Spain

   

Economic Policies

#28
Key Findings
With echoes of the crisis remaining despite growth, Spain falls into the lower-middle ranks (rank 28) with regard to its economic policies. Its score in this area has improved by 1.4 points since 2014.

Growth has been steady and robust for several years, led by strong private consumption, equipment investment and exports. However, average household income remains below its pre-crisis level. Austerity policies have been relaxed further, but both the deficit and debt remain unsustainably high.

Unemployment rates are decreasing but remain very high, reaching 15% in 2017. Most jobs created have been unstable and of inferior quality. The labor market continues to lack flexibility, with a high share of undeclared work and a dual labor market that particularly affects young and low-skilled workers.

Tax collection is low by EU standards. The new social-democratic government planned to increase income-tax rates, change corporate-tax structures, and impose a new banking and financial services tax, among other changes. Borrowing costs have continued to fall. R&D funding levels are low, but the government has expressed an intention to raise them to pre-crisis levels.

Economy

#14

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
8
Spain’s economic expansion continued in 2018, showing a 2.7% growth rate, higher than the other four large EU member states and the rest of southern Europe (aside from the tiny Mediterranean islands of Malta and Cyprus). This means that the recovery that began in 2014 has remained robust for five years in a row, above the euro zone average. Growth was driven by strong private consumption, equipment investment and the positive contribution of net exports to growth. However, the rise in oil prices since spring 2018 is expected to have a negative impact on domestic demand. Other factors that supported growth, such as the improvement in financial conditions, will have less impact in the near future, and growth is expected to decline to an annual rate of 2.4% in 2019.
However, average household incomes remain lower than before the crisis, the public deficit is high, inequality is severe, and unemployment rates, while decreasing, remain at a very high level (15% of the labor force in 2018).
Tourism is an important sector for the economy, with a significant impact on the country’s economic growth and employment. In the first half of 2018, Spain was on track to set a new record for foreign visitors. However, in July 2018 Spain saw its largest fall in visitor numbers in eight years. A total of 4.9% fewer tourists vacationed in the country in July than during the same period in 2017, mainly due to a decline in British and German visitors, and the competitiveness of other Mediterranean countries.

Citations:
OECD (2018), Interim Economic Outlook 2018
http://www.oecd.org/eco/outlook/
August 2018, El Pais, Could Spain’s thriving tourism industry be coming to a standstill?https://elpais.com/elpais/2018/08/30/inenglish/1535624618_272508.html

Labor Markets

#36

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Though still quite high compared to other OECD countries, Spain’s jobless rate fell again during 2018 to 15%, 12 points below an all-time high of 27% five years before. In the first semester of 2018, job recovery was better than expected, with 469,900 jobs created in the second quarter (no three-month period had previously come close to achieving such a figure). Although this progress is positive news (take into account that the average unemployment rate over the past 40 years has been around 16%), most jobs created have been unstable and of inferior quality, as shown by the high temporal increase in unemployment in August 2018 (the biggest since 2011).

The Socialist government that took office in June 2018 lacked the majority needed to introduce changes in a labor-market regulatory regime that has continued to show a number of problems, including: 1) a lack of flexibility, 2) a high share of undeclared work and, 3) a dual labor market that affects young and low-skilled workers particularly strongly. Analysts also point to the existence of several contract modalities, a flawed social dialogue and expensive compulsory social-security contributions. Finally, public-spending cuts implemented in the early 2010s (which have not yet been reversed) reduced the prevalence of active labor-market programs (e.g., training) designed to help the unemployed find work.

Citations:
INE (2018) Economically Active Population Survey:
https://www.ine.es/dyngs/INEbase/es/operacion.htm?c=Estadistica_C&cid=1254736176918&menu=ultiDatos&idp=1254735976595

Taxes

#36

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
Spain collects less in taxes relative to wealth than do most other European countries. The tax-to-GDP ratio in Spain increased from 33.2% in 2000 to 34% in 2018, but it is still low when compared with an EU average of 40%. Despite this, the 2018 budget prepared by the conservative Mariano Rajoy government included a tax cut for low-income earners. Notwithstanding this fact, Treasury revenues rose during 2018 thanks to economic growth, wealth creation and the modernization of revenue-collection mechanisms.

The new social-democratic prime minister who took office in June 2018, Pedro Sánchez, declared that his government would increase annual tax collections to 42% of GDP. The measures to be taken, but not yet implemented as of the end of the review period, were to include an increase in income-tax rates, changes in corporate-tax structures, a new tax on banking and financial transactions, a new tax on the sale of services by technology companies, an increase in tax surcharges on fuel, and an asset-tax increase.

Existing tax policy is difficult to assess with regard to equity and competitiveness. Vertical equity exists in principle, but horizontal equity suffers due to 1) corporate-tax engineering, 2) the prevalence of fraud and 3) the scope of the underground economy. However, one positive sign is that after years of reducing spending on public administration, resources provided to the taxation authorities have been (slightly) increased.

Budgets

#35

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
The budget for 2018 was finally approved in June, after a complex set of political negotiations. It was the third year in a row in which budgetary policy had somewhat softened austerity measures, stretching the timeline of the European Semester budgetary plan. Except for some minor changes, the new socialist government that took office in early June accepted a budget that had been prepared by its conservative predecessor.

Driven by the cyclical improvement of the economy, declining interest expenditures and a slight increase in tax collections, the deficit shrank from 4.5% of GDP in 2016 to 3.1% of GDP in 2017. The 2018 budget forecast a deficit of around 2.7% for the year (although the Bank of Spain warned that it could rise to 2.8%). Despite this reduction, the deficit continues to be higher than in the rest of the European Union’s countries. The public-debt-to-GDP ratio (98.1% in 2018) is the sixth-highest in the EU (after Greece, Italy, Portugal, Belgium, and France), and has been only slightly reduced since the worst years of the crisis. Nevertheless, during 2018, Spain’s risk premium fell to its lowest level since early 2010.

The draft budget for 2019 (which was ultimately not passed, leading to snap elections in early 2019) included a generous rise in public spending (in the areas of minimum wages, pensions, unemployment benefits, housing, paternity leave and increased investments in education and science) without an equivalent increase in revenues (since the increases that were introduced seemed unlikely to be realized). Thus, it would be premature to conclude that Spanish budgetary policy has reached the point of fiscal sustainability, particularly if the slowdown in economic growth forecast for 2019 is taken into account.

Citations:
EC(2018) Interim Economic Forecast: A solid and lasting expansion: https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-forecasts/winter-2018-economic-forecast_en

Ministerio de Hacienda(2018), Presupuestos generales del estado,
http://www.hacienda.gob.es/es-ES/Areas%20Tematicas/Presupuestos%20Generales%20del%20Estado/paginas/Presupuestos.aspx

Research, Innovation and Infrastructure

#23

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
Research and technology policy remained a weak point during the period under review, as evidenced by the low number of patents registered, the relatively poor international ranking of universities and the low level of spending on R&D. Investment in R&D accounts in 2018 for just 1.2% of GDP, compared to EU and OECD averages that are above 2%. However, according to the latest report published by Cotec (a Spanish public-private foundation for the promotion of innovation), some positive signs can be identified.

The European Commission’s 2018 Innovation Scoreboard stresses that Spain’s performance has increased relative to that of 2010 with regard to several indicators, including product, process, marketing and organizational innovation. Human resources, the country’s innovation-friendly environment, and its attractive research systems are also strengths underlined by the Commission. However, relative weaknesses remain with regard to finance and innovation support. Spain also came out relatively well in the 2018 Nature Index; here, Spain was the 10th most prolific country worldwide in terms of scientific performance.

The minister for science, innovation, and universities has stressed the need to put R&D back on the political agenda, and in 2018 convened the Council of Universities for the first time since 2011, announcing that it would work intensively to promote internationalization and excellence within the country’s R&D ecosystem. The new government also announced that spending on R&D would be increased in 2019 to the levels reached before the crisis.

Citations:
EC(2018), European Innovation Scoreboard
https://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en

Cotec(2018), Informe para la innovación
http://informecotec.es/media/Informe-Cotec_2018_versi%C3%B3nweb.pdf

Nature Index(2018)
https://www.natureindex.com/annual-tables/2018/country/all

Global Financial System

#18

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
7
Though aware of its limitations as only a medium-sized power and indebted economy, Spain behaves as an important partner in international forums and tries to contribute actively to improving the regulation and supervision of financial markets. Spain is a permanent invited guest to G-20 meetings, and sits on the Financial Stability Board. It is also part of the IMF system (with 1.94% of the votes) and the World Bank (1.74%). It has also been engaged within the OECD in the fight against tax havens, with a particular focus on Andorra and Gibraltar. In March 2018, Luis de Guindos was appointed vice president of the ECB. At the European regional level, Spain is a member of the EU and is the fourth most important state within the euro zone. It has pushed hard in recent years for a banking union and for the European Central Bank to take a more active role in strengthening the single European currency. It has also sought to strengthen regulation of rating agencies
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