On 22 December 2021 the IMF issued a concluding statement following discussions with Spain under Article IV of the IMF’s articles of agreement.

Spain’s economy is recovering from the recession caused by the pandemic and employment is already above pre-crisis levels. After falling by 10.8% in 2020, the economy grew in the second quarter of 2021, although output remains below the pre-pandemic level.

Economic growth is estimated at 4.6% in 2021 and 5.8% in 2022, driven by private consumption in the near term supported by a strong labour market recovery. Investment is expected to strengthen in 2022 as a result of strong demand, favourable financing conditions and an easing of global supply bottlenecks. There is still uncertainty resulting from the possible future course of the pandemic.

Strong public support measures, which included the short-time work scheme (ERTE) and support for the self-employed, limited the economic damage resulting from the pandemic but have weakened public finances. Fiscal policy needs to remain supportive until the recovery is firmly under way; but should become more targeted and should focus on support for the most vulnerable groups. As economic activity will only return to pre-crisis levels in late 2022 or early 2023, fiscal policy must remain supportive during 2022.

Revenue measures are needed to bring the tax-to-GDP ratio closer to that of other European countries. Measures could include broadening the tax base and increasing environmental taxes. The ongoing expert review of Spain’s tax system can provide further input in these areas.

The initial phase of the pension reform has prioritized social acceptability, but additional measures may be required to ensure sustainability. Under the current reform proposal, pension payments will be permanently indexed to CPI inflation and the sustainability factor will be repealed beginning in 2021. Some of cost the pension reform is likely to be offset by some other proposed measures including incentives to increase the effective retirement age and a temporary increase in social security contributions.

Further revenue raising measures could include increasing the maximum earnings subject to pension contributions, and this is expected to be included in the second phase of reforms in 2022.

Measures on housing affordability would support growth and facilitate labour mobility. The draft housing law and national housing plan would introduce targeted rent support programs for vulnerable groups. The proposed supply-side measures, which include an increase in taxes on empty properties and expansion of the social housing stock, would ease pressures on the rental market.

The Law on Climate Change and the Energy Transition set a goal of carbon neutrality by 2050. Although carbon price coverage in Spain is comprehensive, the effective tax rates are low relative to estimated emission damages and are lower than in other euro area countries. Carbon price increases need to be gradual, predictable, and supported by measures to protect vulnerable households.