Spain: Staff Report for the 2004 Article IV Consultation

This 2004 Article IV Consultation highlights that with growth proceeding at a steady pace of 2.6 percent during 2004, the Spanish economy has weathered the slowdown in the European Union relatively well. The external current account is estimated to have widened to some 4¼ percent of GDP in the first half of 2004. A gradual, but sustained recovery is expected, with GDP growth projected at 2.7 percent in 2005—again based on the strength of domestic demand, with a continued negative contribution of net exports.


This 2004 Article IV Consultation highlights that with growth proceeding at a steady pace of 2.6 percent during 2004, the Spanish economy has weathered the slowdown in the European Union relatively well. The external current account is estimated to have widened to some 4¼ percent of GDP in the first half of 2004. A gradual, but sustained recovery is expected, with GDP growth projected at 2.7 percent in 2005—again based on the strength of domestic demand, with a continued negative contribution of net exports.

I. Background

1. The Spanish economy has weathered the EU slowdown well, thanks to the strength of domestic demand (Table 1). The economy was not appreciably affected by the terrorist attacks of March 2004, and GDP growth proceeded at a steady pace of 2.6 percent in 2004 (the staff—and now also official—projection for the year as a whole), sustained in particular by private consumption and construction (Figure 1). The pattern of growth has, however, become increasingly unbalanced: while the differential of final domestic demand growth over the euro area has remained large (over 3 percentage points in the third quarter of 2004), net exports have been an increasing source of drag (deducting 2 percentage points from GDP growth in the same period), with comparatively weak export growth being swamped by the vigor of imports. Mirroring this pattern, employment remained buoyant in the service sectors, while nonservice sectors—more exposed to international competition—registered continued losses.

Table 1.

Spain: Main Economic Indicators, 1999-2005 1/

(In percent of GDP, unless otherwise indicated)

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Sources: IMF, World Economic Outlook and Information Notice System; and Fund staff estimates.

Figures for 2004 and 2005 are Fund staff projections.

In 2004, the growth rate is for November (y-o-y).

Based on national definition, i.e., the labor force is defined as people older than 16.

As of October 2004.

Calculations exclude one-off adjustments amounting to 0.1 percent of GDP in 2000 (auction of mobile telephone licenses) and 0.8 percent of GDP in 2004 (mostly the assumption of debt of the railway operator, RENFE).

Figure 1.
Figure 1.

Spain: Real Sector, 2000-04

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Sources: Bank of Spain and Eurostat.

Selected Economic Indicators, 2002-04

(Real growth rates in percent, unless otherwise noted)

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Sources: World Economic Outlook and Fund staff estimates.

In percent of potential GDP.

Contribution to growth.



(Percent change from previous year)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

2. Inflation has been rising, with its continued margin over the euro area eroding competitiveness (Figure 2). Headline and core inflation (HICP) rose sharply in the course of 2004, reaching at end-year 3.3 percent and 2.9 percent, respectively, with the differential vis-à-vis the euro area remaining stubbornly around 1 percentage point (headline inflation). Inflation closely tracked movements in oil prices, with fuel-dependent transportation sector price increases substantially outpacing those in the euro area. Price increases have also been marked in sheltered services sectors. The cumulative headline (core) inflation differential with the euro area since EMU qualification in 1997 amounts to about 7 (8½) percentage points; this margin does not appear to have been offset by productivity gains, though data on the latter are weak.1 The associated real appreciation contributed to a plateauing of exports to the euro area, with some losses in specific markets (Figure 3), and a continued compression of export margins. The external current account deficit is estimated to have widened to some 4¼ percent of GDP in the first half of 2004 (Table 2).

Figure 2.
Figure 2.

Spain: Headline and Core Inflation, 1997-2004

(In percent)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Source: Eurostat.
Figure 3.
Figure 3.

Spain: Competitiveness and Exports, 1990-2004

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Sources: IMF, International Financial Statistics; IMF, Direction of Trade; IMF, World Economic Outlook; Bank of Italy; ISTAT; and Organization for Economic Cooperation and Development.1/ As measured by real growth of exports of goods and nonfactor services less growth of import demand in partner countries.
Table 2.

Spain: Balance of Payments, 1999-2004

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Sources: IMF, World Economic Outlook, and Fund staff projections.

Export Margins

(Year-on-year rate of change)

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Source: Bank of Spain.

Assumes a common unit labor cost for the economy.

3. The boom in house prices and the sharp increase in household indebtedness have continued unabated. With a sixth consecutive year of double-digit percentage increases in 2004, house prices have virtually doubled in real terms since 1997. Mortgage credit—almost exclusively at variable rates—has also continued to grow at a rapid pace (around 25 percent in 2004). Relatedly, household indebtedness has overtaken euro area levels, exceeding 70 percent of GDP in 2004.


Real Housing Price Indices, 1990-2003

(1995 =100)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Source: Bank of Spain.

Mortgage Credit Growth and Debt of Households

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

4. Policy conditions have been accommodative. In particular, real interest rates have been in negative territory for some three years, spurring strong credit demand. The general government is estimated—excluding one-off accounting adjustments amounting to 0.8 percent of GDP2—to have recorded a slight surplus in 2004, implying a mildly stimulatory stance (Table 3). The strength of social security contributions has continued to ensure a comfortable social security surplus (slightly under 1 percent of GDP), more than offsetting the deficits recorded by the central and subnational governments.

Table 3.

Spain: Fiscal Accounts, 1999-2005

(In percent of GDP)

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Sources: Cuentas Financieras, Bank of Spain; Intervenciόn General de la Administraciόn del Estado; and Fund staff projections.

Calculations exclude one-off adjustments amounting to 0.1 percent of GDP in 2000 (auction of mobile telephone licenses) and 0.8 percent of GDP in 2004 (mostly the assumption of the debt of the railway operator, RENFE).

Includes one time payment of the disputed debt with Andalucίa (0.3 percent of GDP) in 2004.


Short-Term Real Interest Rates

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Sources: ECB; Datastream; and Fund staff calculations.

II. Report on the Discussions

5. Early in the tenure of the new Socialist-led government, the discussions—in addition to reviewing policies to ward off short-term risks—focused on the government’s announced priorities of fiscal stability, transparency, and productivity enhancement. In large part, the direction of policies in Spain has been in line with Fund advice (Box 1). Building on this record, the discussions sought to safeguard essential elements of achievements to date (notably the stability-orientation of fiscal policy), secure continued progress in initiatives underway (e.g., with respect to greater transparency), and assign higher priority to areas still largely on the drawing board (first and foremost, pension reform). Overall, the discussions were marked by a high degree of agreement, though policies in several areas remained to be defined and mixed signals, affecting policy cohesiveness, had emerged on some fronts.

A. Cyclical Outlook and Risks

6. The authorities were somewhat more sanguine than staff on the outlook. There was agreement that domestic demand (particularly consumption and construction) would remain robust and that net exports would continue exerting a drag on growth. Overall, however, the authorities expressed greater confidence in the economy’s ability to weather the oil price rise and to gather steam going forward, and pointed in particular to evidence of a long-awaited pickup of investment in machinery and equipment. They noted that the negative contribution of the external sector thus also reflected the buoyancy of imports of capital goods. The discussions took place at a time of marked uncertainty regarding oil prices and exchange rates, and some of the differences in perspectives reflected different underlying assumptions. The authorities recently revised their 2005 growth projection downward, albeit only marginally, to 2.9 percent (from 3 percent in the 2005 budget)—still above staff (2.7 percent), but with both projections around estimates of potential growth.

Spain: Policy Recommendations and Implementation

Policy implementation in Spain has for several years been largely consistent with Fund policy advice, and based on a stability-oriented fiscal policy and structural reforms in labor and product markets. Fiscal policy has largely avoided the procyclical responses that the Fund saw as a potential risk in case of a rigid implementation of the Budgetary Stability Law. Improvements have been made in the strengthening of fiscal reporting and monitoring but these still fall short of what is needed, particularly at the subnational level.

A series of structural reforms have appreciably improved the workings of labor and product markets. Political and institutional constraints have, however, stood in the way of two long-advocated measures: comprehensive pension reform, key to long-term fiscal sustainability, and of the land supply and zoning process to improve its responsiveness and transparency. In addition, growing regional responsibilities in several areas have limited the central government’s reach, inter alia complicating the implementation of competition policy.

7. Staff saw a greater risk of inflation persistence. The updated Stability Program (end-December) raised the official projection for inflation in 2005 to 3.1 percent (as measured by the private consumption deflator). Staff however remains less sanguine, as backward-looking wage indexation—affecting three-quarters of contracts—stands to exert pressure on wage costs. Given relatively high year-end inflation, a significant proportion of the revision clauses is likely to be triggered, risking second-round effects from the oil price increases.3 Furthermore, the pervasiveness of such wage indexation, along with the lack of effective competition in sheltered services sectors—where the income catch-up process is prompting relatively stronger demand pressures—risks contributing to the stubbornness of inflation.


CPI Inflation and Contractual Wage Increases

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001


Wage Indexation, Revisions, and Inflation

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

8. Oil price developments were seen to cloud prospects, particularly given Spain’s relatively greater oil dependency. The authorities were nonetheless cautiously optimistic, both on future oil price movements and on their impact on the economy. They noted that the effect on growth (and inflation) of higher oil prices was being mitigated by the appreciation of the euro—which, they acknowledged, presented risks of its own.4 On the policy response to higher oil prices, they supported the ECOFIN’s (and staffs) recommendation to allow domestic oil prices to adjust freely so as to shape incentives toward much-needed energy efficiency and conservation. The latter would be promoted also through appropriate energy policies (see ¶35). The authorities nonetheless introduced income tax rebates for the agriculture and fishing sectors (which were seen as less able to pass on cost increases), while reassuring staff that the measures would be limited and temporary, and that similar calls from other sectors would be resisted.


Energy Intensity, Average 1998-2002

(Energy Consumption in kg of oil equivalent per constant 95 dollars)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

9. The main domestic risk to the recovery is posed by the continued boom in house prices and the high level of household indebtedness. With house prices continuing their unrelenting rise, there was a greater readiness than in the past, both in private and official circles, to recognize that the prolonged boom had led to measurable overvaluation (Box 2). The authorities were inclined toward the lower range of available estimates, and saw the degree of overshooting as remaining within the bounds that would allow for an orderly correction. They recalled the various fundamental factors driving house prices (historically low real interest rates, lengthened mortgage maturities, Spain’s relatively later “baby boom,” high immigration, and strong nonresident demand),5 and saw them as providing a reasonable degree of reassurance. They thus continued to hold the view that the situation was not yet alarming, but would become so if current trends were to persist. Staff noted that, with no signs of abatement in underlying trends, this view was becoming more tenuous.6 Furthermore, given Spain’s high degree of home ownership (85 percent), real estate assets now account for more than 80 percent of household wealth, heightening the possible adverse effects on consumption from a price correction. Staff estimates (Box 2) put such effects at between 0.1 and 0.5 percent over two years, but these should be viewed as a lower bound, since they do not include the indirect macroeconomic effects that may work through income and employment—construction represents 12 percent of employment and 8 percent of GDP—nor possible financial sector strains.7

House Prices Overvaluation and Impact on Consumption

The Bank of Spain uses two models to study the housing market.1 The first model posits that the observed real house price can be split into its long-run equilibrium value and a short-run deviation, with the equilibrium determined by real gross disposable income (per person older than 24), and the nominal interest rate on household mortgage loans. The second model posits that the observed price-rental ratio can be split analogously, with its equilibrium determined by the expected net present value of household consumption and (the growth in) house rents. The explanatory variables are derived from long-run projections of a reduced-form model (augmented by staff to include employment).

These models were re-estimated using data through 2004:Q3. The results suggest that house prices may be overvalued by 20 and 30 percent respectively in the most recent period (text figures A and B) and remain within the range of historical deviations. It should be noted, however, that the second model could overstate the overvaluation to the extent that rental rates are subject to administrative controls, which could result in an undervaluation of rental prices. Also, the net present value of consumption might be underestimated due to structural changes in the economy.


A: Real House Prices

(March 1987 = 510)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001


B: House Prices to Rent Ratio

(March 1987 = 87.8)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Assessing the potential impact on private consumption of a return to long-run equilibrium requires a macroeconomic model and specifying the adjustment scenario. Here, however, the impact is illustrated by using the consumption equation of the Bank of Spain’s quarterly model2—assuming an unchanged macroeconomic scenario—for two price correction paths. Figure C illustrates the cumulative impact from a correction path in real house prices similar to that experienced in 1992-96, when real house prices fell by about 20 percent (with more than half of the adjustment in the first year). This historical pattern of adjustment was applied to both models: the first illustrating a correction of 20 percent (12 percentage points in the first year, Model A) and the second depicting a correction of 30 percent (18 percentage points in the first year, Model B). The model suggests that consumption would decline by about 0.3 (0.5) percent in two years in Model A (B).

Figure D depicts the cumulative effect of a more gradual decline in real house prices (1.0 and 1.5 percent real decline per quarter for 20 quarters in Model A and B respectively). In this case, consumption declines by about 0.1 (0.2) percent after two years in Model A (B).


C: Accumulated impact on Private Consumption

(Historic pattern, quarters)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001


D: Accumulated Impact on Private Consumption

(Smooth pattern, quarters)

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Note that these estimates do not account for macroeconomic effects working through income, employment, or the financial sector, and thus the declines are lower-bound estimates.1 See Bank of Spain Working Papers #307, 2003 and #304, 2003.2 See Bank of Spain Working Paper #413, 2004.

10. The government’s main response to the house price boom has consisted of measures to promote the underdeveloped rental market, along with increased investment in social housing. In July 2004, the government adopted a so-called “shock plan” (Plan de Medidas Urgentes) to address the situation in the housing market. The plan focuses on measures to promote the rental market as a viable alternative to home ownership (mainly via subsidies for young renters and preferential credit lines to refurbish rental properties) and on an increase in the supply of social housing. It also sets up a new intermediation and information agency to promote rental activity (Agencia Publica de Alquiler) and a panel of experts charged with proposing reforms to the legal framework (whose limited protection to landlords was recognized to smother rental supply). While looking forward to the outcome of the latter work, staff saw the plan as not addressing fundamental problems in the housing market, notably: the distortions arising from arbitrary regulations governing developable land, and the unequal fiscal treatment favoring home ownership (at an annual budgetary cost of 0.4 percent of GDP). The authorities agreed on the importance of these issues but also stressed their complexity: the availability of developable land was closely linked to local authority financing, while established tax relief could not be easily changed or even (as suggested by staff) phased out without risking adverse side-effects, including disruptions to construction activity (Spain’s comparatively robust supply response was seen as a distinct strength to be preserved). They nonetheless saw possible room to address the tax issue in the broader context of personal income tax reform (¶14).

B. Fiscal Policy

The near-term stance

11. The 2005 budget is designed to reflect the new government’s economic priorities of continued fiscal stability, productivity enhancement, and transparency. The budget targets a small general government surplus (0.1 percent of GDP), the same as that set in the previous government’s Stability Program. On the revenue side, it contains no major tax initiatives, other than an adjustment of personal income tax brackets for inflation and small increases in taxes on alcohol and tobacco products. On the expenditure side, the ceiling on central government spending is set at a level that maintains a constant expenditure-to-GDP ratio, an objective the authorities viewed as key to securing fiscal discipline. However, they noted that the composition of spending had been tilted in favor of initiatives designed to enhance productivity (notably spending on R&D, education, and public infrastructure). The budget also announces various initiatives to enhance competition and improve the regulatory framework in product markets.

12. The budget documents include a number of innovations designed to further enhance transparency of the central government accounts. A fiscal Report on the Observance of Standards and Codes (ROSC) mission in mid-2004 concluded that, thanks to steps taken over the last several years and recent initiatives, Spain now fully meets or exceeds the Fiscal Transparency Code’s standards in many areas (see separate ROSC report, forthcoming). The Article IV mission welcomed, in particular, the inclusion in the 2005 budget of a reconciliation of budget and national accounts presentations and of information on potential risks emanating from certain public enterprises, as well as the intended close attention to be paid to contingent liabilities associated with private-public partnerships.8 Staff noted, however, that the announcement of a large multi-year investment project outside of the budget process (for national roadworks) ran against the grain of these initiatives.

13. The 2005 budget implies a mildly restrictive fiscal stance. The budget’s target of a general government surplus of 0.1 percent of GDP is the same as the estimated outcome for 2004 (excluding one-off adjustments), making for a mild fiscal withdrawal. Despite slower-than-budgeted real growth, staff saw higher inflation as likely to raise nominal GDP growth even above the budget assumption. A larger-than-targeted surplus (in the order of 0.3 percent of GDP—Table 3) was, in staffs view, thus both possible (thanks in particular to the continued strength of social security contributions, sustained by a planned further regularization of illegal immigrants) and desirable. The persistent inflation differential, the real estate asset boom, and the presence of overly easy monetary conditions for Spain all militated in favor a larger surplus. The authorities intended to let the stabilizers play toward a better outcome if that was forthcoming; staff encouraged a proactive approach in this direction.

14. The authorities intend to revamp the personal income tax to broaden its base and simplify the framework. Although no decisions had been made (and measures were likely only toward the end of the legislature, after a process of open public debate), consideration was being given to the possibility of a flat tax—including a moderately high exemption, and possibly a surcharge for higher income levels. The authorities estimated that, with the reduced tax rate under consideration, revenue neutrality would require a reassessment of tax deductions. Staff viewed the proposal with interest and looked forward to its further specification.

Changes to the Budgetary Stability Law (BSL)

15. While recognizing the contribution of the Budgetary Stability Law—which enshrines balanced budgets at the different levels of government—to promoting a culture of fiscal stability, the authorities intend to introduce a number of modifications. The authorities agreed on the importance of a disciplining fiscal framework for the maintenance of hard-earned fiscal stability. They highlighted the usefulness of several of the current framework’s core elements, particularly the ceiling on central government spending, the contingency fund to deal with unforeseen circumstances, and the dedication of any social security surplus to the pension reserve fund. Nonetheless, they saw a need to modify the BSL with the promulgation of a new law (to be dubbed Budgetary Stability and Transparency Law) with a view to providing explicit scope for countercyclical action, increasing observance by the regions in a highly devolved system, and enhancing fiscal transparency. At the time of the mission, various working groups were examining alternative options; no final proposals have as yet been put forward.

16. A first intended modification is the reformulation of the BSL’s annual “balanced budget” target as “balance-over-the-cycle,” to avoid the risk of procyclical fiscal policy. Past Fund advice has called for a flexible implementation of the BSL to take due account of cyclical developments.9 The authorities were considering various ways to best achieve this goal, ranging from using pre-established formulae to compute the cyclical position and the fiscal stance, to a less structured system largely forgoing rules in favor of case-by-case judgments by a panel of experts. While mindful of the technical difficulties, staff favored a system governed by pre-specified, clear rules covering (a) the desirable medium-term target (which, due to the fiscal costs of aging, it saw as a small surplus—see ¶21), and (b) the cyclical adjustment to this target, subjecting the resulting assessment of the cycle and the related structural fiscal position to public scrutiny. It pointed to Chile and Switzerland as providing potentially interesting country cases where fiscal objectives are expressed in structural terms and the methodology is clearly defined and publicly available.10 In this vein, it also encouraged setting up an independent, non-partisan agency to monitor budget assumptions and developments.

17. The authorities also intend to enhance ownership to strengthen adherence to the BSL by lower levels of government—essential given their large share of total spending. Following considerable expenditure decentralization, territorial entities now account for over 70 percent of public expenditure excluding social security. The authorities noted that, in the BSL’s first year of implementation (2003), 11 of the 17 regions had recorded a deficit, rather than the mandated balanced budget (text table, next page). Although most of the deficits had been small,11 the authorities viewed the outcome with concern. Furthermore, several regions had challenged the constitutionality of the BSL, perceived as impinging on their autonomy, and there was a risk of a legislative void if the appeals were accepted. The authorities thus saw a need for a greater degree of “buy-in” by the regions. Staff, while recognizing the importance of ownership, was concerned by the political economy forces at play in a situation in which the government depends on small regional parties for its majority, and cautioned that changes to the BSL be pondered carefully.


Spain: Composition of Pubic Expenditure, 2004

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Regional Fiscal Indicators

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Source: Ministerio de Economia y Hacienda and Banco de Espana.

The fiscal balance is a small deficit, less than -0.05, that is rounded up to zero.

18. A key concern is how to effectively secure discipline at lower levels of government in a highly devolved political and institutional setting. There was agreement that, in such a setting, full use would need to be made of all available instruments (see Selected Issues paper). Among these, the authorities saw scope for increasing regional revenue-raising powers, strengthening the authorization process for subnational borrowings, and introducing an explicit no bail-out clause. Regional authorities could also consider improving budgetary processes—by including, for example, expenditure ceilings and contingency funds (as at the central government level)—was also viewed as holding promise.

19. A related issue is that of the potential shortfall of transferred national revenues relative to devolved non-discretionary expenditures, notably on education and health. National officials were unconvinced that any of the mandates were “unfunded.” A possible exception was health, whose financing the government has undertaken to review in the course of 2005. A separate issue is the cyclicality of transferred revenues (which are based on revenue-sharing of national taxes, and thus related to actual GDP) in the face of the relative rigidity of expenditure on education and health. The authorities did not view this as a pressing matter, noting that—with a total share of such expenditures ranging between 60 and 70 percent of regional budgets and with scope for efficiency gains—there was a margin for regions to adjust under most plausible scenarios. They also emphasized that the transfer system was designed to strengthen the incentives toward greater fiscal discipline, and were keen not to undercut those efforts. While supporting these objectives, staff noted that, in any revision of the BSL, it would be important to ensure that the framework was cyclically robust. To this end, consideration might be given to making the transfers to the regions proportional to trend (or potential) rather than actual GDP. This would serve to limit cyclical swings in regional revenues and hence spending, thus reducing the scope for regional borrowing or procyclical policies, and help underpin the feature of the present system whereby regions should always aim to achieve budget balance.12 To the extent that—as appears to be the case in some of the proposals under study—regions would no longer be held to a “zero” budget balance, staff saw merit in the build-up of regional stabilization reserves (“rainy day funds”) to provide savings for unexpected revenue shortfalls.

Dealing with the fiscal consequences of aging

20. Although the fiscal costs of aging are generally recognized, the focus has so far been mainly on the build-up of the pension reserve fund, with substantive action on pension reform continuing to be postponed. The sharp declines in fertility rates and increases in life expectancy are driving the demographic transition to an older Spanish population (Figure 4). The fiscal impact of aging, though setting in comparatively later than in other EU countries (after 2020), is considerable, amounting to some 6 percent of GDP by 2050, excluding healthcare.13 If left unaddressed, this demographic shock would increase public debt sharply by 2050 (Table 4).14 The authorities saw the Pacto de Toledo—a tripartite agreement signed in 1997 and laying out general principles for pension reform—as an effective instrument to build consensus on a reform agenda, but staff noted limited implementation of this agenda to date. The sense of urgency had also been muted by the large social security surpluses of recent years, fueled by the sharp increase in the number of contributors since the late 1990s and its coincidence with a small cohort of pensioners. The authorities confirmed their intention to continue to devote such surpluses to the pension reserve fund, which is set to approach 3 percent of GDP in 2005 (equivalent to some four months of benefits), resisting pressures for increased social spending and/or a generalized reduction of social security contributions.

Figure 4.
Figure 4.

Spain: Demographic Shock and Health Spending

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

Sources: World Bank, World Development Indicators 2004 and OECD working paper, Spending on Health and Long-term Care: Projections to 2050 Revisited.
Table 4.

Spain: Public Sector Debt Sustainability Framework, 1997-2050

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General government defined by ESA-95.

The figures for the years 2020, 2030, 2040, and 2050 are also annual changes with respect to the preceding year.

Reflects the most recent official long-run projections for social security expenditure dating from 2001.

Defined as: r = interest rate; π = GDP deflator, growth rate; g = real GDP growth rate.

Reflects official projections in 2001, which are consistent with the social security expenditure projections.

Defined as the ratio of the population aged 65 and older to those aged 20-64.

Real appreciation is approximated by nominal appreciation against U. S. dollar plus increase in domestic GDP deflator.


Contributors, Pensioners, and Social Security Balance

Citation: IMF Staff Country Reports 2005, 056; 10.5089/9781451812114.002.A001

21. While welcoming the build-up of the reserve fund, staff pressed that comprehensive pension reform be moved up on the policy agenda. Spain’s demographic profile implies a peak in the dependency ratio in about 40 years with a subsequent reduction—at however a still relatively high level. In these circumstances, it appears reasonable to “pre-fund” the transitory impact through fiscal adjustment and to implement pension reform to ensure the longer-run sustainability of social security. Staff thus saw fiscal adjustment as a complement to, and not a substitute for, pension reform. On the first count, staff advised setting a moderate structural fiscal surplus as Spain’s medium- to long-term fiscal target; the Stability Program updated in late December 2004 indeed envisages a gradually rising surplus, to slightly above the previous program’s target for 2007 (to 0.4 percent of GDP) and extending the same to 2008 (Table 5). On the second count, staff encouraged the authorities to move ahead with reforms of the pension system that would increase the effective retirement age (primarily by changing the provisions governing early retirement) and further align contributions and benefits (by extending the base period used to compute pensions to life-long earnings). The authorities noted that, following the raising of this period from 8 to 15 years in 1997, its further lengthening was controversial; gradually raising the minimum contribution period was seen as likely to be a politically more acceptable route. There was recognition that aging, along with other factors (including immigration), would place pressures also on healthcare spending—as already apparent at the subnational level, where regions with an above-average share of the elderly face above-average health costs (Figure 4). The authorities saw as immediate priorities addressing some particularly costly aspects of the pension and healthcare systems (notably surviving spouses’ pensions, and abuses of disability pensions and extended sick leave). They also favored crafting a social pact on healthcare reform, along the lines of the Pacto de Toledo, as part of the upcoming review of the system’s financing.

Table 5.

Spain: Updated Stability Program, 2003-08

(In percent of GDP, unless otherwise indicated)

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Source: Actualizatión del Programa de Estabilidad, España 2004-08.

On an ESA95 basis.

C. Banking Sector Developments

22. The banking system continues to display a strong financial position, helped by the favorable macroeconomic environment and the rebound of economic activity in Latin America. The authorities noted that the quality of bank assets had improved from already strong levels, with non-performing loans (NPLs) falling to a record low of 0.6 percent of gross loans, and provisioning surpassing 250 percent of NPLs. Although capitalization ratios have been eroded somewhat by the increase in risk-weighted assets as credit portfolios expanded, the Basel ratio remains above 12 percent (Table 6). In recent years, the strong expansion of credit has surpassed the growth of deposits, inducing banks to search for alternative sources of financing, including cross-border interbank credit, asset securitization, and asset-backed securities such as mortgage certificates. The average cost of banks’ funds has consequently risen, compressing intermediation margins, affected also by declining interest rates and strong competition. The authorities noted that banks have however managed to shelter the bottom-line with strong retail activity, commission revenues, and cost containment.15

Table 6.

Spain: Indicators of External and Financial Vulnerability, 1999-2004 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Bank of Spain, Economic Bulletin and Statistical Bulletin; data provided by the authorities; and IMF, International Financial Statistics.

The interpretation of some indicators is affected by the launch of monetary union in 1999.

Reserves and foreign liabilities refer to the Bank of Spain, both before and after EMU.

For consolidated domestic deposit takers; indicators are expressed as ratios.

NPLs net of specific provisions (i.e. excludes generic and statistical provisions).

NPLs net of all provisions (specific, generic, and statistical).