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Assessement and Recommendations For a decade now, Spain’s performance has been remarkable. Growth has been robust, allowing real convergence at a fairly brisk pace, with the standard of living differential with the euro area average shrinking from 20% to less than 13% between 1995 and 2003. Fiscal consolidation, the fall in interest rates due to the introduction of the single currency, structural reforms pursued since the mid-1990s and a surge in immigration have created a virtuous circle of rapidly rising activity sustained by strong job creation. But...
Maintinaing a Strong Performance The persistence of a sizeable inflation differential with the euro area and a boom in the housing market represent the two most important risks threatening the dynamism of the economy over the medium term. This chapter discusses the structural and fiscal policy options which could ease these tensions. It will focus in particular on improvements to the wage bargaining system, ways to strengthen competition in sheltered sectors and reforms of housing policy.
Preserving Macroeconomic Stability and Competitiveness The persistence of a sizeable inflation differential with the euro area and a boom in the housing market represent the two most important risks threatening the dynamism of the economy over the medium term. This chapter discusses the structural and fiscal policy options which could ease these tensions. It will focus in particular on improvements to the wage bargaining system, ways to strengthen competition in sheltered sectors and reforms of housing policy.
Raising Productivity Growth, While Maintaining Strong Job Creation Since the mid-1990s, employment has expanded at a remarkable pace, while the unemployment rate declined from its peak in the early 1990s to about 10.5% at the end of 2004, although this is still one of the highest rates in the OECD. Several interrelated factors have underpinned strong job creation, including very favourable monetary conditions and the arrival of a large number of immigrants, who have mostly taken jobs in a few low productivity sectors. Labour market reforms have also played a role, especially those implemented in 1997 that lowered severance payments and social security contributions for some workers. But labour market institutions, including employment protection legislation, active labour market policies and unemployment benefits, still require comprehensive reforms to push unemployment down further, while fostering a better productivity performance. Reforms of the education system and firm training, and the promotion of business R&D activities through better framework conditions are also essential to improve the productivity record.
Getting the Most out of Public Sector Decentralisation In about two decades, Spain was transformed from one of the most centralised countries to one of the most decentralised. Spending functions were devolved rapidly. The regions have exercised their discretionary powers quite extensively and innovative policies have been implemented. But devolution was also accompanied by a hike in public employment and pressures on public spending, reflecting duplication in resources and poor co-ordination across and between government levels. The recent devolution of taxing powers could raise the accountability of the regions and, thus, cost-consciousness, although their effective use has been limited. Securing fiscal discipline would require better information on sub-national governments’ policies and outcomes so as to allow citizens to press for improved performance. The financing system of the regions also needs to be reformed to ensure sustainability in the face of changing demographics, while the fiscal rules need to be upgraded to avoid recourse to off-budget operations.
Reforming the Pension System Like the other OECD countries, Spain will be faced with population ageing. The consequences were analysed in detail in the 2001 Economic Survey. It concluded that a reform of the public pension system, including a lowering in the generosity of the parameters underlying pension calculations, was needed to guarantee the longterm financial viability of the system. Since then, demographic prospects have been affected by the surge in immigration. Also various studies have been published, including official ones, suggesting that the scale of the challenge to the public finances may be less critical than had been thought. This chapter takes stock of the situation and assesses the cogency of the OECD’s past recommendations in this area. It also discusses the role that could be played by various measures that aim at increasing the employment rate for women and older workers and by a fiscal policy accumulating surpluses ahead of the demographic shock.
Annexes This annex provides a compendium of recommendations carried forward from the previous Economic Survey finalized in March 2003, and records what actions have been taken since then together with an updated assessment and current recommendations as appropriate.
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