Spain: Staff Report for the 2016 Article IV Consultation

International Monetary Fund. European Dept.

doi:10.5089/9781475572612.002.A001

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Spain: Staff Report for the 2016 Article IV Consultation

Author: International Monetary Fund. European Dept.

Publication Date:: 30 Jan 2017

eISBN:: 9781475572612

Language:: English

Keywords:: ISCR; CR; mortgage contract; contract; IMF staff estimate; European Court of Justice ruling; IMF staff calculation; unemployment rate; State administration; return on assets; General government operation

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The recovery is strong and imbalances are falling fast, aided by past reforms. External tailwinds and expansionary fiscal policy also buoyed activity and job creation. The economy is now more resilient but adjustments are incomplete and structural weaknesses persist. In particular, high unemployment, elevated public debt and shortcomings in the regional fiscal framework, feeble productivity growth, and the still large negative net international investment position pose policy challenges.

Abstract

Context

1. The recovery is strong and imbalances are falling fast, helped by past reforms. Real GDP and employment growth remain well above euro area averages, despite a prolonged period of domestic political uncertainty. Spain continues to reap the benefits of the major financial sector and labor market reforms taken during the crisis years, which in combination with external tailwinds and expansionary fiscal policy have buoyed activity. The Spanish economy has regained competitiveness, employment creation has been swift, and private sector balance sheets have continued to strengthen.

2. But adjustments are not yet complete and structural problems persist. Unemployment, particularly long-term and youth joblessness, is still painfully high, while temporary work remains wide-spread. Without a boost to the low productivity of Spanish enterprises and greater efficiency and inclusiveness of the labor market, growth is set to ease and structural unemployment risks staying exceptionally high. At the same time, elevated public debt, lingering debt overhang in parts of the private sector, and the large negative net international investment position continue to leave the economy vulnerable to shocks.

3. Political fragmentation and reform fatigue have delayed fiscal adjustment and impeded deeper structural efforts. The priorities of the new minority government, which took office with a 10-month delay, are preserving earlier reform achievements and meeting short-term fiscal commitments under the Stability and Growth Pact. However, rekindling the momentum for structural reforms and medium-term fiscal consolidation will be challenging (Appendix I), despite broad-based agreement on reform needs in areas such as regional public finances, active labor market policies (ALMP), and education and innovation policies.

Recent Economic Developments

4. Spain’s strong rebound has continued. Growth picked up to 3.2 percent in 2015 and stayed high in the first three quarters of 2016 at 3.3 percent year-on-year (y-o-y), though confidence indicators have continued to weaken amid lingering domestic political uncertainty (Figure 1). The rebound in private consumption, exports, and investment has remained the main driver of growth, buttressed by past structural reforms, robust growth in households’ gross disposable income, lower oil prices, the depreciation of the euro, and the ECB’s quantitative easing (Box 1). A relaxation of the fiscal stance has also provided stimulus to the economy. After returning to positive territory in September, headline inflation jumped to 0.7 percent in October and November (y-o-y), reflecting higher oil prices and moderate increases in food and services prices (Figure 1).

5. Job creation has remained strong but further reducing unemployment—especially for those long out of work—is a key challenge. Employment has been growing at more than 3 percent annually with almost 1.1 million jobs created over the past two years, supported by wage moderation and labor market reforms (see Annex I). Real unit labor costs have been growing at a modest pace (0.5 percent y-o-y in 2016: Q1-Q3). Temporary contracts still make up the largest share of new jobs (about 53 percent) even though there is some evidence that the share of permanent hires is picking up (Figure 2). Although the unemployment rate has declined by 8 percentage points from its peak three years ago, it remains very high at just under 19 percent; the rate for Spain’s youth is more than double that level. Almost 50 percent of the unemployed have been jobless for over a year, a large share of them being low-skilled and previously employed in the construction sector. Prospects for this group appear particularly grim, with unemployment exit rates significantly lower than the average and higher risks of poverty and social exclusion. In contrast, exit rates for the short-term unemployed (less than a year) have improved by more than 5 percentage points since 2013. The ongoing positive labor market dynamics have been critical in starting to recoup some of the fall in living standards and reverse the rise in inequality caused by the crisis (Box 2).

6. The private sector has further deleveraged while access to credit has improved. New bank lending has picked up in line with the strong economic recovery, in particular consumer credit, lending to agriculture, manufacturing, and non-real-estate services, but total credit growth is still negative (Figure 3). With private debt-to-GDP about 65 percentage points below its 2007 peak level, excess leverage is now concentrated mostly in a few corporate sectors for which the loan repayment capacity is still weak (construction and real estate) and in households (Figures 4-5). Improving profit margins since the crisis have helped the corporate sector finance new investment with retained earnings, along with more debt financing by large corporates. Households proceeded in rebuilding their net wealth positions and further reduced their bank debt. As a result, demand for loans is still weak, but credit supply—underpinned by a stronger banking system—is broadly supportive of the economic recovery, with financial conditions having eased further.

7. Bank balance sheets strengthened further amid new challenges. Asset quality has improved, but banks still hold sizeable nonperforming loans (NPLs), though much lower than in some EU countries. The NPL ratio stood at 9.5 percent for business in Spain at end-June 2016, which is 4.2 percentage points below its peak in 2013, despite the contraction of overall lending (Figure 6). Banks have also continued to build up capital buffers raising the regulatory capital ratio to 14.6 percent by end-June 2016. Although Spanish banks’ holding of common equity tier-1 (CET1) still lags that of European peers, they are generally less leveraged than their European peers thanks to the higher risk weight intensity. Reduced profitability over the four quarters (2015:Q3–2016:Q2) indicates that the operating conditions for banks have become more challenging, amid low interest rates, still elevated levels of legacy assets, continued deleveraging, and stiffened pricing competition for new loans.¹ Meanwhile, Spain’s two largest banks have benefited from their globally-diversified earnings mainly accruing from retail banking, performing relatively well among major European banks during the period of market stress earlier this year. However, more difficult economic conditions outside Spain—in particular in Latin America, Turkey, and the U.K. where large Spanish banks have subsidiaries—risk lowering group-wide profits and their contributions to group-wide capital (Box 3).

8. The fiscal stance turned expansionary in 2015–16. Headline fiscal deficits have continued to fall to 5.1 percent of GDP in 2015 and a projected 4.5 percent of GDP in 2016. The 1½ percentage point reduction over two years has come on the back of the strong cyclical recovery and lower interest costs. In structural primary terms, the fiscal stance loosened by about 0.8 percent of GDP annually, reflecting mostly reductions in personal and corporate income taxes that had larger-than-anticipated impacts and overrun of non-entitlement expenditures (Figure 7).

In 2015, the overall deficit significantly exceeded the excessive deficit procedure (EDP) target of 4.2 percent of GDP. In particular, regional governments (1 percent of GDP) and social security (0.7 percent of GDP) underperformed, but this was partly compensated by over-compliance of the central and the local (i.e. municipal) governments. At the regional level, capital, health and education spending outpaced the budget plan. Moreover, the reclassification of regional public private partnerships (0.2 percent of GDP) into the public sector, despite stricter reporting requirements introduced in recent years that were expected to prevent such surprises, revealed weaknesses in public financial management. The Council of EU Finance Ministers found that Spain did not take effective action to reduce its excessive fiscal deficit in 2015 but cancelled potential sanctions.
For 2016, staff projects the fiscal deficit to decline to 4.5 percent of GDP in 2016, thus putting the new EDP deficit target of 4.6 percent of GDP within reach. The projected deficit is nearly 1 percentage point higher than budgeted and envisaged in Spain’s April 2016 Stability Program (3.6 percent of GDP). Public debt remained high, at just under 100 percent of GDP.

9. The current account registered another surplus. In 2015, the external current account surplus increased by ½ percentage point to 1.4 percent of GDP and it is expected to be around 2 percent of GDP in 2016. While non-oil imports accelerated further as domestic demand rose, the external surplus increased on the back of lower oil prices and interest rates. Sustained and healthy export growth, despite the slowdown in external demand, reflects both regained competiveness arising from price and wage moderation and larger firms’ internationalization efforts.

10. But eliminating external vulnerabilities will take time. At 87 percent of GDP at end-June 2016, Spain’s negative net international investment position (NIIP) is still among the largest in the world, as the improved current account can only gradually reduce the stock vulnerability (Figure 8 and second chapter of the Selected Issues Paper (SIP)). Private sector deleveraging has driven most of the NIIP adjustment while external general government liabilities increased (Annex II). Given the need to sustainably strengthen the NIIP, the cyclically adjusted current account remained by some metrics up to 1 percent of GDP weaker than what would be consistent with medium-term fundamentals and desirable policy settings, and staff assesses that the real effective exchange rate (REER) is still about 5–10 percent overvalued (Appendix II).

Authorities’ Views

11. The authorities stressed reform achievements and progress made in reducing imbalances, both having contributed to the solid growth performance. They highlighted major improvements in employment, bank balance sheet cleansing, deleveraging, credit allocation, and external competitiveness. They emphasized that structural changes of the Spanish export sector are supporting sustained current account surpluses and, for the first time in decades, are considered to be compatible with strong growth. While broadly agreeing that the large negative NIIP remains a source of vulnerability, they stressed its gradual improvement over the last years as well as additional risk-mitigating factors such as equity holding and external debt held by the Bank of Spain.

Outlook and Risks

12. After a strong performance this year, growth is expected to moderate next year but stay well above the euro area average. Real GDP is projected to expand by 3.2 and 2.3 percent in 2016 and 2017, respectively, with domestic demand continuing to be the main driving force. Brexit is estimated to lower Spain’s real GDP by about 0.3 percentage point through 2018 via confidence and trade channels. As the external tailwinds dissipate and fiscal policy envisages some tightening in 2017, real GDP growth is set to ease. Small positive spillovers in 2017 from potentially higher global growth on the back of a possible US fiscal stimulus are expected to more than offset somewhat tighter financial conditions, with Spain’s 10-year government bond yields having risen by 19 basis points from end-October to end-December. Households are expected to further bolster their overall net wealth position and raise their still depressed savings ratio, implying a deceleration in consumption growth, though household deleveraging is set to moderate (see Box 1 in Country Report 15/232). Investment growth is also projected to slow with the unwinding of temporary factors but as the corporate debt overhang continues to shrink, prospects for investment and productivity growth should brighten somewhat.² As a result, credit growth is projected to turn positive but remain subdued. A small positive contribution from net exports is forecast for this and next year as exports continue to benefit from improved competitiveness and better partner-country prospects while import growth should moderate in line with domestic demand and higher public and private savings. The current account surplus is projected to rise a bit this year and stabilize at around 2 percent of GDP, allowing for a gradual reduction of the NIIP. Inflation will likely pick up gradually to an estimated 1.2 percent in 2017, in line with the projected gradual recovery of oil prices and euro area inflation.

13. Spain’s reform achievements are paying off but need to be enhanced to uphold high and job-rich growth over the medium term. In particular, the 2012 labor market reforms have supported wage moderation and strong job creation, helping Spain reduce unemployment while regaining the external competitiveness lost during the pre-crisis boom. In total, the key structural reforms undertaken so far are estimated to lift the level of GDP by about a cumulative 2½ percent over a five-year horizon (Box 1). But under current policies Spain will continue to confront the challenges of feeble productivity, unfavorable labor force demographics, high structural unemployment, and slow capital accumulation that conspire against medium-term growth prospects. As a result, once tailwinds dissipate growth is set to slow and converge in the medium term to its potential rate of around 1½ percent.

14. Risks to the outlook are tilted to the downside. External risks to the outlook include weak growth in key advanced and emerging economies or a significant slowdown in the latter, as well as uncertainty about the potentially protracted negotiations of a post-Brexit arrangement (Appendix III). Moreover, the recent erosion of support for European institutions and increased protectionist sentiment in many economies is a risk to international integration, trade, and coordination. Slowing external demand would generally weigh down Spanish activity through the trade channel, while weaker macroeconomic conditions in Latin America would mostly be transmitted through financial channels, including through potentially reduced profits of Spain’s global banks (Box 3). Sharply tighter or more volatile global financial conditions could renew sovereign and financial sector stress via loss of market confidence, upward pressure on private sector lending rates, and resulting bank balance sheet effects, but the ECB’s policies mitigate against excessive financial volatility and private sector balances have strengthened.³ Domestically, reversal of past policy achievements could hurt market confidence, dampen investment, and weigh down medium-term growth prospects. Weak implementation of fiscal commitments could further delay the reduction of fiscal vulnerabilities, limiting the room for maneuver in case of future shocks.

Authorities’ Views

15. The authorities broadly agreed with staff on the outlook and balance of risks, stressing their commitment to preserve reforms in the face of pressure for their reversal. The Bank of Spain’s projections for real GDP growth and medium-term growth potential are similar to staff’s, while the government expects somewhat stronger growth dynamics over the medium term. High unemployment and low productivity are considered to be the key structural challenges. Therefore, the authorities recognized that there is no scope for complacency.

Policy Agenda

16. Sustaining the strong momentum of the recovery while proceeding to make the economy more inclusive and robust to shocks requires continued broad-based policy efforts. Priorities include (i) a return to gradual, credible, and growth-friendly fiscal consolidation; (ii) enhanced labor market performance, particularly by assisting the long-term unemployed and young; (iii) improved productivity, including by removing barriers to competition and obstacles for small firms to grow; and (iv) continued strengthening of the financial sector’s position and its capacity to support growth. Undoing past reforms could create uncertainty and weigh on medium-term prospects.

A. Fiscal Policy: Resuming Growth-Friendly and Inclusive Consolidation

17. The fiscal stance is set to tighten in 2017. The Council of EU Finance Ministers extended Spain’s deadline to exit the EDP by two years, with new deficit targets of 3.1 and 2.2 percent of GDP in 2017 and 2018, respectively, calling for an annual structural adjustment of 0.5 percent of GDP. Fiscal measures adopted by the government for 2017 will offset part of the CIT revenue decline, by tightening CIT credit and deductions for large companies, raise excises for tobacco and alcohol, and introduce a tax on sugar-based drinks. These measures are expected to yield 0.4 percent of GDP additional revenue (mostly from CIT). The government also plans to improve VAT collection, in particular by eliminating the possibility of deferment and fractioning of VAT debts, and reducing tax fraud via changes to VAT administration. If part of the expected revenue impact (0.2 percent of GDP) materializes, the EDP deficit target for 2017 is in reach. Though a budget for 2017 still has to be adopted, the planned fiscal adjustment is an important step to reduce the structural deficit and public debt.

Fiscal Projections ^1/^2/

(Percent of GDP)

^{^1/}For EC, European Economic Forecast-Autumn 2016. The EC forecast for 2017 does not yet incorporate the new measures in the 2017 Budget Plan Update. For authorities, 2017 Budget Plan Update.

^{^2/}The original fiscal balance target was -3.6 percent of GDP for 2016 and -2.9 percent of GDP for 2017.

^{^3/}For 2015, structural balance and output gap refer to IMF staff estimates. EC estimate for structural balance is -2.8 percent and that for output gap is -4.0 percent.

Fiscal Projections ^1/^2/

(Percent of GDP)

		2015	2016			2017
			Auth.	IMF	EC	Auth.	IMF	EC
Fiscal balance		−5.1	−4.6	−4.5	−4.6	−3.1	−3.2	−3.8
	Revenue	38.6	38.0	38.1	38.0	38.2	38.3	37.8
	Expenditure	43.8	42.5	42.5	42.6	41.3	41.5	41.6
Structural balance ^3/		−2.4	−2.9	−3.0	−3.8	−2.4	−2.6	−3.8
Memorandum items:
Nominal GDP growth		3.7	3.9	3.9	3.9	4.0	3.4	3.5
Real GDP growth		3.2	3.2	3.2	3.2	2.5	2.3	2.3
Output gap ^3/		−4.5	−2.9	−2.4	−1.5	−1.3	−1.3	0.0

^{^1/}For EC, European Economic Forecast-Autumn 2016. The EC forecast for 2017 does not yet incorporate the new measures in the 2017 Budget Plan Update. For authorities, 2017 Budget Plan Update.

^{^2/}The original fiscal balance target was -3.6 percent of GDP for 2016 and -2.9 percent of GDP for 2017.

^{^3/}For 2015, structural balance and output gap refer to IMF staff estimates. EC estimate for structural balance is -2.8 percent and that for output gap is -4.0 percent.

Fiscal Projections ^1/^2/

(Percent of GDP)

		2015	2016			2017
			Auth.	IMF	EC	Auth.	IMF	EC
Fiscal balance		−5.1	−4.6	−4.5	−4.6	−3.1	−3.2	−3.8
	Revenue	38.6	38.0	38.1	38.0	38.2	38.3	37.8
	Expenditure	43.8	42.5	42.5	42.6	41.3	41.5	41.6
Structural balance ^3/		−2.4	−2.9	−3.0	−3.8	−2.4	−2.6	−3.8
Memorandum items:
Nominal GDP growth		3.7	3.9	3.9	3.9	4.0	3.4	3.5
Real GDP growth		3.2	3.2	3.2	3.2	2.5	2.3	2.3
Output gap ^3/		−4.5	−2.9	−2.4	−1.5	−1.3	−1.3	0.0

^{^1/}For EC, European Economic Forecast-Autumn 2016. The EC forecast for 2017 does not yet incorporate the new measures in the 2017 Budget Plan Update. For authorities, 2017 Budget Plan Update.

^{^2/}The original fiscal balance target was -3.6 percent of GDP for 2016 and -2.9 percent of GDP for 2017.

^{^3/}For 2015, structural balance and output gap refer to IMF staff estimates. EC estimate for structural balance is -2.8 percent and that for output gap is -4.0 percent.

18. However, a credible medium-term consolidation path has yet to emerge. The government projects the structural deficit to fall to about 1¼ percent of GDP by 2019 on the account of expenditure restraint, but no specific measures have been announced. Thus, under current policies, staff estimates the structural deficit to remain at around 2¼ percent of GDP over the medium term—still far from the structural balanced budget objective.⁴ Risks to reach fiscal targets are also considerable at the regional level, given the poor compliance track record (see SIP chapter III), weak enforcement of regional targets, and weak market discipline related to support via the regional liquidity mechanisms (which lowered the regions’ interest payments by 0.3 percent of GDP in 2015).

19. Fiscal space is limited and remaining fiscal vulnerabilities demand gradual but steady and well-specified fiscal adjustment. Under current policies, both gross and net debt ratios are projected to remain elevated over the medium term at around 95½ percent and 80 percent of GDP, respectively, despite the favorable interest-growth differential, thus limiting fiscal space for cyclical policy responses to shocks. Gross funding needs are still high at about 18 percent of GDP in 2017. The fiscal outlook faces risks, particularly from policy implementation shortfalls, potential negative growth shocks, and the realization of contingent liabilities. For example, in a growth shock scenario with two consecutive years of recession, debt levels would be pushed near 110 percent of GDP (11 percentage points higher than in the baseline projection) and annual gross financing needs above 22 percent of GDP in 2018 (Appendix IV). In contrast, returning to a gradual but sustained fiscal consolidation would put debt firmly on a downward path. For instance, an annual adjustment of the structural primary balance of about 0.5 percent of GDP beyond 2017, and a multiplier of 0.6 (assuming revenue-based measures), would lower the debt-to-GDP ratio by 4 percentage points in 2021 compared to the baseline (Figure 7). Such an adjustment pace would strike an appropriate balance between preserving growth and ensuring public debt sustainability, while simultaneously lowering the sovereign-bank nexus (Annex II) It would also be consistent with the latest EC recommendation and with reaching structural balanced budget in five years, close to the target date set for meeting national rules.

Most of the medium-term adjustment will need to come from higher revenues and should also create space to support greater inclusiveness and employment creation. While there is some room for spending restraint and rationalization, the public primary spending-to-GDP ratio is already relatively low compared to those of EU peers. So far, nearly two-thirds of the adjustment (5½ percent of potential GDP) has come from spending measures. And the expenditure-to-GDP ratio is expected to decline by another 2½ percentage points over the medium term under current policies, as expenditure is envisaged to rise only in line with the GDP deflator and thus fall relative to nominal GDP (according to the latest Stability Program). With total medium-term adjustment needs of 2¼ percent of GDP for structural balanced budget by 2021, priority should be given to the least distortive revenue measures that raise VAT collections, tackle the remaining inefficiencies in the tax system, and increase environmental levies or excises. Such revenue measures also have low multipliers, thus limiting their negative short-term impact on economic activity. Advancing expenditure rationalization could also contribute to the fiscal adjustment, but should not come at the expense of targeted incentives for employment creation and productivity growth.

Improving the value added tax (VAT) efficiency. VAT collection is about 3 percentage points of final consumption lower than the EU average, mirroring Spain’s large VAT gap. Only about 60 percent of the consumption basket pays VAT at the standard rate in Spain, compared to 70 and 80 percent in France and Germany, respectively. VAT preferential treatments via lower rates and exemptions explain most of the VAT gap, while compliance is strong and recovered most of the deterioration during the global financial crisis. Lowering the VAT policy gap to the EU average, while maintaining VAT compliance at the pre-crisis level (2004–07) would raise Spain’s VAT revenues by over 2 percent of GDP. This could be achieved by gradually raising the lower VAT rates in line with the medium-term fiscal adjustment needs.

Addressing the remaining tax system inefficiencies. Despite the 2014 tax reform, the tax system is still characterized by a large number of deductions, exemptions, and fiscal incentives, which tend to reduce the tax bases and collection even with the high marginal rates. Addressing remaining inefficiencies in the Spanish tax system, as recommended by the government-appointed committee of experts in 2014, would therefore be important and could yield additional revenue of ¼–½ percent of GDP. Continuing efforts against informality and tax evasion can also help improve the efficiency of revenue collection.
Raising excise duties and environmental levies. Despite increases in recent years, environmental taxes remain significantly below the EU average, with reduced effectiv rates especially on energy. Harmonizing and enhancing the performance of environmenta taxes could raise about ¼–½ percent of GDP in a relatively non-distortionary way.
Rationalizing expenditure further. The government’s across-the-board spending cuts in 2016 could usefully be replaced by thorough expenditure reviews that focus on improving the quality and efficiency of public spending via better targeting, and eliminate unfunded mandates at the regional level. Conducting health and education reviews would be a priority to assess expenditure needs and minimum provision standards against the availability of financing resources at all government levels, including social security. Improved procurement procedures, in particular for pharmaceutical products (for which spending rose by 9½ percent in 2015), and introducing copayments for public health services—with exemptions or compensation for the most vulnerable—could also help to lower or contain fiscal costs. And finally, better targeting hiring subsidies, as well as streamlining various hiring incentives—to lower further the tax wedge for the young and low-income earners—would provide more effective support for job creation for those that have difficulties in entering the labor market.

Supporting job creation and inclusion. Active labor market programs and R&D fiscal incentives continue to be ineffective, calling foremost for better coordination and targeting, with fiscal resources to be reallocated to the most efficient programs (see Sections B and C). Any of the proposed fiscal measures should create sufficient space to provide better protection for vulnerable groups. Moreover, an introduction of fiscal incentive schemes could be considered, in the context of the regional financing system reform, to encourage regional governments to accelerate the implementation of structural reform measures, for example, in the area of the Market Unity Law and active labor market policies.

20. Without bold reforms the regional financing framework remains a risk for the achievement of fiscal targets. The last electoral cycle was a first true test for the fiscal governance framework adopted in the 2012 Budget Stability Law reform, and it exposed old and new fault lines, in particular of the sub-national fiscal regime. Compliance with the rules has been weak and uneven so far with limited enforcement (Figure 7). In addition to the weaknesses on the governance side, issues with fiscal autonomy—the intergovernmental fiscal mechanism—continue to hamper compliance and fiscal discipline. A two-pronged approach could address this:

Strengthening governance. In the short term, priorities would be to enforce the existing fiscal framework, strengthen the oversight institutions and procedures (e.g., providing the fiscal council timely and appropriate information as mandated by law; ensuring that public entities observe the ‘comply and explain’ principle by publishing explanations for non-compliance), as well as reinforce conditionality and step up monitoring under the regional liquidity mechanisms for non-compliant regions. Allowing regions’ fiscal targets to temporarily differ would help to account for structural differences in adjustment needs and fiscal capacity. In the medium term, governance can be strengthened further by (i) enforcing more automatically sub-national fiscal rules, starting with preventive actions and escalating to corrective and coercive mechanisms; (ii) harmonizing conditions, monitoring, and transparency requirements for regions that access the regional liquidity mechanism with those under the Economic and Financial Plans; and (iii) improving public financial management systems to allow for comprehensive and frequent evaluation of compliance with fiscal rules and targets.

Reforming the system of regional finances. Enforcement will likely remain challenging unless the governance framework is matched with a regional financial system that improves the regions’ capacity and incentives for fiscal discipline. In connection with a regional spending review (in particular for education and health), reforms should aim at (i) increasing the transparency and effectiveness of the fiscal equalization system to ensure meeting the public service provision standards without undermining regions’ broader spending mandates; (ii) enhancing the regions’ revenue-raising capacity so as to better match the greater degree of expenditure decentralization and raise accountability; (iii) enhancing the intergovernmental transfer settlement system by reducing the size discrepancies and time lags between advance payments and legal entitlements; and (iv) phasing out the use of regional liquidity mechanisms for non-emergency purposes and considering introducing rainy-day funds to improve fiscal resilience in normal times.

Authorities’ Views

21. The authorities are committed to achieving the 2017 deficit target and agreed with the need to improve regional public finances. They considered that the adopted measures will deliver at least ½ percent of GDP structural adjustment, enough to reach the 3.1 percent of GDP deficit target. While the authorities generally agreed on the need for reducing the deficit and debt in the medium term in order to strengthen the resilience of the Spanish economy, they also stressed that the pace and composition of the fiscal adjustment should not weaken the momentum of growth and job creation. They stressed that the approach set out in the Draft Budgetary Plan for 2017 would allow for a progressive reduction in the structural deficit, including through improved fiscal compliance and the application of the spending rule, which would avoid the need for future tax hikes. Regarding the system of regional public finances, the authorities noted that fundamental reforms were necessary, particularly to enhance fiscal prudence, but the complexity of the issues would require strong political commitment, beyond the broad consensus on the reform needs, if progress was to be made. They also suggested that stricter enforcement of corrective measures introduced in the 2012 Budget Stability Law had started to improve the fiscal compliance of some regions and mitigated moral hazard risks.

B. Labor Market: Tackling Long-Term Unemployment and Labor Market Rigidities

22. An immediate priority is promoting job creation for the long-term unemployed and low-skilled youth. The impact of ALMPs, especially for those who have been jobless for years and low-skilled youth, has been limited, and high unemployment had unfortunate implications for social exclusion (Box 2). This calls for urgent improvement in policy effectiveness, particularly by better coordination with regional governments. Reviewing the effectiveness of the current toolkit of ALMPs, for example as part of the OECD peer review exercise, could guide the reallocation of resources to the most promising programs and development of new alternatives in line with the most successful programs in other EU countries. Specifically, profiling of job seeker’s characteristics should be strengthened to provide more personalized assistance programs, and cooperation between the public employment service and private job-placement agencies will need to be improved for better outcomes of customized programs. Improving and modernizing training, apprenticeship, and education programs, including by better aligning them to current labor market needs, would help reduce skill mismatches, especially for low-skilled youth and individuals formerly employed in the construction sector. In this respect, reducing the high share of early school leavers is a key challenge. Making effective use of—and potentially enhancing—the EU’s Youth Guarantee schemes could support the employability of low-skilled youth, too. At the same time, the ties between active and passive policies could be strengthened, for example by strictly enforcing the requirement of the verification of an active job search and participation in activation programs to receive unemployment benefits. Finally, various hiring subsidies, including lower social security contributions for all new contracts, could be consolidated to create effective and better-targeted subsidy schemes, particularly, for low-skilled and long-term unemployed.

23. Lowering labor market duality requires making permanent contracts more attractive for employers. The high labor market duality (particularly among the youth) exacerbates employment volatility, lowers human capital investment and workers’ productivity, and increases inequality. While labor market reforms have lowered several obstacles for open-ended hires, the remaining significant gap between the costs for permanent and temporary workers continue to act as a disincentive for employers to offer open-ended positions (Annex I). This could be tackled by, for example, simplifying the menu of contracts to choose from, while effectively reducing the employment protection gap. One option is to introduce a single open-ended contract with no ex-ante time limit and severance payments that increase gradually with tenure. This could co-exist with separate contracts that account for the specific needs and costs related to training staff and employment in sectors with high seasonal turnover (e.g., tourism and agriculture). An alternative is to gradually introduce the Austrian ‘backpack’ model, under which entitlements to severance payments acquired in one job can be carried to subsequent jobs, so that severance payments grow with tenure regardless of contract type. In the meantime, the persistent legal and administrative uncertainties that hamper the effectiveness of labor market reforms and affect open-ended employment should be addressed. In particular, a number of formal requirements for collective dismissals and the possibility of nullifying the dismissal on formal grounds have been associated with high cost of annulled dismissals on grounds of procedural mistakes. Simplifying the list of possible causes for nullifying a dismissal and differentiating the corrective actions between annulments based on procedural and substantial grounds would mitigate legal uncertainties that have served as disincentives to open-ended contracts.

24. Enhanced flexibility to set working conditions, especially in SMEs, is also critical. Ensuring that wage dynamics reflect differences in firm- and sector-specific conditions would promote a reallocation of resources toward more productive sectors, boost aggregate productivity and income, and reduce structural unemployment. The labor market reforms included steps in this direction: prioritizing firm-level agreements over higher-level ones; making it somewhat easier for firms in economic difficulties to ‘opt-out’ from higher level agreements; and limiting ultra-activity (the period during which an expired agreement would remain valid). However, the reform has not been able to promote a substantial change in the structure of collective bargaining. Wage flexibility generally improved, but the incidence of firm-level agreement has not increased significantly. Firm-level agreements remain especially unusual for SMEs, and ‘opting-out’ is the only possibility of wage adjustment for these firms, but only based on agreements with workers’ representatives, as the procedures for resolving potential conflicts associated with ‘opt-outs’ remain excessively demanding. Enhancing the flexibility at the firm rather than sectoral-regional level could be facilitated by eliminating the automatic extension of negotiated working conditions to all firms in the corresponding sector, for example by strictly verifying the thresholds of unions and employers’ representativeness.

Authorities’ Views

25. The authorities emphasized the importance of continued job creation and the need not to reverse the 2012 labor market reforms, while recognizing scope for some fine-tuning. Lowering unemployment, especially for the long-term unemployed and low-skilled youth, is a policy priority. The authorities stressed that there is broad political consensus that enhancing the effectiveness of ALMPs is critical, with efforts already underway, such as improving the incentive alignment with the regional governments and private sector partners. Tackling pervasive labor market duality is a longer-term goal that requires a consensus among social partners on the ways forward. Therefore, an expert group will first develop policy options before engaging in a new dialogue. As regards the collective bargaining process, the authorities noticed that the labor reforms have given firms greater flexibility to adapt to their differentiated business needs, and the easier opting out has served as a disciplining tool, despite its muted uptake so far. Nevertheless, the issue of greater representativeness to conclude collective agreements with general effects could be explored over the medium term. The authorities stressed that their immediate focus is on preserving reform achievements, in particular in the context of the recent decision on temporary replacement workers by the Court of Justice of the European Union.

C. Structural Reforms: Boosting Firm Productivity and Growth

26. Spain’s weak productivity remains a core medium-term challenge. A large part of the recent improvement in total factor productivity (TFP) growth was a result of drastic labor shedding and exit of low-productivity firms during the crisis. The reform agenda initiated in 2012 is likely to keep TFP growth at slightly above ½ percent over the next five years, implying that potential growth will rise gradually but not surpass 1½ percent without further reform efforts. Spain’s corporate landscape, with many small firms that tend to be less productive, innovative, and export-oriented than European peers, is behind this phenomenon (Figure 9). At the same time, significant within-sector heterogeneity in firm productivity points to inefficient resource allocation.

27. A number of factors weigh on firm growth and productivity. Staff analysis finds that product market regulation, in particular in more tightly-regulated sectors, has weighed on TFP growth. Moreover, different regulatory practices across regions, leading to an uneven business environment, have limited the capacity of firms to benefit from larger markets and exploit economies of scale. Size-dependent rules and regulations, including past tax incentives to SMEs, have also lowered firm productivity growth. Finally, the relatively high debt-to-asset ratio, by constraining access to finance and investment, has held back firm productivity and growth, in particular, for SMEs that tend to have weaker financial position compared to other firms (second chapter of SIP). Survey results corroborate these empirical findings.

28. Boosting firm growth and productivity calls for progress in three key areas.

Fostering competition. As the implementation of the Market Unity Law has been delayed, little progress has been made on the intended reduction in regulatory barriers and administrative burden for Spanish firms that face three layers of administration (central, regional, and local). Sizeable differences persist in the business environment across regions, and Spain still lags in a number of areas compared to peers. For example, the time and costs to open a business are one and a half times the OECD average, while opening an industrial SME takes eight times as long and costs twice as much as of opening a normal business. Introducing performance-based transfers to regions that would incentivize them to accelerate the Market Unity Law implementation could be considered. The delayed liberalization of professional services also needs to be advanced in order to level the playing field, increase transparency and accountability of professional bodies, open up unjustified reserved activities and safeguard market unity in the professional services in Spain. The macroeconomic gains of these reforms are likely to be larger when undertaken in the context of the current cyclical recovery (IMF World Economic Outlook, April 2016).
Revisiting size-based regulations, including those on reporting, auditing, labor regulation and CIT incentives, with a view to addressing disincentive effects that can create a “small business trap” and hamper productivity. The recent CIT reform did just that by eliminating the lower tax rate for small firms and replacing it with targeted support for startups. At the same time, removing barriers to competition would ensure efficient market selection of new entrants.

Enhancing innovation capacity, which is currently limited by low private R&D spending and weak public R&D spending efficiency. This could be addressed by improving the weak coordination across government layers, strengthening public-private sector cooperation, and enhancing internationalization and financing.

Authorities’ Views

29. The authorities broadly agreed with the main obstacles to firm-level productivity growth and the proposed policy options. In particular, they shared the need to improve the regulatory environment and enhance competition by faster implementation of the Market Unity Law. While the authorities concurred with the benefits from liberalizing professional services, they stressed the importance to advance this agenda also at the EU level. Enhancing innovation would need to go beyond R&D spending and require reforms also to the education system.

D. Financial Sector: Continue Strengthening Capacity to Support Growth

30. Continued promotion of banks and borrowers’ resilience is a critical part of the economic recovery. Due to better asset quality, stronger capital and funding positions, and reduced debt overhangs, the system is closer to putting most of the crisis legacies behind it. Similarly, borrowers have also reduced their debt overhangs amid improving labor market conditions. Going forward, enhancing further the resilience of both sides and expanding the still limited access to non-bank funding, particularly for frontier innovation, will be key to ensure stable financing of the economy over the medium term.

31. Efforts to reduce the level of impaired assets on banks’ balance sheets should continue. While the reduction in NPLs has generally proceeded well, though at different speeds across banks, efforts should continue to ensure banks’ adequate provisioning and encourage the fuller use of the enhanced insolvency regime. Following bank-specific time-bound, realistic and ambitious NPL reduction plans as foreseen in the ECB Guidance to Banks on NPLs are therefore a welcome tool in the Spanish banking system’s final stretch to fully put the crisis legacies behind. This process could also benefit from the insolvency reform, which supports more efficient debt restructuring and gives a “fresh start” to individuals. However, the use of the latter has been relatively limited so far. A stock-taking exercise of the framework’s functioning would thus be beneficial as certain design changes could likely help the deleveraging process. These include addressing the special treatment for public creditors, and introducing the “cram-down” mechanism (i.e., allowing to disregard the dissent of several voting classes of creditors as long as they receive a fair value under the restructuring plan), and further removing uncertainties around the “fresh start” regime.

32. Continued efforts to strengthen banks’ capital and funding positions will enhance the banking system’s ability to support economic expansion and withstand shocks. It remains important to encourage banks to increase high-quality capital through retained earnings. Additional capital would help ensure sufficient credit provision to financially-sound corporates and households as credit demand picks up. At this stage near-term supply constraints appear unlikely, but bolstering banks’ capital would be prudent to safeguard financial stability and ensure adequate capital in light of regulatory initiatives. In addition, banks may need to adjust their liability structures to fulfill new regulatory requirements, such as Minimum Requirements for Own Funds and Eligible Liabilities (MREL) and Net Stable Funding Ratio (NFSR).

33. Adjusting to profitability pressures is a key challenge, especially in the current macro-financial environment. Similar to other European economies, banks’ profitability in Spain is currently well below the pre-crisis level, with the return on equity lower than the cost of capital. Profitability has been stable in the past year, as for business in Spain reduced net interest and other income has been offset by falling impairment costs. The more difficult domestic and global operating conditions, in particular in a low interest rate environment, will put pressure on banks’ cost structure and business models. Achieving greater efficiency, in particular since Spanish banks still rely on a larger branch network than European peers, further reducing operating expenses, and raising non-interest income will be central to addressing the profitability challenge.

34. Efforts to further improve access to finance for SMEs should continue. Access of Spanish firms to non-bank (typically equity) financing for frontier innovation, in particular, is low compared to their European peers. This suggests the need to step up ongoing efforts to increase market-based financing for SMEs, including via alternative exchanges, venture capital, and securitization. At the same time, the ongoing program providing guarantees and direct financing through Instituto de Crédito Oficial (ICO), a state-owned financial institution, remains highly relevant for financing of new firms, with its lending at more favorable conditions now more concentrated in tenures beyond three years. The efforts have started to be complemented by European efforts, including by guarantees extended under the Juncker plan.

35. Three items under Spain’s financial sector reform remain to be completed: the divestment of public ownership in two banks and the liquidation of real estate assets owned by the Asset Management Company (SAREB). The framework for savings banks and banking foundations is now fully in place, and requires banking foundations either to divest relevant credit institutions or to set up reserve funds. The legal challenge related to the 2011 IPO of Bankia has been addressed, removing the deadlock for further privatization. However, the plan by the Spanish Resolution Authority (FROB) to sell its stakes in Bankia/BFA and BMN has stalled due to market conditions and political uncertainties, with the new government extending the deadline for the sale of both institutions by two years. FROB has recently hired a consultant to explore the option of merging the two institutions before a sale. At the same time, SAREB reduced its portfolio more slowly than planned (by 15 percent or about €8 billion) in the first three years due to difficult market conditions, but the recovery of the real estate market should bolster future sales. SAREB again registered a loss in 2015, following the adoption of the new accounting rule that requires appraisals of underlying collaterals in all loan books to properly reflect marking-to-market. The loss significantly eroded its capital and resulted in a conversion of subordinated debt into equity, with minimal impact on exposed banks given provisions made already.

36. The macroprudential policy framework remains to be fully put in place. The Bank of Spain has employed macroprudential powers, setting the amounts of countercyclical capital buffers (at zero) and capital surcharges for systemic banks, but the national macroprudential authority has not been established. Given the financial cycle, there are no imminent systemic risks in the cyclical dimension. Nevertheless, the macroprudential policy framework should be developed to safeguard financial stability by mitigating a buildup of systemic risk following the return to positive credit growth and rising housing prices in the near future.

37. Progress towards the banking union continues. In February 2016, the Bank of Spain completed the transposition of the capital requirements regulation and directive (CRR/CRD IV). The Bank of Spain also plans to amend regulations so as to align national discretions of the CRR with the recent ECB regulation. Under the Single Supervisory Mechanism banks benefit from a more forward-looking supervisory approach that focuses on business model and risk management. Preparation for resolution plans remains work in progress, with banks preferring the multiple points of entry approach for their subsidiaries outside the euro area. The upcoming FSAP will review the overall financial stability architecture and advise on further enhancing the financial system’s resilience.

Authorities’ Views

38. The authorities broadly agreed with staff’s assessment on the recent progress and remaining challenges in the financial sector. The authorities stressed that the positive trends in the banking system were the outcome of the decisive financial sector reform, including recapitalization and balance sheet cleansing. They highlighted the progress made in NPL reduction over the last years and considered this pace to be appropriate. The Bank of Spain has continued to ensure adequate provisioning and forced weak banks to take additional measures, as needed, to address legacy asset problems. The authorities considered that going forward, low profitability would be the main challenge for banks, as in virtually all other European banking systems. They viewed banks as being well-positioned to handle forthcoming regulatory changes and supported the finalization and implementation of pending financial reforms. The authorities are committed to develop the macroprudential framework.

Staff Appraisal

39. The Spanish economy has continued its impressive recovery and strong job creation. Real GDP and employment growth have outpaced the euro area average despite a prolonged period of domestic political uncertainty. The current account is projected to record its fourth consecutive annual surplus. And private sector balance sheets have further strengthened.

40. Earlier reforms and confidence-enhancing measures have laid the ground for this rebound, and they need to be preserved. In particular, wage moderation and greater labor market flexibility have helped the economy regain competitiveness and have contributed to strong job creation. Together with banking sector reforms they have made the Spanish economy more resilient. Reversing policy achievements could hurt market confidence and weigh on medium-term growth prospects.

41. Despite considerable progress, adjustment is still incomplete and structural problems persist. Far too many Spaniards are still without employment and many have been jobless for years. Together with still pervasive labor market duality this has raised social exclusion, inhibited human capital investment, and served as a drag on productivity. Lowering structural unemployment and raising medium-term potential growth above the estimated annual 1.5 percent remain key challenges. At the same time, high public debt, pockets of over-indebtedness in the private sector, and the still large negative net international investment position leave the economy vulnerable to shocks.

42. Maintaining high job-rich growth calls for a comprehensive medium-term strategy. Preserving past reform achievements is of utmost importance, but it cannot by itself sustain the dynamic economic performance. To advance the structural agenda, immediate attention should be given to those priority areas for which there is a commonly shared view on reform needs and objectives, though not necessarily on the preferred policy tools: enhancing ALMP to lower long-term and youth unemployment, reforming regional public finances to safeguard public finances, and strengthening innovation and education policies to lift productivity. Going forward, additional labor and product market reforms need to enhance such a strategy.

43. Resumption of gradual fiscal consolidation would ensure that debt is firmly put on a downward path. Building on the large fiscal measures adopted over 2010–13, adjustment can take a more measured pace but should be steady and be underpinned by well-defined policy actions. An annual adjustment of the structural primary balance of about 0.5 percent of GDP would bring the structural fiscal deficit into balance in five years and markedly lower the debt ratio. The pace would strike an appropriate balance between preserving the economic recovery and mitigating fiscal risks.

44. A carefully designed adjustment can be growth and job-friendly. In particular, Spain has room to raise revenues. Gradually reducing VAT exemptions as well as raising excise duties and environmental levies would bring revenue collection more in line with that of European peers. On the expenditure side, room for further efficiency gains could be best gauged by conducting thorough expenditure reviews—in particular in health and education. At the same time, it will be important to properly shield vulnerable groups and enhance the efficiency of expenditure programs that directly support employment and growth, such as ALMP and public research and development spending.

45. Without reforms, the regional financing framework remains a risk for public finances. Reforms should aim to improve regions’ incentives to comply with fiscal targets while accounting for their different economic capacities to do so. This calls for more automatic and stricter enforcement of targets and providing regions with greater power to mobilize their own revenues. And finally, the introduction of performance-based transfers could be considered to strengthen regions’ incentives to advance critical reform areas, such as the implementation of the Market Unity Law and ALMP.

46. Reducing unemployment, in particular long term and youth joblessness, remains a key challenge. Despite recent efforts, the limited effectiveness of ALMP calls for urgent improvements, particularly though better coordination with regional governments. The range of hiring subsidies could be consolidated into better-targeted schemes, particularly for the low-skilled and long-term unemployed. At the same time, the long-standing issue of labor market duality is still to be addressed. Allowing firms more control and flexibility over working conditions is also critical to enhance the functioning of the labor market.

47. The current cyclical recovery is the right time to get a high pay-off from structural reforms. In particular, three types of policies can help raise the low productivity of Spain’s many SMEs. Implementing the Market Unity Law, advancing the delayed liberalization of professional services, and lowering the cost of doing business would promote competition. Enhancing private R&D investment, increasing the efficiency of public R&D spending, and improving access to nonbank financing for frontier innovation would foster high productive investment. And finally, revisiting size-contingent regulations would help overcome the small business trap.

48. The banking system has gained further strength amid new challenges. Due to better asset quality, stronger capital and funding positions, and reduced debt overhangs, the system is closer to putting most of the crisis legacies behind it. However, banks have progressed at different speeds, and NPLs and foreclosed assets remain sizeable, though much lower than in some EU countries. At the same time, like other European banking systems, Spain’s banks face challenges arising from the low profitability environment and new regulatory initiatives. Going forward, continuing to ensure adequate provisioning, further improving efficiency gains—possibly through mergers—, boosting non-interest income, and increasing further high-quality capital would enhance the banking system’s ability to withstand shocks, and facilitate sufficient credit provision as credit demand picks up.

49. It is recommended that Spain remain on the standard 12-month Article IV consultation cycle.

Box 1.

What Has Been Driving the Recovery?

A combination of temporary tailwinds and structural reforms has driven the strong recovery of the Spanish economy. Beginning in mid-2013, the rebound followed major labor market and banking sector reforms as well as falling long-term interest rates but otherwise still weak external conditions, which have since improved.

The stronger-than-anticipated rebound was largely driven by temporary factors. At 3.2 percent in 2015, real GDP growth exceeded staff’s (and consensus) projection in the 2014 October WEO by 1.5 p.p. A decomposition of the growth surprise reveals that external tailwinds and fiscal expansion account for the bulk of it.

The decline in oil price and interest rates explains about two thirds of the better growth outturn, each contributing about ½ p.p. Compared to the projection in the October 2014 WEO, oil prices dropped by some 34 percent and long-term interest rates by about 100 bps.¹
The impact of weaker euro in combination with wage moderation (5 percent real exchange rate depreciation, unit-labor-cost based) was broadly offset by external headwinds from weaker growth in the euro area and the resulting softer foreign demand for Spanish exports (-¼ p.p.).
A looser-than-projected fiscal stance (structural primary impulse of about 0.8 percent of GDP) provided an additional boost of about 0.4 p.p.
The remaining part of the growth surprise (about 0.2 p.p.) can be attributed to other factors, such as stronger confidence effects of structural reforms.

For 2016, growth will likely exceed earlier staff projections by 0.6 p.p. of which two thirds can be attributed to a looser than expected fiscal stance and most of the rest to stronger foreign demand.

At the same time, structural reforms, initiated in 2012, have made a difference. A simple benchmarking exercise suggests that structural measures adopted so far could boost potential output by about 2V percent over five years. Put differently, structural reforms are estimated to add annually about V percent to potential growth over a five-year horizon. This is reflected in staff’s baseline projections.

The labor market reforms explain close to half of the total growth impact from structural reforms. The reduction of the labor tax wedge, the 2012 reform of unemployment benefits and revisions to employment protection, combined with moderate wage growth over the last few years, are estimated to boost potential output by 1.1 percent over five years.
Efforts to make the tax system more growth-friendly by increasing its reliance on indirect taxation, and pension reforms are estimated to boost output by close to 1 percent over the medium term.
Productivity enhancing reforms (the 2013 approved Market Unity Law and the 2012 retail trade sector reforms) are projected so far to raise potential output by about 0.4 percent in the medium term.

Table 1.

Benchmarking the Impact of Structural Reforms over the Medium Term

(Impact on the level of potential GDP after 5 years, percent)

Sources: EC (2016), OECD and IMF staff calculations.

^{^1/}Impact based on estimates in European Commission (2016), Box 2.5.1 “Potential macroeconomic impact of structural reforms” in Country Report Spain, 2016. For other reforms, the impact is derived using empirically estimated productivity and employment elasticities (Kastrop, 2015, “Assessing the impact of structural reforms”, Presentation at the Public Finance Dialogue, 8 September 2015.).

Table 1.

Benchmarking the Impact of Structural Reforms over the Medium Term

(Impact on the level of potential GDP after 5 years, percent)

		Potential output
Product market reforms		0.4
	The market unity law (Dec 2013) ^1/	0.2
	The retail reform (2012) ^1/	0.2
Labour market reforms		1.1
	The 2012 reform of unemployment benefits ^1/	0.3
	The EPL reduction	0.3
	The labor tax wedge reduction	0.5
The 2013 pension reform ^1/		0.2
The reducion of the share of direct taxation		0.7
Total GDP Impact		2.4

Sources: EC (2016), OECD and IMF staff calculations.

Table 1.

Benchmarking the Impact of Structural Reforms over the Medium Term

(Impact on the level of potential GDP after 5 years, percent)

		Potential output
Product market reforms		0.4
	The market unity law (Dec 2013) ^1/	0.2
	The retail reform (2012) ^1/	0.2
Labour market reforms		1.1
	The 2012 reform of unemployment benefits ^1/	0.3
	The EPL reduction	0.3
	The labor tax wedge reduction	0.5
The 2013 pension reform ^1/		0.2
The reducion of the share of direct taxation		0.7
Total GDP Impact		2.4

Sources: EC (2016), OECD and IMF staff calculations.

¹ The impact estimates use oil price elasticities from the Bank of Spain (Annual Report, 2015), and the authorities’ REMS model for the effect of lower long-term interest rates (Ministry of Economy and Competitiveness, 2016).

Box 2.

Inequality and Poverty in the Aftermath of the Crisis

Income inequality and risks of poverty or social exclusion increased markedly with the global financial crisis on the back of a dramatic fall in employment, which affected young, unskilled, and temporary workers disproportionally. Measures to address duality and increase the employability of long-term and young unemployed are a policy priority to reduce risks of social exclusion among vulnerable groups.

The swift job creation since 2014–15 has started to dent the rising risks of poverty and social exclusion. But the benefit of the recovery has been uneven across generations and levels of education. Especially the employment of the young und low-skilled workers has lagged behind, making policies that improve their employability a priority.

As a result of the crisis, social indicators deteriorated sharply. The number of people at risk of poverty or social exclusion increased by more than 23 percent between 2007 and 2015 in Spain. Low-skilled workers, youth, and immigrants have been particularly vulnerable. At the same time, income inequality also deteriorated markedly, with the Gini coefficient rising by 2¾ points during this period. Spain now exhibits the third highest income quintile share ratio in the EU, with the top 20 percent of the population earning almost 7½ times as much income as the bottom 20 percent.

The rise in inequality and poverty rates largely reflects the impact of the crisis on the labor market. Employment fell by almost 20 percent between 2008 and mid-2013. Job losses affected disproportionally low-educated /low wage workers, youth, and immigrants, particularly working in the construction sector under temporary contracts. Moreover, unemployment spells of these groups have increased substantially, increasing the risks of social exclusion. At the same time, wage dispersion has risen, correcting in part the pre-crisis misallocation of resources to low productivity sectors and consequent wage inflation, including in the oversized construction sector, and in part reflecting the dual labor market. However, estimates suggest that the dominant effect on income inequality has been from the drop in employment (Bonhomme and Hospido, 2012; OECD, 2015).¹

¹ OECD (2015) In It Together. Why Less Equality Benefits All. Bonhomme, S. and L. Hospido (2012) “The Cycle of Earning Inequality: Evidence from Spanish Social Security Data,” Working Paper 1225, Banco de España.

Box 3.

Spain: Spillovers from Latin America

Potential spillovers from direct financial ties could be more relevant than the trade channel. Spain’s trade exposure to Latin America is small though growing. Exports of goods and services to this region represent 1¼ percent and ½ percent of Spanish GDP, respectively (average 2013–14) suggesting limited implications from growth deceleration. The exposure through FDI channels is larger, however. Latin America accounted for over a third of the outward FDI by Spanish firms (17 percent of outward FDI flows) in 2014. As a result, Spain’s largest and publicly listed firms have a significant presence in the region, especially in Brazil and Mexico, which accounts for about one quarter of their total sales revenues. Thus, a prolonged recession and weak local currencies could harm some of these firms’ profitability and their stock market prices. Meanwhile, FDI flows from Latin America to Spain have grown rapidly in recent years, but remain low in terms of FDI stocks (less than 5 percent of total FDI).

Spain’s two largest and global banks maintain significant subsidiary operations in Latin America. As of March 2016, they had about one-fifth of credit exposures to Latin America resulting in total claims of Spanish banks to the region of about 12 percent of total banking sector claims—a much higher share than other advanced economies’ banking systems. In 2015, operations in Latin America accounted for 43 and 80 percent of group-wide profits (excluding centralized corporate operations) for the two Spanish global banks, respectively, contributing a higher return on assets than domestic-oriented banks. These banks operate with a subsidiary model primarily based on decentralized management and funded locally in domestic-currency.

Spanish subsidiaries appear to be in a solid position to deal with rising credit risk, but lower profits would weaken contributions to the parents’ capital buffers. So far, the adverse macroeconomic conditions, in particular in Argentina, Brazil and Venezuela, and asset quality deterioration have not yet significantly marked down profitability, although NPLs typically worsen with some lag. Spanish subsidiaries should be able to manage additional losses given their relatively strong profits and provisions. Their pre-impairment net income could potentially absorb about up to twice the current NPL level, but an increase in asset impairments could have a sizeable impact on group-wide profitability. For example, a 25 percent increase in the impairment of financial assets by subsidiaries could reduce the contribution of profits to group-wide capital by about 25 percent.

Table 1.

Main Economic Indicators, 2012–21

(Percent change unless otherwise indicated)

Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates.

^{^1/}2014–15 values are IMF staff estimates.

^{^2/}Output per worker.

^{^3/}The headline deficit for Spain excludes financial sector support measures equal to 3.7 percent of GDP for 2012, 0.3 percent of GDP for 2013, 0.1 percent of GDP for 2014, 0.05 percent of GDP for 2015, and 0.2 percent of GDP for 2016.

Table 1.

Main Economic Indicators, 2012–21

(Percent change unless otherwise indicated)

							Projections
			2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Demand and supply in constant prices
	Gross domestic product		−2.9	−1.7	1.4	3.2	3.2	2.3	2.1	2.0	1.9	1.7
		Private consumption	−3.5	−3.1	1.6	2.9	3.0	2.4	2.1	2.1	1.9	1.7
		Public consumption	−4.7	−2.1	−0.3	2.0	1.3	1.2	0.9	0.7	0.6	0.4
		Gross fixed investment	−8.6	−3.4	3.8	6.0	3.6	3.2	2.7	2.5	2.5	2.4
	Total domestic demand		−5.1	−3.2	1.9	3.4	2.9	2.3	2.0	1.9	1.8	1.6
	Net exports (contribution to growth)		2.2	1.5	−0.5	−0.1	0.4	0.1	0.1	0.2	0.2	0.2
		Exports of goods and services	1.1	4.3	4.2	4.9	4.2	4.2	4.2	4.2	4.1	4.0
		Imports of goods and services	−6.4	−0.5	6.5	5.6	3.2	4.2	4.1	4.1	3.9	3.9
Savings-Investment Balance (percent of GDP)
	Gross domestic investment		20.0	18.7	19.4	20.1	20.4	20.6	20.7	20.7	20.8	20.9
		Private	17.5	16.5	17.2	17.5	18.2	18.5	18.6	18.7	18.7	18.9
		Public	2.5	2.2	2.2	2.5	2.2	2.1	2.1	2.1	2.1	2.1
	National savings		19.8	20.2	20.5	21.4	22.3	22.3	22.5	22.7	22.8	22.9
		Private	23.4	24.3	24.0	24.0	24.6	23.5	23.2	22.9	22.9	22.9
		Public	−3.7	−4.0	−3.5	−2.6	−2.3	−1.2	−0.7	−0.3	−0.1	0.1
	Foreign savings		0.2	−1.5	−1.1	−1.4	−2.0	−1.8	−1.8	−1.9	−2.0	−2.0
Household saving rate (percent of gross disposable income)			8.5	9.6	9.0	8.2	9.8	9.9	10.0	10.2	10.3	10.3
Private sector debt (percent of GDP) ^1/			266.7	254.4	240.7	228.5	220.3	215.4	210.7	205.9	201.3	197.0
		Corporate debt	180.0	171.8	162.6	156.0	150.2	147.0	143.8	140.6	137.4	134.8
		Household debt	86.7	82.6	78.1	72.5	70.2	68.4	66.9	65.4	63.9	62.2
Credit to private sector			−9.9	−10.2	−6.5	−4.2	−0.5	0.8	1.0	1.1	1.2	1.3
Potential output growth			0.2	0.0	0.3	0.7	1.0	1.2	1.4	1.5	1.5	1.5
Output gap (percent of potential)			−6.1	−7.8	−6.8	−4.5	−2.4	−1.3	−0.6	−0.1	0.3	0.5
Prices
	GDP deflator		0.1	0.4	−0.3	0.5	0.7	1.0	1.2	1.4	1.5	1.6
	HICP (average)		2.4	1.5	−0.2	−0.6	−0.4	1.2	1.3	1.4	1.6	1.7
	HICP (end of period)		3.0	0.3	−1.1	−0.1	0.7	0.9	1.2	1.4	1.6	1.7
Employment and wages
	Unemployment rate (percent)		24.8	26.1	24.4	22.1	19.4	17.9	17.0	16.1	15.6	15.3
	Labor productivity ^2/		2.0	1.8	0.3	0.2	0.2	0.3	1.0	0.9	0.9	0.8
	Labor costs, private sector		1.1	0.2	0.2	0.2	0.5	1.1	1.2	1.3	1.3	1.4
	Employment growth		−4.3	−2.8	1.2	3.0	2.9	2.0	1.1	1.2	1.0	0.9
	Labor force growth		0.0	−1.1	−1.0	−0.1	−0.5	0.1	0.0	0.2	0.4	0.5
Balance of payments (percent of GDP)
	Trade balance (goods and services)		1.5	3.3	2.5	2.4	2.9	2.7	2.8	2.9	3.0	3.1
	Current account balance		−0.2	1.5	1.1	1.4	2.0	1.8	1.8	1.9	2.0	2.0
	Net international investment position		−89.9	−94.3	−97.5	−89.9	−83.9	−78.7	−73.7	−68.6	−63.7	−59.0
Public finance (percent of GDP)
	General government balance ^3/		−6.8	−6.7	−5.9	−5.1	−4.3	−3.2	−2.7	−2.3	−2.1	−2.0
	Primary balance		−8.0	−4.1	−3.0	−2.4	−2.1	−0.9	−0.5	−0.2	−0.1	0.1
	Structural balance		−3.5	−2.5	−2.0	−2.4	−3.0	−2.6	−2.4	−2.3	−2.3	−2.3
	Primary structural balance		−0.5	1.0	1.5	0.6	−0.2	0.2	0.2	0.2	0.2	0.2
	General government debt		85.7	95.4	100.4	99.8	99.2	99.2	98.7	97.8	96.7	95.6

Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates.

^{^1/}2014–15 values are IMF staff estimates.

^{^2/}Output per worker.

Table 1.

Main Economic Indicators, 2012–21

(Percent change unless otherwise indicated)

							Projections
			2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Demand and supply in constant prices
	Gross domestic product		−2.9	−1.7	1.4	3.2	3.2	2.3	2.1	2.0	1.9	1.7
		Private consumption	−3.5	−3.1	1.6	2.9	3.0	2.4	2.1	2.1	1.9	1.7
		Public consumption	−4.7	−2.1	−0.3	2.0	1.3	1.2	0.9	0.7	0.6	0.4
		Gross fixed investment	−8.6	−3.4	3.8	6.0	3.6	3.2	2.7	2.5	2.5	2.4
	Total domestic demand		−5.1	−3.2	1.9	3.4	2.9	2.3	2.0	1.9	1.8	1.6
	Net exports (contribution to growth)		2.2	1.5	−0.5	−0.1	0.4	0.1	0.1	0.2	0.2	0.2
		Exports of goods and services	1.1	4.3	4.2	4.9	4.2	4.2	4.2	4.2	4.1	4.0
		Imports of goods and services	−6.4	−0.5	6.5	5.6	3.2	4.2	4.1	4.1	3.9	3.9
Savings-Investment Balance (percent of GDP)
	Gross domestic investment		20.0	18.7	19.4	20.1	20.4	20.6	20.7	20.7	20.8	20.9
		Private	17.5	16.5	17.2	17.5	18.2	18.5	18.6	18.7	18.7	18.9
		Public	2.5	2.2	2.2	2.5	2.2	2.1	2.1	2.1	2.1	2.1
	National savings		19.8	20.2	20.5	21.4	22.3	22.3	22.5	22.7	22.8	22.9
		Private	23.4	24.3	24.0	24.0	24.6	23.5	23.2	22.9	22.9	22.9
		Public	−3.7	−4.0	−3.5	−2.6	−2.3	−1.2	−0.7	−0.3	−0.1	0.1
	Foreign savings		0.2	−1.5	−1.1	−1.4	−2.0	−1.8	−1.8	−1.9	−2.0	−2.0
Household saving rate (percent of gross disposable income)			8.5	9.6	9.0	8.2	9.8	9.9	10.0	10.2	10.3	10.3
Private sector debt (percent of GDP) ^1/			266.7	254.4	240.7	228.5	220.3	215.4	210.7	205.9	201.3	197.0
		Corporate debt	180.0	171.8	162.6	156.0	150.2	147.0	143.8	140.6	137.4	134.8
		Household debt	86.7	82.6	78.1	72.5	70.2	68.4	66.9	65.4	63.9	62.2
Credit to private sector			−9.9	−10.2	−6.5	−4.2	−0.5	0.8	1.0	1.1	1.2	1.3
Potential output growth			0.2	0.0	0.3	0.7	1.0	1.2	1.4	1.5	1.5	1.5
Output gap (percent of potential)			−6.1	−7.8	−6.8	−4.5	−2.4	−1.3	−0.6	−0.1	0.3	0.5
Prices
	GDP deflator		0.1	0.4	−0.3	0.5	0.7	1.0	1.2	1.4	1.5	1.6
	HICP (average)		2.4	1.5	−0.2	−0.6	−0.4	1.2	1.3	1.4	1.6	1.7
	HICP (end of period)		3.0	0.3	−1.1	−0.1	0.7	0.9	1.2	1.4	1.6	1.7
Employment and wages
	Unemployment rate (percent)		24.8	26.1	24.4	22.1	19.4	17.9	17.0	16.1	15.6	15.3
	Labor productivity ^2/		2.0	1.8	0.3	0.2	0.2	0.3	1.0	0.9	0.9	0.8
	Labor costs, private sector		1.1	0.2	0.2	0.2	0.5	1.1	1.2	1.3	1.3	1.4
	Employment growth		−4.3	−2.8	1.2	3.0	2.9	2.0	1.1	1.2	1.0	0.9
	Labor force growth		0.0	−1.1	−1.0	−0.1	−0.5	0.1	0.0	0.2	0.4	0.5
Balance of payments (percent of GDP)
	Trade balance (goods and services)		1.5	3.3	2.5	2.4	2.9	2.7	2.8	2.9	3.0	3.1
	Current account balance		−0.2	1.5	1.1	1.4	2.0	1.8	1.8	1.9	2.0	2.0
	Net international investment position		−89.9	−94.3	−97.5	−89.9	−83.9	−78.7	−73.7	−68.6	−63.7	−59.0
Public finance (percent of GDP)
	General government balance ^3/		−6.8	−6.7	−5.9	−5.1	−4.3	−3.2	−2.7	−2.3	−2.1	−2.0
	Primary balance		−8.0	−4.1	−3.0	−2.4	−2.1	−0.9	−0.5	−0.2	−0.1	0.1
	Structural balance		−3.5	−2.5	−2.0	−2.4	−3.0	−2.6	−2.4	−2.3	−2.3	−2.3
	Primary structural balance		−0.5	1.0	1.5	0.6	−0.2	0.2	0.2	0.2	0.2	0.2
	General government debt		85.7	95.4	100.4	99.8	99.2	99.2	98.7	97.8	96.7	95.6

Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates.

^{^1/}2014–15 values are IMF staff estimates.

^{^2/}Output per worker.

Table 2a.

General Government Operations, 2012–21 ^1/

(Billions of euros, unless otherwise indicated)

Sources: Ministry of Finance; Eurostat; and IMF staff estimates and projections.

^{^1/}Compiled using accrual basis and ESA10 manual, consistent with Eurostat dataset.

Table 2a.

General Government Operations, 2012–21 ^1/

(Billions of euros, unless otherwise indicated)

									Projections
					2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Revenue					391.2	395.6	403.4	415.5	425.4	442.4	456.4	470.7	487.0	502.7
	Taxes				220.9	227.2	232.3	243.7	247.3	259.7	268.9	278.8	288.5	298.4
		Indirect taxes			108.6	115.0	119.6	127.6	131.3	136.8	141.5	146.6	151.7	156.6
			o.w. VAT		57.6	62.1	64.9	70.0	72.0	74.6	77.2	80.0	82.7	85.5
			o.w. Excise		32.2	33.8	34.6	36.7	37.8	39.7	41.1	42.6	44.1	45.4
		Direct taxes			108.5	107.1	107.0	109.8	109.5	116.1	120.3	125.0	129.4	134.0
			o.w. Private households		79.7	83.1	84.5	84.0	84.3	87.1	89.8	92.7	95.4	98.3
			o.w. Corporate		22.2	21.9	20.9	25.5	24.9	28.7	30.3	32.0	33.6	35.4
		Capital tax			3.9	5.1	5.7	6.4	6.6	6.8	7.0	7.3	7.5	7.8
	Social contributions				131.9	128.2	130.1	132.3	136.2	139.5	142.8	145.6	150.7	155.0
	Other revenue				38.4	40.2	41.0	39.6	41.8	43.3	44.7	46.3	47.7	49.3
Expenditure					500.1	467.5	465.6	470.7	475.1	480.0	489.2	499.7	514.5	529.5
	Expense				499.4	466.9	464.8	471.4	474.2	479.0	488.2	498.7	513.5	528.6
		Compensation of employees			113.9	114.7	115.2	119.1	122.3	123.1	126.0	129.3	132.5	135.6
		Use of goods and services			58.6	54.7	55.1	57.1	57.4	56.6	57.7	58.8	61.0	62.2
		Consumption of fixed capital			25.2	22.5	21.5	27.7	23.5	23.2	24.0	24.9	25.8	26.7
		Interest			30.9	35.6	36.0	33.2	30.9	31.4	30.8	30.8	31.6	33.2
		Social benefits			197.0	199.0	198.7	198.8	202.6	206.6	211.2	216.3	223.4	231.1
		Other expense			73.7	40.4	38.2	35.4	37.4	38.1	38.6	38.6	39.2	39.8
			Subsidies		10.0	10.9	11.4	12.5	12.4	12.3	12.5	12.5	12.5	12.5
			Other		63.7	29.5	26.8	23.0	25.0	25.8	26.1	26.1	26.7	27.3
				o.w. financial sector support	38.3	3.3	1.4	0.5	2.2	…	…	…	…	…
	Net acquisition of nonfinancial assets				0.7	0.6	0.8	−0.7	1.0	1.0	1.0	1.0	1.0	1.0
		Gross fixed capital investment			25.9	23.1	22.3	27.0	24.4	24.2	25.0	25.9	26.7	27.6
		Consumption of fixed capital			25.2	22.5	21.5	27.7	23.5	23.2	24.0	24.9	25.8	26.7
		Other non financial assets			0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Gross operating balance					−108.2	−71.3	−61.4	−55.8	−48.8	−36.6	−31.8	−28.0	−26.5	−25.8
Net lending / borrowing					−108.9	−71.9	−62.2	−55.2	−49.7	−37.5	−32.8	−29.0	−27.5	−26.8
Net lending / borrowing (excluding financial sector support)					−70.6	−68.6	−60.8	−54.6	−47.5	−37.5	−32.8	−29.0	−27.5	−26.8
Memorandum items:
	Nominal GDP				1,039.8	1,025.6	1,037.0	1,075.6	1,117.8	1,156.0	1,194.7	1,236.2	1,278.6	1,320.9

Sources: Ministry of Finance; Eurostat; and IMF staff estimates and projections.

^{^1/}Compiled using accrual basis and ESA10 manual, consistent with Eurostat dataset.

Table 2a.

General Government Operations, 2012–21 ^1/

(Billions of euros, unless otherwise indicated)

									Projections
					2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Revenue					391.2	395.6	403.4	415.5	425.4	442.4	456.4	470.7	487.0	502.7
	Taxes				220.9	227.2	232.3	243.7	247.3	259.7	268.9	278.8	288.5	298.4
		Indirect taxes			108.6	115.0	119.6	127.6	131.3	136.8	141.5	146.6	151.7	156.6
			o.w. VAT		57.6	62.1	64.9	70.0	72.0	74.6	77.2	80.0	82.7	85.5
			o.w. Excise		32.2	33.8	34.6	36.7	37.8	39.7	41.1	42.6	44.1	45.4
		Direct taxes			108.5	107.1	107.0	109.8	109.5	116.1	120.3	125.0	129.4	134.0
			o.w. Private households		79.7	83.1	84.5	84.0	84.3	87.1	89.8	92.7	95.4	98.3
			o.w. Corporate		22.2	21.9	20.9	25.5	24.9	28.7	30.3	32.0	33.6	35.4
		Capital tax			3.9	5.1	5.7	6.4	6.6	6.8	7.0	7.3	7.5	7.8
	Social contributions				131.9	128.2	130.1	132.3	136.2	139.5	142.8	145.6	150.7	155.0
	Other revenue				38.4	40.2	41.0	39.6	41.8	43.3	44.7	46.3	47.7	49.3
Expenditure					500.1	467.5	465.6	470.7	475.1	480.0	489.2	499.7	514.5	529.5
	Expense				499.4	466.9	464.8	471.4	474.2	479.0	488.2	498.7	513.5	528.6
		Compensation of employees			113.9	114.7	115.2	119.1	122.3	123.1	126.0	129.3	132.5	135.6
		Use of goods and services			58.6	54.7	55.1	57.1	57.4	56.6	57.7	58.8	61.0	62.2
		Consumption of fixed capital			25.2	22.5	21.5	27.7	23.5	23.2	24.0	24.9	25.8	26.7
		Interest			30.9	35.6	36.0	33.2	30.9	31.4	30.8	30.8	31.6	33.2
		Social benefits			197.0	199.0	198.7	198.8	202.6	206.6	211.2	216.3	223.4	231.1
		Other expense			73.7	40.4	38.2	35.4	37.4	38.1	38.6	38.6	39.2	39.8
			Subsidies		10.0	10.9	11.4	12.5	12.4	12.3	12.5	12.5	12.5	12.5
			Other		63.7	29.5	26.8	23.0	25.0	25.8	26.1	26.1	26.7	27.3
				o.w. financial sector support	38.3	3.3	1.4	0.5	2.2	…	…	…	…	…
	Net acquisition of nonfinancial assets				0.7	0.6	0.8	−0.7	1.0	1.0	1.0	1.0	1.0	1.0
		Gross fixed capital investment			25.9	23.1	22.3	27.0	24.4	24.2	25.0	25.9	26.7	27.6
		Consumption of fixed capital			25.2	22.5	21.5	27.7	23.5	23.2	24.0	24.9	25.8	26.7
		Other non financial assets			0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Gross operating balance					−108.2	−71.3	−61.4	−55.8	−48.8	−36.6	−31.8	−28.0	−26.5	−25.8
Net lending / borrowing					−108.9	−71.9	−62.2	−55.2	−49.7	−37.5	−32.8	−29.0	−27.5	−26.8
Net lending / borrowing (excluding financial sector support)					−70.6	−68.6	−60.8	−54.6	−47.5	−37.5	−32.8	−29.0	−27.5	−26.8
Memorandum items:
	Nominal GDP				1,039.8	1,025.6	1,037.0	1,075.6	1,117.8	1,156.0	1,194.7	1,236.2	1,278.6	1,320.9

Sources: Ministry of Finance; Eurostat; and IMF staff estimates and projections.

^{^1/}Compiled using accrual basis and ESA10 manual, consistent with Eurostat dataset.

Table 2b.

General Government Operations, 2012–21 ^1/

(Percent of GDP, unless otherwise noted)

Sources: Ministry of Finance; Eurostat; and IMF staff estimates and projections.

^{^1/}Compiled using accrual basis and ESA10 manual, consistent with Eurostat dataset.

^{^2/}Including interest income.

Table 2b.

General Government Operations, 2012–21 ^1/

(Percent of GDP, unless otherwise noted)

								Projections
				2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Revenue				37.6	38.6	38.9	38.6	38.1	38.3	38.2	38.1	38.1	38.1
	Taxes			21.2	22.2	22.4	22.7	22.1	22.5	22.5	22.6	22.6	22.6
		Indirect taxes		10.4	11.2	11.5	11.9	11.7	11.8	11.8	11.9	11.9	11.9
			o.w. VAT	5.5	6.1	6.3	6.5	6.4	6.5	6.5	6.5	6.5	6.5
			o.w. Excise	3.1	3.3	3.3	3.4	3.4	3.4	3.4	3.4	3.4	3.4
		Direct taxes		10.4	10.4	10.3	10.2	9.8	10.0	10.1	10.1	10.1	10.1
			o.w. Private households	7.7	8.1	8.1	7.8	7.5	7.5	7.5	7.5	7.5	7.4
			o.w. Corporate	2.1	2.1	2.0	2.4	2.2	2.5	2.5	2.6	2.6	2.7
		Capital tax		0.4	0.5	0.5	0.6	0.6	0.6	0.6	0.6	0.6	0.6

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Abstract

Context

Recent Economic Developments

Authorities’ Views

Outlook and Risks

Authorities’ Views

Policy Agenda

A. Fiscal Policy: Resuming Growth-Friendly and Inclusive Consolidation

Authorities’ Views

B. Labor Market: Tackling Long-Term Unemployment and Labor Market Rigidities

Authorities’ Views

C. Structural Reforms: Boosting Firm Productivity and Growth

Authorities’ Views

D. Financial Sector: Continue Strengthening Capacity to Support Growth

Authorities’ Views

Staff Appraisal