new government has work on its hands. Sustained fiscal consolidation needs to get underway, given the demographic outlook (a rapidly ageing population and a low fertility rate) and the high debt, which makes Spain vulnerable to external shocks.

The Bank of Spain’s says the consolidation should be framed in a detailed multi-year programme in order to ensure its credibility from the outset and increase the likelihood of a gradual consolidation. This will not be easy for a government supported by parties with such disparate agendas. The risk is that in order to satisfy all of them, structural reforms will not be effective.

A particular problem for Spain is sluggish productivity growth, a key element of a country’s prosperity. Growth was 0.6% per year between 2010 and 2022 compared with 0.8% in the euro area, and is one factor behind Spain’s lagging convergence with the EU in terms of per capita GDP, which in 2022 was 15% below the EU average. Between 2002 and 2009, when the economy boomed until the global financial crisis, per capita income was above the EU average. ‘Weak productivity performance has severe implications for future improvements in material living standards, given that ageing will soon become a larger drag on growth’, the OECD says.

There are many reasons for Spain’s relatively lower productivity: the sectoral composition of the economy skewed more towards services such as commerce and the hospitality sector, sectors of low value-added; the scant investment in R&D+i (1.2% of GDP, 0.8 pp below the EU average and way below the top performers); the lower quality of human capital (for example, the still high early school-leaving rate of 13.7%); the complex regulatory environment (different between regions and even between municipalities and hence not a level playing field) and its impact on an efficient assignment of funds; a labour market, despite reforms, which still has a relatively high proportion of workers on temporary contracts (in itself a cause of low productivity); cronyism (a Bank of Spain study indicated that the companies that grow the most are sometimes those closest to political power and not the most productive); and the reduced confidence in public institutions and their management capacity, including a judiciary system whose efficiency is below that of comparable countries.

The productivity problem is also highlighted in a recent book, Un país posible: manual de reformas políticamente viables (A country that is possible: manual of politically viable reforms, Deusto) by a group of economists, sociologists and political scientists, coordinated, among others, by Toni Roldán, a former MP for the now disappeared would-be centrist Ciudadanos and the party’s economy spokesperson, which sets out how to enhance Spain’s economic potential. Its main message is that the new legislature should be one that concentrates much more on human as opposed to physical infrastructure.

Both the report and the book should be on the desks of the new economic team.