Boosting Economic Growth: Implementing the OECD’s Recipes in Spain

The OECD’s latest economic survey of Spain, produced every two years by the Paris-based think tank, provides a comprehensive analysis of economic developments and challenges, setting out policy recommendations. Spain’s economy, severely impacted by the COVID-19 pandemic, recovered in mid-2022 and is expected to grow strongly, driven by tourism, commerce, and exports. The Bank of Spain predicts a 2.3% GDP growth this year, above the euro zone average.

However, public debt stands at 111.2% of GDP, the structural fiscal deficit is around 4% of GDP, and doubts remain about the sustainability of the pensions system in its current form. The OECD makes a series of recommendations, including ending support measures introduced in 2021, such as a temporary cut in VAT on natural gas and electricity, a one-off payment of €200 million for 4.2 million households, and direct support worth €1.8 billion for companies in transport, agriculture, fishing, and energy-intensive sectors.

The challenges faced by Spain in addressing its youth, including high energy and food prices, child poverty, and improving the education system. It suggests that support measures should be ended, public debt should be reduced, and tax revenues should be increased. Social spending should focus on growth-enhancing items like education and training, with young people benefiting less from public spending than others.

The tax system needs improvement, with the VAT base being narrow and marginal personal income tax rates increasing quickly, discouraging labour supply. To mobilize additional tax revenues, the VAT base should be broadened, excise duties on alcohol and tobacco raised, and environment-related taxes raised. Additionally, the legal framework to fight corruption should be strengthened, and efforts should be made to reduce corruption in the public sector.

Spain remains heavily reliant on fossil fuels, with tax exemptions, modest fuel taxes, and subsidies in agriculture and fishing favoring them. To combat this, the base for environment-related taxation should be broadened, and the tax rate on non-ETS emissions should be gradually increased.

To improve water quality, the report recommends increasing electric vehicle charging points and providing more support for retrofitting buildings. Water quality is poorer due to intensive agriculture production and persistent drought, and promoting efficient use of fertilisers through increased taxes or improved regulation.

The report highlights challenges faced by youth in labor, education, entrepreneurship, and housing, with low government spending on early childhood education and poorer families facing difficulties in accessing education and childcare, posing a barrier to female labor force participation.

Training teachers to identify and support students at risk of leaving education early and addressing their learning needs is crucial. Enrollment in vocational education and training programs is growing but remains low, and collaboration between SMEs can help. Skill mismatches hamper school-to-work transitions, and collaboration between education institutions and businesses can promote better alignment between studies and labour market needs.

Recent increases in minimum wages could potentially lower employment for vulnerable groups. The expert commission should be independent with a mandate to advise on minimum wage changes in line with labour market conditions and productivity. Entrepreneurship education should be extended to more young people who are out of the formal education system.

Rental housing is expensive, and the stock of rental housing is stagnant, with many young people involuntarily delaying living independently. To encourage rental supply in stressed areas, the report recommends increasing the stock of rental housing, relaxing rent controls, and making taxation less distortive.

The OECD’s report highlights Spain’s need for sustained fiscal consolidation due to its demographic outlook, high debt, and rapidly aging population. The Bank of Spain suggests that the consolidation should be framed in a detailed multi-year program to ensure credibility and increase the likelihood of gradual consolidation. However, this will be challenging for a government supported by parties with disparate agendas, as structural reforms may not be effective in achieving these goals.

Slow productivity growth is a significant issue for Spain, with growth being 0.6% per year between 2010 and 2022 compared to 0.8% in the euro area. This 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. The weak productivity performance has severe implications for future improvements in material living standards, given that ageing will soon become a larger drag on growth.

Several factors contribute to Spain’s lower productivity, including a skewed economy towards services, scant investment in R&D+i, lower quality of human capital, complex regulatory environment, a labor market with a high proportion of temporary workers, cronyism, and reduced confidence in public institutions and their management capacity.

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), coordinated by economists, sociologists, and political scientists. The main message is that the new legislature should focus more on human as opposed to physical infrastructure, enhancing Spain’s economic potential.

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