Executive summary

The recovery is underway but making growth more inclusive remains a challenge

Growth is gathering pace
Real GDP, index Q4 2007 = 1001
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← 1. Euro area member countries that are also members of the OECD (16 countries).

Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database), March.

 https://doi.org/10.1787/888933458795

Spain is enjoying a robust recovery from a deep recession, with GDP growth averaging 2.5% over the past three years. A wide range of structural reforms has contributed to sustainable rises in living standards. Highly accommodative euro area monetary policy, low oil prices and, more recently, expansionary fiscal policy have all supported domestic demand. Exports have been a particular bright spot, as Spain has resisted the slowdown in global export growth. However, raising well-being and GDP per capita, particularly via productivity increases, and making growth more inclusive remains a challenge.

Fostering innovative business investment is crucial to unlock productivity growth

Spanish productivity growth is low
Average annual multifactor productivity growth between 2008-15, percentage
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Source: OECD (2016), “OECD Economic Outlook No. 100, Volume 2016 Issue 2”, OECD Economic Outlook: Statistics and Projections (database), November.

 https://doi.org/10.1787/888933458808

Spain has long suffered from very low productivity growth, which has restrained increases in living standards. Misallocation of capital towards low productivity firms and underinvestment in innovation have dragged down productivity, although more recently capital allocation has been improving. Policies to foster a better allocation of capital and higher productivity include reducing regulatory barriers in product markets that are holding back competition, encouraging higher investment in R&D and innovation and ensuring that capital goes to a wider set of innovative firms. Reducing entry barriers and improving framework conditions would also help to foster green investment.

Reducing unemployment and improving job quality can make growth more inclusive

Unemployment remains very high
Percentage
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Source: OECD (2017), OECD Employment and Labour Market Statistics (database), February and Eurostat (2017), “Employment and unemployment (Labour Force Survey)”, Eurostat Database, February.

 https://doi.org/10.1787/888933458814

The unemployment rate is gradually falling down thanks to stronger growth, but it remains very high, particularly among the young and long-term unemployed. The high share of long-term unemployed risks loss of skills, disaffection and alienation. Poverty has also risen, mainly due to lack of quality jobs that provide enough hours of paid work to support decent incomes. Part of the answer is continued strong economic growth, but strengthening training and job placement and better minimum income support are crucial.

MAIN FINDINGS

KEY RECOMMENDATIONS

Macroeconomic policies

In addition to other factors, structural reforms have contributed to the economic recovery and improved competitiveness.

Continue to undertake structural reforms towards solid and balanced growth.

Public debt is high and there are risks around its future decline.

Stick to medium-term fiscal targets to ensure a gradual reduction of public debt.

The tax system is characterised by loopholes that undermine the tax base. Environmental tax revenue has declined in real terms since 2000.

Enhance the efficiency of the tax system by:

  • Abolishing poorly-targeted personal income tax exemptions.

  • Abolishing regressive reduced value-added tax (VAT) rates.

  • Increasing environmental taxes.

Reducing unemployment and making growth more inclusive

Poverty and child poverty remain high and small and poorly targeted cash transfers do little to reduce poverty.

Increase the amount and coverage of the regional minimum income support programmes and of cash benefits for families with children.

The unemployment rate is decreasing, but at nearly 19% remains very high. Close to half of all unemployed have been unemployed for more than one year.

Increase the efficiency of regional public employment services by:

  • Employing profiling tools and specialisation of counsellors.

  • Increasing resources and staff-to-job seeker ratios.

  • Improving co-ordination to provide integrated support for jobseekers via a single point of contact for social and employment services and assistance.

Wage and employment conditions imposed by extensions of collective agreements can be too stringent for new firms to effectively compete with established firms.

Request gradually increased representativeness of business associations when allowing the extension of collective agreements.

High employer social security contributions raise the tax on labour, discouraging employment.

Reduce employer social security contributions for low-wage workers on permanent contracts.

Adult skills are poor dragging down productivity growth. The early school leaving rate is falling, but remains high.

Improve the quality of teaching through better university and on-the-job training for teachers.

About 40% of youth are unemployed, and many of them have low-skills.

Continue the development and modernisation of vocational education and training (VET). Expand dual VET and ensure skills meet firms’ needs by fostering a greater role of employers in training students and designing curricula.

Promote the VET system and adult education programmes to help the unemployed and those in need to gain relevant skills.

Fostering innovative business investment

Structural bottlenecks are holding back competition.

Continue to implement the Market Unity Law and adopt the professional services reform.

Under-investment in knowledge-based capital is holding down productivity growth. Research and development (R&D) spending by firms is low and there is a high brain drain of talented researchers.

Partially reallocate funds from loans to R&D grants to projects and researchers based on performance and international peer review.

Misallocation of capital to low productivity firms within sectors is holding down productivity growth.

In cases when debt forgiveness is not automatic, reduce the period during which bankrupt entrepreneurs are required to repay past debt from future earnings.

Set up small and medium-sized enterprises (SME) bond funds with guarantees provided both by government and SME companies.

Increase public and private funding for innovative firms at the seed and early start-up phases.