Spain

   

Economic Policies

#33
Key Findings
With political tensions hampering budgetary policy, Spain scores relatively poorly (rank 33) with regard to economic policies. Its score in this area has improved by 1.2 points since 2014.

The steady and robust growth of the past few years has slowed somewhat to an annual rate of 1.9%. Economic growth continues to be driven by strong private consumption, equipment investment and exports. The tourism sector, which is crucial for the economy and employment, has declined slightly for several years.

Unemployment rates are decreasing but remain very high, reaching 14.1% in 2019. The high degree of labor market segmentation between temporary and open-ended contracts impedes labor productivity growth. Job-creation figures during 2019 were the weakest since the summer of 2014.

Tax collection is low by EU standards. The parliament’s failure to approve the 2019 budget bill resulted in the extension of the 2018 budget, without any new tax measures. The deficit shrank to 2.3% of GDP; consequently European Council closed the excessive deficit procedure for Spain. Government debt remains high at nearly 96% of GDP. R&D funding levels are low.

Economy

#20

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
7
Spain’s economic situation remained stable in 2019. Spain’s 1.9% economic growth rate for 2019 is higher than other large EU member states and the rest of southern Europe (aside from the tiny Mediterranean islands of Malta and Cyprus), but shows signs of slowdown. The recovery that began in 2014 has remained solid for six years in a row, consistently above the euro zone average, although this tendency has weakened toward the end of this period and, in particular, during 2019. In the context of domestic and international political and economic instability, growth is expected to decline to an annual rate of 1.5% in 2020 according to the European Commission.

Economic growth continues to be driven by private consumption, equipment investment and the positive contribution of net exports. However, the large stock of internal and external debt, both public and private, and high unemployment, in the context of weak productivity growth, are significant vulnerabilities. For its part, tourism, which is a key sector for the Spanish economy and employment, suffered an 1.3% fall in the number of foreign tourists visiting the country in July 2019 with respect to the same month in 2018 (according to data from the National Statistics Institute). This is the second consecutive year that the figure has fallen in the same period, mainly due to a decline in British and German visitors, and the competitiveness of other Mediterranean countries.

Citations:
European Commission (2019), Autumn 2019 Economic Forecast: A challenging road ahead, Spain
https://ec.europa.eu/economy_finance/forecasts/2019/autumn/ecfin_forecast_autumn_2019_es_en.pdf

September 2019, El Pais, Spain sees fall in July tourist visits for second year running, https://elpais.com/elpais/2019/09/02/inenglish/1567423811_074989.html

Labor Markets

#35

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
6
Though still quite high compared to other OECD countries, Spain’s jobless rate fell again during 2019 to 14.1%, 13 points below an all-time high of 27% six years before. In the first semester of 2019, job recovery was still positive, with 446,000 jobs created. After public-spending cuts implemented in the early 2010s, public employment grew by 107,900 employees. Although this progress is positive news (take into account that the average unemployment rate over the past 40 years has been around 16%), the unemployment rate remains very high and the high degree of labor market segmentation between temporary and open-ended contracts impedes faster labor productivity growth. In addition, jobs creation figures during 2019 are the weakest since the summer of 2014.

The Socialist government 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. At the end of the period under review, a minimum salary hike was approved with the consequences for unemployment uncertain.

Citations:
INE (2019) Economically Active Population Survey:
OECD (2019), Unemployment rate (indicator). doi: 10.1787/997c8750-en

Taxes

#33

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 2019, but it is still low when compared with an EU average of 40%. The former PSOE government announced an increase in annual tax collections to 42% of GDP with a structural impact of an estimated €55.7 billion. The measures included in the 2019 budget comprised an increase in income-tax rates, changes in corporate-tax structures, an increase in tax surcharges on fuel as well as the creation of the Tax on Specific Digital Services and the Financial Transaction Tax. However, the 2019 budget was not adopted. Notwithstanding this fact, treasury revenues rose during 2019 thanks to economic growth, wealth creation and the modernization of revenue-collection mechanisms.

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.

Budgets

#36

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
6
The failure to approve the 2019 Budget Bill in February 2019 resulted in the automatic extension of the 2018 budget through 2019. Thus, the expenditure for 2019 covers virtually the same levels of expenditure as the 2018 budget. However, revenue will be affected by the absence of new tax measures. The consolidated budget out-turn of the government in June 2019 was a deficit of -2.14% of GDP (central government: -0.91%, regional governments: -0.65%, social security system: -0.68%, local administrations: -0.03%) against -1.88% recorded in June 2018.

Driven by the cyclical improvement of the economy, declining interest expenditures and an increase in tax collections, the deficit shrank from 4.5% of GDP in 2016 to 2.3% of GDP in 2019. Due to this effort, in June 2019, the European Council closed the excessive deficit procedure for Spain, confirming that Spain reduced its deficit below the European Union’s 3% of GDP reference value. Spain is now in the preventive stage, where the European Commission no longer sets targets for reducing the nominal deficit but focuses on the progressive correction of the structural deficit. Regarding the 2020 budget, the European Commission sent a letter to the Spanish government warning that there was a significant probability that Spain would fail to comply with the planned deficit and asking that Spain implement a €7.5 billion readjustment.

Despite continued robust GDP growth, government debt as a share of GDP remains high. According to the Stability Program, the government debt-to-GDP ratio is expected to decrease from 97.1% in 2018 to 95.8% in 2019, before reaching 88.7% in 2022.

Citations:
EC(2019), Autumn 2019 Economic Forecast: A challenging road ahead, Spain
https://ec.europa.eu/economy_finance/forecasts/2019/autumn/ecfin_forecast_autumn_2019_es_en.pdf

Spanish Government (2019), Stability Programme Update 2019-2022

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. Due to the failure to approve the 2019 budget, investments in R&D account for just 1.2% of GDP in 2019 in comparison to EU and OECD averages that are above 2%. The main Spanish research centers criticized the inaction of the caretaker PSOE government in October 2019. While the government presented an urgent action plan to address the paralysis in the science sector in March 2019, only a few minor measures could be implemented because of the budget deadlock.

However, according to the latest report published by Cotec (a Spanish public-private foundation that promotes innovation), some positive signs can be identified. The European Commission’s 2019 Innovation Scoreboard stresses that Spain’s performance has increased relative to 2010 with regard to several indicators, with human resources the strongest performing innovation dimension. Spain also scores high on sales of new-to-market and new-to-firm product innovations, broadband penetration, and doctorate graduates. However, private investment in R&D continues to be the weakest performing innovation dimension. Other low-scoring indicators include SME in-house innovation, knowledge-intensive service exports and SME product or process innovation. Spain also came out relatively well in the 2019 Nature Index, ranking as the 11th most prolific country worldwide in terms of scientific performance.

Citations:
EC(2019), European Innovation Scoreboard
https://ec.europa.eu/docsroom/documents/35912

Cotec(2019), Informe para la innovación
http://informecotec.es/media/INFORME-COTEC-2019_versionweb.pdf

Nature Index(2019)
https://www.natureindex.com/country-outputs/spain

El Pais, November 2019, Spain’s scientists burdened by legal uncertainty and lack of funding., https://elpais.com/elpais/2019/10/31/inenglish/1572520930_378460.html

Global Financial System

#16

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%). Spain has also been engaged within the OECD in the fight against tax havens, with a particular focus on Andorra and Gibraltar. At the European regional level, Spain is a member of the European Union 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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