Until the onset of the COVID-19 pandemic, Spain was experiencing a robust job-rich recovery and had improved its resilience in the aftermath of the global financial crisis, with a more balanced growth pattern, a healthier financial sector, and a lower share of construction in value-added. The impact of the crisis has been more severe than in other OECD countries due to the large scale of the pandemic and the sectoral composition of the economy, with a high share of services and tourism-related activities in employment and value-added. Some of the activities most directly affected by contact restrictions could not be done remotely, either due to their nature or to the lagging use of digital technologies prior to the crisis. The high share of small firms and temporary employment also made Spain more vulnerable to the shock (Figure 1.1).
OECD Economic Surveys: Spain 2021
1. Key Policy Insights
The pandemic has accentuated some persistent structural challenges
Figure 1.1. The impact of the COVID-19 shock has been severe
1. Trade includes wholesale and retail trade and repair of motor vehicles.
2. Micro enterprise refers to those with less than 10 employees.
Source: OECD Economic Outlook: Statistics and Projections (database); Bank of Spain; and Eurostat, Structural Business Statistics.
Swift and extensive income and liquidity support measures mitigated the economic and social impact of the pandemic (see below). The short-time work schemes and the support to the self-employed limited the impact on unemployment and household incomes, while public loan guarantees helped prevent a disruption to the supply of credit in contrast to the global financial crisis. However, the crisis will exacerbate Spain’s key challenges of low potential growth and high unemployment (Figure 1.2). The pandemic has shown the benefits of a more digitalised economy (e-commerce, teleworking) and accelerated the pace of digital adoption, which can help boost growth through productivity gains (Chapter 2). Addressing structural issues in labour markets will be key to an inclusive recovery. Spain also entered the crisis with existing risks around long-term fiscal sustainability. Public debt to GDP was already high at 95.5% in 2019, only 5% below its peak in 2014, and Spain is projected to have one of the highest old-age to working-age ratios in the OECD in 2050.
Figure 1.2. Boosting potential output and lowering unemployment are key challenges
Source: OECD Economic Outlook: Statistics and Projections (database).
The authorities took extensive economic and social measures to protect vulnerable groups, via guarantees for the supply of basic essential utilities, deferral of rent payments, mortgage and other personal loans and taxes, eviction bans, rent freezes, and a new rental aid program. A national minimum income guarantee scheme was also introduced in May 2020. These measures contributed to shielding most households from the immediate effect of the shock, but certain groups are more affected (CaixaBank, 2020[1]). The pandemic could raise inequalities, as most impacted sectors tend to employ a traditionally high proportion of women, youth and low-skilled workers on temporary contracts.
Despite improvements in recent years, income inequality, the share of people at risk of poverty and in-work poverty were relatively high before the crisis (Figure 1.3). These outcomes have been linked to labour market segmentation, lower average hours worked and household structure (e.g. one working adult with children) (EC, 2019[2]). Spain also displays large regional disparities in terms of education and labour market outcomes, compounded by low interregional mobility (OECD, 2018[3]). The crisis had an uneven effect on regions due to heterogeneity in the severity of the health crisis, the sectoral structure (e.g. share of tourism) and existing types of employment (Figure 1.4), which can exacerbate regional disparities.
Figure 1.3. Income inequality and poverty rates were relatively high before the crisis
1. Percentage of individuals living in households with disposable income below 50% of the median income, among all individuals living in a given type of household with a head of working age and at least one worker.
Source: OECD Income Distribution database; and Eurostat, Income and Living Conditions database.
Figure 1.4. The uneven effects of the crisis on regions can exacerbate regional inequalities
1. The number of jobs in each country or region that can be carried out remotely as the percentage of total jobs. Countries are ranked in order by the share of jobs in total employment that can be done remotely at the national level.
Source: OECD (2020), OECD Regions and Cities at a Glance 2020; INE, Labour Market Statistics; and Eurostat, Regional National Accounts database.
Against this background, the main messages of the survey are:
Macroeconomic policy needs to remain supportive as long as the economy remains vulnerable, with an increasing use of targeted policies. Once the recovery is firmly underway, the government should announce a medium-term fiscal consolidation strategy to ensure fiscal sustainability.
A durable and inclusive recovery will require improving the quality of jobs via lower labour market segmentation, better skills and enhanced support for job seekers.
Accelerating the digital transformation – notably by reducing barriers to technology adoption and use, including through higher digital skills and innovation – should facilitate the changes of the economy to a post-pandemic world, while boosting productivity growth.
Mitigating the social and economic impact of the pandemic remains a priority
Spain has been hit hard by the pandemic
The three waves of the pandemic in the spring and the autumn of 2020 and early 2021 led to containment measures and severely strained the health system (Figure 1.5, Panels A-C). The first confinement and health measures were taken by the central government with a state of emergency (14 March-21 June). Since June, containment measures are taken at the regional level, which have the competency for health policies. The state of emergency introduced in October, which allowed the introduction of a national night curfew, ended on 9 May. As the vaccination campaign started, the reduction in cases led to the partial lifting of some containment measures since early March, although some localised mobility restrictions and limited operating hours and capacity constraints remain, with regional differences.
Figure 1.5. The COVID-19 pandemic in Spain
1. The Oxford COVID-19 Government Response Tracker index is a composite measure based on nine response indicators including school closures, workplace closures, and travel bans, and is scaled from 0 (no restrictions) to 100 (highest category of restrictions). The OECD average covers all OECD countries where data are available for all components.
Source: Oxford University; and OECD Calculations based on Our World in Data, OECD Population Statistics, Eurostat Population Statistics (as of May).
Additional resources reinforced the capacity of the health system to fight the pandemic. EUR 4.4 billion (0.35% of GDP) was allocated to health spending at different levels of government in March 2020, and the COVID-19 Fund (a non-repayable transfer from the central government to the regions of EUR 16 billion) transferred EUR 9 billion based on health expenditure indicators. Until the successful and wide deployment of the vaccines, social distancing and hygiene measures should be maintained, and capacity in terms of health workers, critical medical supplies and infrastructure should continue to be strengthened. Cross-country evidence suggests that an effective testing, tracing and isolation strategy is key to controlling the virus, while minimising the impact on economic activity (OECD, 2020[4]). Testing capacity has increased over time in Spain (Figure 1.5, Panel D).
In November 2020, the government announced its plan for the distribution of vaccines (140 million doses expected), which would be free, voluntary and administered through the public healthcare system (Government of Spain, 2020[5]). The strategy is continuously updated to reflect changing conditions, most recently in April 2021 (Government of Spain, 2021[6]). According to a March survey, the intention to get vaccinated in Spain, at 82%, is high compared to the 15 countries for which data are available, similar to Italy, and higher than the 59% in France (WEF and IPSOS, 2021[7]). Although gathering pace in recent weeks, the initial roll-out of vaccination has been slow, like in most EU countries, mostly due to the slow delivery of the vaccines. 33% of the Spanish population had received at least one dose of vaccine in mid-May, compared to 46% in the United States or 53% in the United Kingdom. An acceleration of the vaccination process, linked to the availability of vaccines, is necessary as the spread of variants could endanger the control of the epidemic. Gradual lifting of containment measures and close monitoring of cases will also be important with the end of the state of emergency.
The economic recovery is fraught with high risks
The Spanish economy experienced an unprecedented downturn of -10.8%, in 2020, given the strength of infections and strict containment measures. After falling steeply, industrial production, retail trade and business confidence have not fully recovered, with a more severe impact on services (Figure 1.6). In response to the pandemic, household and firms’ bank deposits have risen and increased by 7.1% and 10.9%, respectively in March 2021, compared to a year ago. Household savings reached a record high of 22.5% of disposable income in the second quarter of 2020 and remained elevated at 15% in the third quarter. Exports and imports also declined strongly in 2020, reflecting the collapse of tourism and the sharp reduction in domestic demand, respectively. After recovering in the summer, mobility has declined since then, but remains above that during the spring lockdown (Figure 1.6, Panel D).
Tourism contributes 12.3% of GDP and 12.7% of employment (Figure 1.7, Panel A), while international tourism expenditure accounts for 16% of export revenues and 50% of service export revenues. The crisis hit hard the services trade balance, which traditionally contributes positively to the current account surplus (Figure 1.7, Panel B). Foreign tourism, which makes up around half of tourism activity, came to a halt during the spring confinement and recovered only slightly since (Figure 1.7, Panels C-D). Estimates point to a 75.4% drop in tourism activity between April 2020 and March 2021 (Exceltur, 2021[8]), with a heterogeneous effect across regions (Bank of Spain, 2020[9]). Tourism could also be adversely affected by Brexit, given that the UK accounts for 21.6% of tourist inflows and expenditures, with uneven regional effects (Buesa et al., 2020[10]).
Figure 1.6. Activity is recovering slowly
Source: OECD Monthly Economic Indicators; Eurostat, Quarterly Sector Accounts database; Refinitiv; and Apple (2021), Mobility trends reports.
After the steep decline in 2020, GDP is projected to rebound from the second half of 2021, with the gradual deployment of vaccines enabling the release of pent-up demand and the support of the Next Generation EU funds (Table 1.1). Recent projections suggest that tourism activity in 2021 will still be 37.6% below the levels of end-2019 (Exceltur, 2021[11]), which will moderate the recovery in 2021. However, tourism will gain momentum in 2022, resulting in a positive contribution of net exports. Policies will continue to limit job losses and cushion the damage to the productive capacity in 2021. A reduction in uncertainty will lead to a decline in precautionary savings and support private consumption, but not all household savings will be unwound given the incomplete recovery of the labour market. Business investment will pick up from the second half of 2021, supported by low interest rates, declining uncertainty and the implementation of the recovery plan. However, some firms whose financial positions weakened considerably could limit the extent of the recovery.
Figure 1.7. Tourism sector was badly hit
Source: OECD Tourism Statistics (database); Eurostat, Balance of Payments (database); and INE, Tourism Statistics.
The short-term outlook is subject to particularly high uncertainty. A higher than projected rise in insolvencies, as policies are wound down, could dent economic prospects. A slower recovery of the main trading partners would also delay the recovery. On the upside, a faster-than-projected vaccination, and a decline in precautionary savings, and a swifter use of EU funds would raise growth. In addition, other possible shocks include prolonged and strict national lockdowns beyond the first half of 2021, due to lower-than-expected effectiveness of vaccines (Table 1.2).
Table 1.1. Macroeconomic indicators and projections
Annual percentage change, volume (2015 prices)
1. Contribution to changes in real GDP
2. As a percentage of potential GDP.
3. As a percentage of the labour force.
4. As a percentage of household disposable income.
5. As a percentage of GDP.
Source: OECD (2021), OECD Economic Outlook: Statistics and Projections (database), May.
Table 1.2. Events that could lead to major changes in the outlook
The crisis has increased financial stability risks
Spain entered this crisis with reduced macro-financial vulnerabilities from the global financial crisis, in terms of the end of the excessive credit growth fuelled by the housing bubble, and stronger private sector (including banks) balance sheets (Figure 1.8). Tier-1 and CET1 capital ratios are higher than minimum requirements, but the latter, at 12.9% in December 2020, is 3 percentage points lower than the euro area average. In February 2021, the ratio of non-performing loans (NPLs) to GDP was 4.5%, close to the EU average. However, elevated public debt has been a growing vulnerability since 2007, which can also have implications for financial stability, with banks holding domestic government bonds, at 7% of assets (IMF, 2020[12]). The exposure of some banks to emerging markets heavily impacted by the crisis through subsidiary operations (Brazil, Mexico, Turkey), which helped mitigate the effects of the great financial crisis, creates new risks.
A number of financial measures were taken at both the European and national level in response to the crisis, such as the relaxation of capital and liquidity requirements, and higher flexibility in accounting rules and computation of regulatory capital, while banks were asked not to pay dividends until January 2021 and exercise prudence regarding dividend distribution thereafter.
Figure 1.8. Macro-financial vulnerabilities have changed since 2007
Index scale of -1 to 1 from lowest to greatest potential vulnerability, where 0 refers to long-term average, period since 1970¹
1. Each aggregate macro-financial vulnerability dimension is calculated by aggregating (simple average) normalised individual indicators from the OECD Resilience Database. Individual indicators are normalised to range between -1 and 1, where -1 to 0 represents deviations from long-term average resulting in less vulnerability, 0 refers to long-term average and 0 to 1 refers to deviations from long-term average resulting in more vulnerability. The capital ratios, return on assets and equity refers to the banking system.
Source: Calculations based on OECD (2020), OECD Resilience Database, November.
The pandemic increased the financial weakness of some segments of firms and households, through a loss of activity and income, and higher debt accumulation in the case of firms (Bank of Spain, 2021[13]). Firms’ debt ratio increased in 2020 (Figure 1.9, Panel A). According to Bank of Spain calculations and simulations for firms reporting to the Central Balance Sheet Data Office Quarterly Survey, the percentage of firms posting losses rose by 8 percentage points to 34% in 2020, with a disproportionately higher effect on SMEs in the most impacted sectors (Bank of Spain, 2021[13]). An OECD accounting exercise suggests that young, small and low-productivity firms in sectors with low intangible intensity and more affected by containment measures are likely to have higher insolvency risks (Box 1.1).
Policies helped to mitigate the impact on households and firms, but as support measures are gradually unwound, NPLs are likely to increase. The extensions of the maturity period to pay the whole loan, the grace periods for the payment of the principal of the loan, and the deadline to apply for loans under the public guarantees until December 2021 will limit an immediate rise in NPLs. In addition to the public loan guarantees (see below), certain loan moratoria for mortgage and non-mortgage loans, amounting to EUR 56.7 billion (8% of total credit granted by Spanish credit institutions for the loan portfolios that qualify for the moratoria) in January 2021, were introduced (Bank of Spain, 2021[14]), which can increase NPLs going forward.
The increase in loan loss provisions in preparation for these contingencies and fall in revenues lowered bank profitability, as reflected in sharp falls in their return on assets and equity in 2020 (Figure 1.8). Supervisors need to continue to monitor closely banks’ forward-looking plans for resolving NPLs and ensuring resilient capital positions. It will be important to incorporate an analysis of how borrowers qualifying for moratoria can resume their loan repayments in these plans. In addition, the authorities should start planning for a potential need for longer-term restructuring of payment obligations, as these schemes aim to prevent short-term liquidity needs (see below).
Figure 1.9. Corporate debt and housing markets pose risks
Note: In panel B, only January and February data is used for 2021Q1.
Source: Bank of Spain; Eurostat, House Price Indices; and INE.
Future bank profitability could be improved by higher efficiency through cost-cutting and better digitalisation (Toloba and Del Río, 2020[15]). The FinTech sandbox introduced in November 2020 can help banks develop new financial products and services. Regulatory sandboxes allow the pilot testing of newly developed technologies within a well-defined space and duration, with safeguards to contain the consequences of failure. While regulatory sandboxes are emerging as a new way to increase flexibility, it will be important to monitor their effectiveness in terms of balancing consumer protection and innovation (OECD, 2018[16]). The consolidation of the banking sector, such as the recent two mergers of four banks, can also enhance efficiency, but the impact on competition needs to be monitored closely.
The slowdown in housing markets could also potentially lower bank profits. The housing market was already cooling down in terms of activity and prices in 2019 (Figure 1.9, Panel B), but the strict spring lockdown led to a sharp fall in sales in the residential and commercial real estate markets, which started to pick up with the relaxation of restrictions. The fall in house prices was much less than that in the global financial crisis, reflecting the lack of widespread overvaluations prior to the pandemic. Given the income shock and the uncertainty of the situation of households, demand is recovering more slowly than supply. Housing market developments may be uneven across regions and types of property, given the heterogeneity in prices prior to the crisis, and contribute to downside risks to the economic recovery and credit quality of bank assets, even though risks have been contained so far.
Box 1.1. The effects of the shock on firm viability: an empirical simulation
Figure 1.10 presents calculations, based on the methodology in (Demmou et al., 2021[17]), on the percentage of solvent firms, which may turn distressed due to the COVID-19 shock, but does not take into account the policy support measures, so should be treated with caution (see (Blanco et al., 2020[18]) for how policies have helped potential solvency risks). It utilises data for 188 767 Spanish firms in manufacturing and business non-financial services from the ORBIS database. The sample excludes firms that would have been distressed (firms with negative book value of equity at the end of 2018) and would have experienced negative profits even in normal times, hence presents the incremental effect due to the shock.
The results suggest that 7.5% of otherwise viable companies could become distressed, i.e., the book value of their equity becomes negative. Young, small and low-productivity firms in sectors with low intangible intensity and more affected by containment measures are estimated to have higher insolvency risks. Furthermore, calculations suggest that the predicted decline in profits of around 35% impairs firms’ ability to service their debt and around 40% of firms would not be profitable enough to cover their interest expenses. Relying on historical experiences, an increase of firm financial leverage ratios consistent with the predictions of this model is expected to decrease the investment ratio by 2.2% in Spain.
Figure 1.10. The share of viable firms predicted to become distressed varies by firm characteristics
Note: The figure shows the percentage of distressed firms in a scenario of a sharp drop in activity lasting two months (a confinement period), followed by progressive recovery in the first seven months and a second, relatively smaller, outbreak from the eighth month onwards, accompanied by more limited lockdowns in the remaining part of the year (see (Demmou et al., 2021[17]) for details). Firms are defined as distressed if their book value of equity is predicted to be negative one year after the implementation of confinement measures. Note that the sample is restricted ex-ante to firms having both positive profits and book value of equity in the 2018 reference year. Intangible intensity is measured following (Demmou, Franco and Stefanescu, 2020[19]), as the median ratio (across firms within industries) of intangible over total assets. Productivity levels, defined according to quartiles within each (2-digits Nace Rev.2) industry of multi-factor productivity computed according to (Wooldridge, 2009[20]) value added based methodology. Age is defined as the difference between 2018 and the year of incorporation of the firm and young firms are those with less than 5 years, mature firms those from 5 to 10 years and old those more than 10 years. Small enterprises are those with 10 to 49 employees, medium enterprise those with 50 to 249 employees and large enterprise those with 250 or more persons employed.
Source: OECD calculations based on ORBIS.
Policy support should continue, but adapt to the evolution of the pandemic
The government introduced direct fiscal support (4% and 2.3% of GDP in 2020 and 2021, respectively) and liquidity measures (14.3% of GDP) to address the impact of the pandemic. Fiscal support should continue until recovery is firmly underway, with a view to be selective and targeted to those most affected by the crisis. For example, sector-based plans were launched for tourism, transport and the automotive industries in June-July 2020. In October 2020, the government announced a training plan to reach 70 000 tourism workers and, in December 2020, a reinforcement plan for hospitality, commerce and tourism (EUR 4.2 billion), consisting of measures related to commercial rentals, loan guarantees and tax deferrals, was introduced.
Finding the right balance between the protection of firms and workers, and their necessary adjustment to the new economic reality, as the pandemic evolves, will require a constant reassessment and adaptation of measures. This could require the phasing out or refining of some existing measures, in the absence of strict national lockdowns, as recovery commences.
The main measures to preserve employment and support household income were special short-time work schemes (ERTEs) and the extraordinary allowance for the self-employed. The former reached 3.6 million workers (23% of salaried workers) at the peak of the crisis (Figure 1.11, Panel A), but has declined, except in some regions and tourism-related sectors. In response to the subsequent waves, these policies were extended until 31 May 2021 and are likely to be extended further. Given the success of these schemes, the authorities plan to refine the system as an employment adjustment tool, as part of the national recovery plan.
Over time, ERTEs were modified to increase incentives for a gradual return to work (higher social security contribution exemptions for reinstated workers than those that remain fully on ERTEs), to distinguish companies that are partially or fully affected by the containment measures, and to be targeted towards sectors most impacted by the pandemic. Such targeting of ERTEs should continue. The ability to maintain benefits when taking up a job at another firm could also be introduced to pave the way for a potential reallocation, if needed. Some features of the scheme could also limit the future uptake by vulnerable firms, as the prolongation of the crisis has increased insolvency risks. For example, firms are required to maintain employment for at least six months and if they fire one worker, they have to return all the aid they have received for all workers, not only those that were fired (de la Fuente et al., 2020[21]).
Ensuring that all workers on ERTEs, especially those in sectors facing the longest recovery periods, get training options is crucial. Since March 2020, one million workers on ERTEs have received some type of training, mostly in the hotel and catering, commerce and metal sectors. Half of this training was provided by firms receiving public funding through rebates. Since October 2020, workers on ERTEs are given priority for training, which is welcome. As some firms, especially SMEs, can face difficulties in providing training even under normal times (Chapter 2), there might be a larger role for public provision of training for workers on ERTEs. In addition, training priorities for firms and workers could differ in the sense that some workers might need to reallocate to other firms and sectors.
The impact of the crisis on labour markets, has been uneven across sectors and groups (Figure 1.11, Panels B-C), suggesting the need for more targeted interventions in the next phase of the recovery. Certain constrains on dismissals for reasons related to COVID-19, which are still in place, were introduced in March 2020. While these measures supported workers during the initial confinement period, strict limitations to economic dismissals may inhibit restructuring processes and slow down the recovery during post-confinement, when combined with generous ERTEs. Some workers could be locked in unviable companies instead of being taken care of by public employment services, which could offer re-training and other support. Labour mobility in terms of moving from sectors whose activity may remain subdued for some time to those that may be growing quicker (such as health care and online and delivery services) can also be impeded (OECD, 2020[22]). The dismissal restrictions should not be further extended and should be replaced with targeted support to the most vulnerable. Temporary enhancement to the unemployment benefit system and more effective active labour market programmes would help.
Figure 1.11. The impact on labour markets varies with sector and worker characteristics
Source: Ministry of Inclusion, Social Security, and Migration.
Firms, especially SMEs and the self-employed, were provided liquidity support through a number of measures, including a moratorium on tax debt and social security contributions, the deferral of tax payments, and the option to declare taxes based on an estimate of their current levels of activity, rather than on the volume of business in 2019. The most important policy tool was public loan guarantees (13% of GDP). While the size of the guarantee was less than in peer economies, the take-up rate of the initial EUR 100 billion scheme was much higher in Spain, reaching around 90% in March 2021, with SMEs and the self-employed accounting for 74% of the total, with a large sectoral variation (Figure 1.12, Panel A). In July 2020, a EUR 40 billion additional guarantee scheme geared towards new investment by viable firms was created.
Spain also introduced a temporary insolvency moratorium, which remains in effect until December 2021. Together with the public loan guarantees, this has limited a rise in insolvencies, according to official bankruptcy statistics (Figure 1.12, Panel B). A prolonged extension of this moratoria could prevent the restructuring of viable firms’ debt or liquidation of non-viable firms and create a backlog of insolvency cases (García-Posada, 2020[23]). The prolonged existence of unviable firms can lower investment and employment growth, discourage the entry of new firms and prevent the allocation of resources to more productive firms (Adalet McGowan, Andrews and Millot, 2017[24]). Hence, the moratorium should not be extended further, unless the recovery is disrupted. Instead, targeted direct aid to firms and modification to the restructuring processes to make them more efficient should be preferred.
Figure 1.12. Policies helped cushion some of the impact on firms
Source: Ministry of Economic Affairs and Digital Transformation; Ministry of Inclusion, Social Security, and Migration; and INE.
While debt financing has succeeded in addressing immediate liquidity constraints, equity financing could play an important role in recapitalising firms, which suffer from financial difficulties solely due to COVID-19, but are likely to return to profitability in the future. Hence, the creation of the EUR 10 billion public equity fund to support the solvency needs of strategic firms and the EUR 1 billion recapitalisation fund for medium-sized firms (e.g. ordinary or participative loans) are welcome. Their effectiveness will depend on developing a credible exit strategy of public funds (mechanisms to incentivise all parties to wind down support when economic conditions improve) and monitoring the associated contingent liabilities (OECD, 2020[25]).
In March 2021, a new line of direct aid (EUR 7 billion) to enable regions to grant non-reimbursable aid to viable firms in the most impacted sectors, whose income fell by more than 30% compared to 2019, was introduced. The funds could be used for the payment of invoices with suppliers, fixed costs and other debt. The number of eligible sectors were expanded in April 2021. In addition, EUR 3 billion is allocated to help with the restructuring of financial debt related to the pandemic, by allowing the state to join the refinancing and restructuring of loans made under the public guarantee, which will be agreed by the financial institutions and their clients. The conditions of eligibility and a code for good practices are to be established soon. These measures are welcome and should be implemented without delay to prevent unwarranted insolvencies. For example, some regions might not be equipped with resources to identify swiftly viable firms that should be supported and clear guidelines for banks are required to start the potential restructuring of loans. These could be accompanied by other incentives for private creditors to restructure debt, such as tax incentives (e.g. tax exemption for creditors who forgive part of debt). Finally, if the crisis persists longer, there might be a need to increase the amount of funding for this type of direct aid.
At the same time, it will be important to address other remaining gaps in the insolvency regime, as efficient and speedy restructuring of viable firms in temporary distress can prevent their unwarranted liquidation and allow them to increase investment. One way to achieve this is the use of out-of-court procedures for restructuring processes, which is being planned as part of the transposition of the 2019 EU Restructuring and Insolvency Directive (Chapter 2). Even before the crisis, the estimated time needed to resolve litigious civil and commercial cases was high (Figure 1.13). In addition, evidence suggests a negative relationship between judicial inefficiency (in terms of court congestion) and firm investment at the local level in Spain (Dejuán and Mora-Sanguinetti, 2019[26]). Hence, out-of-court restructuring processes should be promoted, especially for SMEs. For example, in 2020, the Netherlands adopted the Act on Confirmation of Private Plan, which modernises the Dutch insolvency law and introduces fast and flexible restructuring options, in response to the COVID-19 crisis.
Figure 1.13. The average time needed to resolve civil and commercial cases is high
First instance, in days
Source: EU Justice Scoreboard 2020 (database).
Containing medium-term fiscal challenges and supporting employment for a sustainable recovery
A durable recovery will require improving productivity growth, by boosting digitalisation, innovation, and investment in intangible capital (Chapter 2), and creating high-quality jobs, by addressing structural problems in labour markets, such as high duality (below). These reforms can also contribute to improving fiscal sustainability in the medium-term, without derailing the economy, complementing fiscal and pension reforms. Box 1.2 quantifies the impact of some of these reforms discussed in this survey, which are quantifiable, on growth and fiscal balances.
Addressing medium-term fiscal vulnerabilities
While fiscal policy should remain supportive until the recovery is firmly underway, as discussed above, lowering public debt as a share of GDP, which has increased to 120% in 2020, should be prioritised once economic growth is on a solid path. According to OECD simulations, which are surrounded by high uncertainty, Spain’s public debt would only decline to 116% of GDP by 2050 in a scenario offsetting ageing costs, but rise to 171% if ageing costs are not offset (Figure 1.14). In a positive scenario of higher growth by 1 percentage point, the debt-to-GDP ratio would fall to 82%, highlighting the importance of structural reforms in facilitating a reduction in fiscal sustainability risks in the medium-run. While the low cost of financing decreases risks related to high public debt in the short-run, contingent liabilities from the public loan guarantees can exacerbate the spillover effects from the real and financial sectors to public finances.
In the medium-term, a credible and transparent fiscal consolidation strategy, including every level of government, is needed. This should be a gradual fiscal consolidation to ensure that economic recovery is not impeded, while bringing credibility to fiscal sustainability and lowering vulnerabilities to changes in financial market perceptions. The decline in the budget deficit between 2014 and 2019 was driven by nominal GDP growth and the fall in interest expenditures (Table 1.3). A gradual improvement in the structural deficit will be key to putting the debt path on a downward path.
Figure 1.14. The impact of the crisis on fiscal sustainability is projected to be large
Public debt, as a percentage of GDP
Note: The scenario offsetting ageing related spending consists of the Economic Outlook No. 108 projections up to 2022, and the long-term projections of the Economic Outlook No. 108 database afterwards, except for the primary balance, which is projected to improve gradually until 2028 and kept constant after. The “higher growth” scenario assumes higher real GDP growth by 1 percentage point each year compared to this scenario. The “higher interest rate” scenario assumes higher interest rate by 1 percentage point from 2022. The “without offsetting ageing costs” scenario includes European Commission projections for net total aging costs (net public pensions, long-term care and health costs, adding 3.5 percentage points of GDP to annual government spending in 2050). These estimates do not include the potential changes to the pension system discussed below, which will increase the size of aging costs, unless compensating measures are taken.
Source: Adapted from OECD (2020) Economic Outlook: Statistics and Projections (database); and Long-term baseline projections; European Commission (2018), The 2018 Ageing Report - Economic and budgetary projections for the 28 EU Member States (2016-2070).
Table 1.3. Fiscal indicators
As a percentage of GDP
1. As a percentage of potential GDP. The underlying balances are adjusted for the cycle and for one-offs.
Source: OECD (2021), OECD Economic Outlook: Statistics and Projections (database).
Box 1.2. Potential impact of reforms on growth and the fiscal balance
The impact of some key structural reforms proposed in this Survey are estimated in Table 1.4 using historical relationships between reforms and growth in OECD countries. The estimates are illustrative.
Table 1.4. Potential impact of selected proposed reforms on GDP per capita
Effect on the level of GDP (through employment and productivity)
Note: The calculations are based on a 25% policy change scenario, which corresponds to increasing spending on childcare from 0.5% of GDP, business R&D from 0.7% of GDP and ALMP spending per unemployed as a share of GDP per capita from 15%. The increase in effective retirement age is estimated to be 1.5 years.
Source: OECD calculations based on (Égert and Gal, 2017[27]).
Table 1.5 quantifies the illustrative direct gross fiscal impact of selected recommendations included in the Survey. A number of recommendations (e.g. efficiency gains in public spending) are not quantifiable in terms of their fiscal impact and there will be additional revenues associated with higher GDP induced by structural reforms.
Table 1.5. Illustrative direct fiscal impact of selected recommended reforms
Note: They are based on the following assumptions: i) increase in government spending on primary and secondary education to the OECD average of 3.1% and on childcare to the OECD average of 0.6% ; ii) an increase in ALMP spending by 0.3% of GDP; iii) the estimated change in public pension spending in line with an increase in retirement age with life expectancy; iv) an increase in VAT and environmental taxation as a share of GDP to close half the gap to the EU average (from 6.6% to 6.9% of GDP and from 1.8% to 2.1% of GDP, respectively), with flanking measures to support poor households most affected costing about one half of the increase in revenues.
Source: OECD Secretariat and AIReF.
Increasing the effectiveness of the tax system
A number of tax benefits, due to numerous exemptions, deductions and special reduced rates, lead to foregone revenues and distort the effectiveness of the tax system in Spain (AIReF, 2020[28]). A tax reform could contribute to lowering the deficit (together with improved expenditure efficiency as discussed below) and debt, while helping to finance additional spending to achieve social, distributional and environmental objectives. However, major tax reforms should wait until the recovery is firmly underway, and be accompanied by targeted social transfers to minimise their impact on low-income households. Nevertheless, progress can already be made on the design to ensure effective implementation. Hence, the formation of an expert committee for tax reform in April is welcome.
Raising revenues from value-added (VAT), excise and environmental taxes, which are lower than the EU average (Figure 1.15, Panel A), as recommended in the 2018 Economic Survey of Spain, would limit distortions to economic growth. For example, the reduced rates in VAT lower the efficiency of VAT collection and those that disproportionately benefit higher income deciles should be gradually aligned to standard rates (Figure 1.15, Panels B-C; (AIReF, 2020[28])). In terms of environment taxation, there is room to improve carbon pricing, both for road and non-road emissions (Figure 1.16). For example, the transport sector accounted for 26% of emissions in 2018, but transport taxes are only 12.7% of total environmental taxes, compared with the OECD average of 23%. Hence, tax rates on fuel for both types of emissions can be raised.
The Budget 2021 includes increases to personal income tax for high-incomes (annual income above EUR 300 000), the tax rate applicable to savings income (dividends, interest and certain capital gains exceeding EUR 200 000), and the VAT rate on sweetened drinks, and a reduction in tax exemptions from 100% to 95% for dividends and capital gains from foreign subsidiaries. A law on prevention and fight against fraud, a 15% tax on Real Estate Investment Trusts, a waste tax and a tax on non-reusable plastic are also under discussion in the Parliament. It is important to ensure that any tax increase does not impede the economic recovery in the short-run.
Since 2013, Spain had been working with some other EU member states (Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia and Slovenia) for the adoption of a Directive for the implementation of a financial transaction tax (FTT). In the absence of an agreement, the authorities introduced a FTT of 0.2% on the purchase of shares of Spanish companies with a market capitalisation of more than EUR 1 billion, which came into effect in January 2021. This tax is similar to the one adopted in France and Italy in 2012 and 2013, respectively. However, such taxes can be distortionary by increasing misallocation of capital and create high administrative costs, while the expected revenue is relatively low at less than 0.2% of tax revenues. Lack of international harmonisation creates a risk that Spanish firms can try to become tax residents in another jurisdiction. Similarly, a digital services tax of 3% for firms with a large turnover in Spain came into effect in January 2021. While this tax will raise revenues, it can create distortions in the absence of international coordination. In this context, cooperation with the ongoing OECD/G20 BEPS project, which aims to find a global solution to the tax challenges related to the digitalisation of the economy, is key (OECD, 2020[29]). Hence, the effects of these taxes should be monitored closely and efforts for international coordination should continue.
Figure 1.15. There is room to increase revenues from value-added and environmental taxes
Source: Eurostat (2020), Tax Revenue Statistics; OECD (2020), Consumption Tax Trends 2020; and AIReF (2020), Spending Review.
Figure 1.16. Carbon pricing can be improved
1. 2018 tax rates as applicable on 1 July 2018. CO2 emissions are calculated based on energy use data for 2016 from IEA (2018), World Energy Statistics and Balances. Emissions from the combustion of biofuels are included. The scale of the vertical axis differs between panels.
Source: OECD (2019), Taxing Energy Use 2019: Using Taxes for Climate Action, OECD publishing, Paris.
Improving public spending efficiency
Spain experienced a decline in the quality of public spending mix in the aftermath of the global financial crisis, with public investment as a share of GDP among the lowest in the OECD in 2019 (Figure 1.17; (Bloch and Fournier, 2018[30])). This likely reflects the fact that it is easier to cut investment than current spending to meet short-term budgetary pressures. For example, government spending on R&D decreased from 0.64% of GDP in 2009 to 0.47% in 2018. Increasing public investment, especially in areas of digitalisation, innovation, environment, and education, can not only directly boost productivity, but also generate spillover private investments (Chapter 2).
In the near-term, the Next Generation EU funds will help increase public investment. Spain is eligible to receive EUR 154 billion (11% of 2019 GDP, in current prices) in 2021-26, of which EUR 82 billion are in transfers. Spain’s national recovery plan, approved in April 2021, outlines the envisaged use of these funds, in the next three years (Government of Spain, 2021[31]). Ecological transition (e.g. retrofitting of buildings, creating charging stations for electric vehicles, and upgrading water infrastructure) and digital transformation (e.g. digital skills, digitalisation of public administration, healthcare, and agriculture sectors and SMEs) represent 39% and 29% of the total investment, respectively. The other two main pillars of the plan are to promote social cohesion, by addressing labour market challenges and improving housing affordability, and gender equality (Box 1.3). The plan outlines a large number of reforms in many areas recommended in past surveys and discussed in this one, but the design of policies to achieve these outcomes will be crucial. To better make use of these funds, prioritisation of the investments and reforms that facilitate long-term growth is key. For example, the transposition of the EU Directive on insolvency should be brought forward. Aiming at political and social consensus on reforms would help ensure that reforms are long-lasting, although it should not unduly delay necessary reforms in case such consensus cannot be reached.
The Budget 2021 already includes the use of EUR 26.6 billion of these funds, with 50% allocated to public investment, 30% to assistance for private sector investment and 20% for current spending. These include increases for health (reinforce primary care and buy vaccines), education (including scholarships and modernisation of vocational education and training), active labour market policies, social spending on dependency, child poverty and gender policies (housing and minimum income) and spending on infrastructure, R&D and innovation, and support to SMEs. Sectoral policies to decarbonise the industrial and energy sectors and support the tourism and retail sectors are also included. Depending on fiscal multipliers and absorption capacity, the estimates for the effect on GDP in 2021 vary around 1.5% (Bank of Spain, 2020[32]; AIReF, 2021[33]). The government estimates the plan to increase GDP by 2% on average each year and create 800 000 jobs in the period 2021-23 (Government of Spain, 2021[31]; Government of Spain, 2021[34]).
Figure 1.17. Public investment has declined in the past decade
1. Current expenditures include government final consumption, social security benefits, property income and other outlays.
Source: OECD (2020), OECD Economic Outlook: Statistics and Projections (database), November.
The uncertainty regarding the absorption of funds in 2021 is high. While Spain is expected to fully absorb the structural EU funds of the 2014-20 period by 2023, which is the deadline for submitting claims for expenditures incurred until 2020, they had only submitted to the EU 45% of their allocated funding by December 2020, which suggests administrative burdens and slow absorption. In December 2020, a new law was introduced to simplify multiple regulations on public procurement and budgetary procedures to reduce red tape, streamline administrative processes and deadlines. To enable the public administration to increase its capacity, rules in the creation of temporary units were eased. To improve public-private collaboration, a list of planned strategic projects and a registry of interested parties was created. These steps are welcome, and their effectiveness should be assessed, and further changes should be made, if needed, over time.
A good governance system with cooperation across levels of government, which is outlined in the Plan, will be key. In December 2020, Spain introduced a multi-level governance system (Official Bulletin, 2020[35]). A commission of ministries will be chaired by the President, which will be supported by a Technical Committee, placed in the Ministry of Finance, the central body for the execution of the plan. Another committee will bring together representatives from different levels of government to increase cooperation and coordination. As regions will be allocated around half of the funds, this set-up is needed and coordination across levels of government is one of the pillars of effective public investment in decentralised economies. It is important to ensure that this multi-level governance system does not lower the speed of absorption, while ensuring accountability.
A recent cross-country OECD study on the governance of the EU structural funds highlights a number of important lessons, such as encouraging stakeholder involvement through the whole process and mobilising private actors and financing institutions (OECD, 2020[36]). In this context, the involvement of the private sector, social partners and other relevant stakeholders in the implementation of the plan should be further clarified, since additional private investment can boost the effectiveness of public investment. In addition, it will also be important to design transparent procedures and criteria for prioritisation of projects and a commitment to some cost-benefit analysis. Recent evaluations found gaps in the design and execution of infrastructure investment in Spain (AIReF, 2020[37]; OECD, 2020[38]), and these challenges are likely to be higher for investment in digitalisation and intangible assets.
Box 1.3. Spanish Recovery, Transformation and Resilience Plan
The Plan contains 110 investments and 102 reforms to strengthen and modernise the Spanish economy, built around 10 policy levers (see Annex B for further details). The main policy areas, some of which are covered in depth in the Survey, are as follows:
Business environment: Firm entry, growth and exit will be facilitated by eliminating obstacles to growth, improving access to finance, removing administrative barriers, improving the functioning of the internal market and reforming the insolvency and justice systems to speed up firm restructuring. The national framework for competition protection will be reinforced and a new public-private venture capital fund to promote start-ups will be created. The Spain Industrial Policy 2030 strategy aims to modernise strategic sectors, especially tourism.
Human capital: A Digital Skills Plan, including the provision of digital equipment to schools and the training of students and teachers, was approved in January 2021. The 2020 Education Law will improve the design and application of new curricula. The Strategic Plan for VET will improve the VET degrees catalogue, the flexibility and accessibility of the system and the recognition and accreditation of skills. A reform of the university system will promote access and the reskilling and mobility of staff and improve the governance of universities.
Technological capital: Digital Agenda 2025 brings together reforms in the areas of connectivity, 5G, Artificial Intelligence, digital skills, the digitalisation of the public administration (labour market, justice and health) and SMEs, among others. Reforms will also increase cyber-security and digital rights. Spain Entrepreneurial Nation Agenda will promote innovative business association clusters and managers’ training.
Innovation: Reforms and investment are planned to increase R&D investment to 2% of GDP via institutional reform and strengthening capacities through evaluation, new innovation tools and digitalisation. National health system will also be modernised further.
Energy and environment: The main priorities are to redirect the productive model, promote decarbonisation, energy efficiency, and the deployment of renewable energy, electrification of the economy, development of energy storage and the circular economy. Conservation and restoration of marine and terrestrial ecosystems, improving the management of irrigation, livestock farming and the revaluation of agricultural land, promoting the digitalisation and green value chains, retrofitting of buildings and upgrading water infrastructure are also planned.
Labour markets: A package of 17 complementary structural reforms are planned to simplify the menu of contracts, transform the ERTEs, streamline hiring incentives, modernise the collective bargaining system, regulate subcontractors and digital workers, and modernise active labour market policies, especially digitalise public employment services.
Territorial cohesion and social capital: Renovation and improvement of the housing stock, facilitation of urban mobility programmes (e.g. intermodal transport hubs, modernise infrastructure), digitalisation of government, improving the efficiency of the justice system, developing a new system to support the vulnerable (e.g. elderly care) to complement the newly introduced minimum income guarantee scheme are planned.
Gender equality: Revamping the childcare system, strengthening regulations to narrow the gender pay gap and equalising maternity and paternity leave are priorities.
Fiscal reforms: Measures to fight against tax fraud and informal economy, tax on digital services and financial transaction services have already been implemented. A reform of environment taxes is also planned. An expert committee for tax reform was set up in April. The pension system will be reformed to ensure purchasing power, separate sources of funds, increase the effective retirement age, reform the self-employed pension system and boost supplementary pension systems. Spending reviews will be reinforced.
In the medium-term, it is important to improve the efficiency of public spending to continue to invest in productivity-enhancing activities and address challenges from population ageing and climate change after the recovery plan time horizon. In this context, 11 spending reviews conducted by the Fiscal Council (AIReF) in 2018-20 identify room to improve efficiency in a number of areas, such as pharmaceuticals, active labour market policies (ALMPs) and hiring subsidies. The recommendations of the reviews should be an integral part of the medium-term fiscal plan.
Sub-national governments accounted for 70% of public investment in 2018, and they are responsible for a large part of public spending in a number of areas, especially health and education (Table 1.6). The recent spending reviews mostly covered public expenditure at the central government level, but also highlighted large regional heterogeneities in spending efficiency (e.g. ALMPs), which can contribute to regional disparities. Hence, spending reviews should be made regularly at each level of government, but this is often impeded by the lack of data collection and quality in some regions that makes evaluation difficult (AIReF, 2019[39]).
In general, more could be done to ensure that a lack of consistent and reliable information on regional policies and evaluation system does not lower the benefits of decentralisation (OECD, 2016[40]). Hence, systemic evaluation of policies at all levels of government should be facilitated. An ongoing OECD project is assessing what the ideal institutional set-up to implement these goals should be in Spain, given the decentralised nature of the economy and based on international best practices. For example, the independence of the evaluator is key. One option would be to extend the mandate of the Fiscal Council. In this case, it would be important to create a formal mechanism to ensure that policy recommendations of the evaluations are reflected as changes in policies, with an impact on spending and fiscal balances within a reasonable time frame.
Table 1.6. Division of responsibilities across different levels of government
Distribution of public spending as percentage of GDP, 2017
Note: Spain has a three-tier system with central, regional and local governments. There are 17 self-governing autonomous regions, 2 autonomous cities, 50 provinces and more than 8 119 municipalities. The map of competences is regulated in the Spanish Constitution and while some are exclusively managed by the central government, most of them are shared between the central and regional governments. Specifically, the central government passes basic legislation and regions regulate and implement their own laws.
Source: The General Comptroller of the State Administration (IGAE).
Addressing pressures from population ageing
The current pension spending as a share of GDP, at 10.9%, in Spain is above the OECD average of 8%, but below some European peer economies. However, population ageing is projected to increase long-term fiscal sustainability pressures (Figure 1.15), with a large rise in the old-age dependency ratio by 2050 (Figure 1.18, Panel A). Spain has undertaken major pension reforms in 2011 and 2013 to address this challenge, notably to raise the effective retirement age and reduce the replacement ratio (OECD, 2018[3]).
Figure 1.18. Pension reform is needed
1. The average effective age of retirement is defined as the average age of exit from the labour force during a 5-year period. Labour force (net) exits are estimated by taking the difference in the participation rate for each 5-year age group (40 and over) at the beginning of the period and the rate for the corresponding age group aged 5-years older at the end of the period. The official age corresponds to the age at which a pension can be received irrespective of whether a worker has a long insurance record of years of contributions.
2. The normal retirement age is the age at which an individual can retire in 2018 without any reduction to their pension having had a full career from age 22.
3. Theoretical pensions of a self-employed worker relative to an employee having both a taxable income (net income or net wage before taxes) equal to the average net wage before taxes, for individuals with a full career from age 22 in 2018 and contributing only the amount that is (quasi) mandatory to pensions
Source: OECD (2019), Pensions at a Glance and OECD (2020), Pensions Outlook.
Two main elements of the 2013 reform have created tensions regarding their social acceptability and have been suspended since 2018, and are planned to be permanently changed, following the main principles for pension reform agreed by the parliamentary committee on pensions (Toledo Pact) in November 2020. First, the sustainability factor (adjustment of the initial pension level to changes in life expectancy), which was temporarily suspended until 2023, will not be reinstated. Second, contributory pension benefits have been increased in line with CPI (1.6% in 2018-19 and 0.9% in 2020) instead of the reform mechanism (Index for Pension Revaluation), which would have implied a growth of 0.25%, based mainly on the structural balance of the pension system. One of the key elements of the pension reform package of the government is to permanently relink pension increases to inflation to preserve the purchasing power of pension benefits and introduce a new adjustment mechanism.
Not applying the indexation mechanism and the sustainability factor implies an increase in expected pension spending as a share of GDP from 11.9% to 15.1% in 2050 (Table 1.7) (AIReF, 2020[41]). It is crucial that adequate and socially acceptable measures to ensure the financial sustainability of the pension system are taken swiftly. The government’s proposed pension reform package is to bring the effective retirement age closer to the legal age, a review of the retirement pension and maximum contribution bases, the progressive convergence of different pension regimes (e.g. self-employed), and the promotion of complementary collective pension systems.
Incentives to retire early should be reduced as the average labour market exit age in 2018 was 61.7, below that of 64.6 in the OECD (Figure 1.18, Panel B). The authorities are currently assessing existing incentives with a view to modify them and are considering establishing benefits for firms that keep older workers. The system does not sufficiently acknowledge long contributory careers and does not incentivise extending working lives after the relevant periods of contributions have been attained, as discussed in detail in the 2018 Economic Survey of Spain. Hence, early retirement schemes should be further disincentivised, and the number of years of contributions required to gain a full pension should be lengthened. In addition, although the previous reforms raise the statutory retirement age over time by two years, this represents only the approximate improvement in life expectancy at age 65 since 2000. The statutory retirement age should therefore eventually be linked to changes in remaining life expectancy, which is the case in Denmark, Finland and Portugal.
Table 1.7. Pension expenditures: different scenarios
Note: The baseline projections assume that pensions are linked to inflation, while the sustainability factor is maintained. It incorporates the parameters of the 2011 reform and calculation period for pensions to 25 years and a central scenario of macroeconomic and migration projections by the AIReF.
Source: (AIReF, 2020[41]).
Policies to extend working lives should be accompanied by measures to enhance older workers’ incentives and ability to stay in the labour market (e.g. lifelong learning). Some potential structural changes due to COVID-19 could also help delay retirement decisions. Evidence based on US data suggests that older workers having access to flexible working hours and telecommuting options tend to delay retirement (Hudomiet et al., 2019[42]). Indeed, in Spain, in 2018, those aged 55 over were 4.5 times more likely to telework than those aged 15-24 (INE, 2020[43]). Hence, the new teleworking law of September 2020 is welcome, as it creates flexibility in terms of working conditions. Mechanisms that ensure firm-level flexibility can also help.
Total assets in private pensions funds is 9% of GDP in Spain, much lower than the OECD average of 36%, and participation rates in voluntary occupational plans are low (Figure 1.18, Panel C). The Budget 2021 plans to promote company-based plans by raising their contributions exempt from taxation, while lowering those on private plans. Greater choice of pension scheme providers and investment options available through employers was recommended in the 2018 Economic Survey of Spain. It is also important to encourage non-standard workers to join funded pension plans, through applying the same enrolment rules to all workers, facilitating access to plans in the workplace, and offering dedicated retirement savings products (OECD, 2020[44]). Part of the new pension reform proposal is the creation of a new public pension fund, which can also help SMEs facing barriers in generating such plans themselves.
The pension contribution rates for the self-employed remain low, compared to standard employees, which reduces their entitlement to adequate benefits. They are allowed to make flat rate contributions and can choose their contribution base beyond a minimum threshold of 42% of the average wage, irrespective of actual income. In June 2020, 85.3% of the self-employed opted for the minimum pension contribution. Consequently, in the full-career case, the theoretical future pension of the self-employed is 42% of the pension of employees with similar earnings (Figure 1.18, Panel D) (OECD, 2019[45]), which could raise old-age poverty. Contribution rates between the self-employed and employees should be harmonised, for example by ensuring that the former pay contributions based on the actual rather than the contribution base of their choice.
Table 1.8. Past OECD recommendations on fiscal and pension policies
Boosting employment and job quality
Active labour market policies
The youth and the long-term unemployment rates were among the highest in the OECD before the crisis, but spending on active labour market policies (ALMPs) per unemployed remained low in international perspective (Figure 1.19, Panels A-B). Given the uneven effect of the crisis on different sectors and firms, there might be a need to reallocate some displaced workers to those with better medium-term prospects (those less impacted by containment measures). Sectors most affected by the crisis in Spain have a greater concentration of less-skilled workers, who tend to perform less IT, numerical, reading and writing-related tasks (Anghel, Lacuesta and Regil, 2020[46]), highlighting the importance of training. In November 2020, the government announced that workers on ERTEs would have priority in access to training, which is welcome. Effective ALMPs are key to facilitate this transition for these and displaced workers, but a recent evaluation by the Fiscal Council has highlighted a number of gaps (AIReF, 2019[39]), so it is appropriate that the recovery plan includes the modernisation of ALMPs.
The share of ALMP spending on training remains low, which can be a barrier to the up-skilling of the labour force (Figure 1.19, Panel C). In addition, training programmes are highly uneven across regions and are not evaluated sufficiently in terms of their effectiveness. Hence, the quality of training and its connection to the labour market should also be raised by increasing the coordinating role of public employment services (PES) with employers and training providers. In Spain, regions limit the entry of training providers from other regions, which can lower quality and increase costs. Increasing the allocation of ALMPs towards training and removing barriers to competition of training centres, as recommended in the 2018 Economic Survey of Spain, would help. Work-place training provided by employers could also be improved (Chapter 2). A number of OECD countries (Austria, Denmark and the Netherlands) have accelerated the use of digital channels to provide timely and relevant training, and explore the options of more informal methods of training, such as posting training videos, reading materials and tests that jobseekers can use directly on PES websites (OECD, 2020[47]). The available digital tools for training in Spain should be further extended.
Figure 1.19. There is room to improve active labour market policies
1. People who have been unemployed for 12 months or longer, as a percentage of unemployed.
2. 15-24 year olds.
3. The average of the countries shown on the figure.
Source: OECD (2020), Labour Force Survey (database); OECD (2020), Statistics on Labour Market Programmes (database); and OECD (2019), Employment Outlook.
The use of profiling tools can help target more costly and intensive services and incentives to jobseekers who are more at risk of becoming long-term unemployed, allow interventions at an earlier stage, and tailor services more closely to the individual needs of jobseekers. Statistical profiling tools rely on statistical models to predict labour market disadvantage as opposed to rule-based profiling, which uses eligibility criteria, or caseworker-based profiling, which relies more on judgement, to classify jobseekers into client groups. As the availability of real-time data has increased, together with the necessary computing power, the use of statistical profiling tools has become more widespread across the OECD (Desiere, Langenbucher and Struyven, 2019[48]). Profiling tools would be particularly useful in Spain to reach workers affected by the pandemic in a timely manner, and could help counsellors develop tailor made activation programmes to those identified as high-risk jobseekers by the profiling model.
The effectiveness of ALMPs largely relies on the capacity of the regional public employment services (PES), but the share of jobseekers in regular contact with the PES or who find their job with PES involvement are among the lowest in the OECD (Figure 1.19, Panel D). Furthermore, the efficiency of the regional PES is very heterogeneous. Despite the move towards the allocation of funds to regional PES based on evaluations according to pre-defined performance indicators, the allocation continues to concentrate on the number of job-seekers (AIReF, 2019[39]). Establishing a clear framework for effectiveness and common impact assessment should be prioritised. This requires better data collection and digitisation of information, which are also highly uneven across regions. Hence, the 30% increase in the resources allocated to ALMPs in the Budget 2021, with plans to increase training for digital skills and digitalisation of PES, is welcome. In April 2021, the distribution of EUR 2.1 billion to regions to modernise their ALMPs and PES was approved. Part of this funding will be allocated to the training of workers on ERTEs and the youth.
Collective bargaining and wage adaptability
Increased labour market flexibility has played a role in promoting the job-rich economic recovery before the pandemic, without a substantial impact on overall poverty, even if it might have reduced average hours worked and increased in-work poverty (IMF, 2020[12]). In particular, the introduction of the priority of firm-level agreements over sectoral and regional agreements and opt-outs from collective agreements have increased wage adaptability. In general, such systems can increase worker reallocation and productivity growth (OECD, 2018[49]). The share of firm-level agreements remained low at around 6% in 2019. However, 22.5% of firms have used internal flexibility measures (remuneration below what was initially agreed or reduction of working hours) in 2019 (Figure 1.20), which were especially used in very large firms and in the hospitality and arts sectors.
Figure 1.20. The use of internal adaptability measures by firms can help during crisis times
Percentage of firms in each category, 2019
Source: Ministry of Inclusion, Social Security, and Migration.
Prior to the pandemic, the government had announced its intention to modify some elements of collective bargaining, such as the abolition of the one-year limit to the automatic extension of expired collective agreements (‘ultra-activity’), the reinstatement of the priority of sectoral collective bargaining over firm-level agreements, and the alteration of the negotiation process in cases of substantial changes in working conditions. While details are not precisely defined, one key part of the labour market reform in the national recovery plan, the modernisation of the collective bargaining process, will include these changes. Mechanisms to ensure firm-level flexibility should be maintained, as firms will need to be adaptable to very different economic conditions following the pandemic, such as changes in the demand for certain products or services, and likely changes in the structure of the economy overall.
Non-standard employment
Non-standard employment can provide flexibility for workers and firms, facilitate the emergence of new business models and could provide a stepping stone to standard employment for young and low-skilled workers. However, it can also raise concerns about job quality and potentially increase disparities (OECD, 2019[50]). Even before the crisis, in-work poverty rates were much higher for workers on temporary contracts (21.3%), part-time workers (26.9%), and the self-employed (21.7%), compared to 7.3% for permanent workers. Furthermore, the share of non-standard workers in activities most affected by containment measures are relatively high in Spain (Figure 1.21, Panel A).
Figure 1.21. Non-standard work is prevalent for some sectors and groups
1. The average share of non-standard workers (workers in temporary contracts, in part-time jobs, and the self-employed) in total employment across the affected sectors. The sectors included are construction (VF), wholesale and retail trade (VG), accommodation and food services (VI), real estate services (VL), professional service activities (VM), arts, entertainment and recreation (VR), and other service activities (VS).
2. Self-employed who choose to work on their own account owing to the lack of alternatives (Eurofound, EWCS).
Source: OECD (2020), OECD Economic Outlook, Volume 2020 Issue 1; and Perea and Roman (2019).
Self-employment is around 16% of those employed, slightly above the OECD average, but self-employment out of necessity at 26% in Spain is higher than the euro area average of 20%, and is more prevalent among the youth (Figure 1.21, Panel B; (Perea and Román, 2019[51])). The social protection of the self-employed were improved in January 2019 to improve access to unemployment benefits, provide insurance against occupational risks and temporary disability due to sickness and with targeted temporary measures in response to the pandemic in 2020.
There remain some policy gaps in the protection of platform workers. While economically dependent self-employed (“TRADE”), those relying on a single client for at least 75% of their income, have access to labour and social protection, this definition is restrictive and applies only to a low number of workers (OECD, 2019[50]; Todolí-Signes, 2019[52]). These gaps can exacerbate fake self-employment, which not only lowers the protection of workers, but can also distort competition across firms. Following a court decision in October 2020 that some platform workers should be considered employees, the government is preparing a draft law to improve the rights of platform workers. Best practices to lower fake self-employment include making it easier for workers to challenge their employment status, for example, by placing the burden of proof on the employer, reducing court fees, simplifying procedures, and protecting workers against potential retaliation (OECD, 2019[50]).
Temporary workers are the main source of job creation and destruction in Spain, with implications for income inequality (Bonhomme and Hospido, 2017[53]) and less investment in training by firms and workers (García-Pérez, Marinescu and Vall Castello, 2018[54]). The share of temporary contracts at around 27% in 2018 is twice that in the EU and remain high, despite some improvements. While temporary contracts can provide flexibility under some circumstances, a number of features of temporary employment in Spain stand out. These include a high share of very short contracts and prevalence of temporary work among the youth and the less educated, and the low probability of transitioning to a permanent contract (Figure 1.22).
In the short-run, the use of temporary contracts can contribute to job creation, especially in hospitality and tourism sectors, which have been disproportionately affected by the pandemic. Hence, while a reform to address the long-standing problem of labour market duality is needed to improve resilience to future crises, it should wait until the recovery is firmly under way. Consensus among the various political, economic and social agents will be key for a successful reform. Some of the reform proposals discussed below are already part of the reform agenda associated with the recovery plan, which is welcome.
There are three broad types of labour contracts in Spain: open-ended, fixed-term, training and work experience contracts. In addition, there are several types of contracts with different legal requirements and hiring-incentives, aimed at specific groups of workers. While these different contracts are not all widely utilised, the high number creates regulatory complexity for potential employers and investors, and could make it harder to monitor and detect the abuse of temporary contracts. Hence, the menu of contracts firms can choose from should be simplified, while clarifying conditions under which temporary contracts can be used, such as for training of staff or hiring workers based on seasonal jobs (tourism and agriculture). A single open-ended contract with severance pay rising with tenure could also be considered.
It will also be important to ensure that the abuse of temporary contracts is lowered. In this context, the recent increase in resources allocated to intensified labour inspections is welcome. Established recruitment practices, such as the outsourcing of non-core functions through multiservice companies and the use of temporary work agencies, also increase the use of temporary contracts (EC, 2020[55]). The authorities are planning to regulate subcontracting as part of the recovery plan, which can help, but the design should combine flexibility and worker protection. Finally, forcing firms to internalise the cost of using temporary contracts is another option. For example, in the United States, experience-rating, which links employers’ social security contributions to the layoff history of the firm, was introduced to prevent firms from taking advantage of temporary layoffs in response to cyclical downturns in labour demand. France has recently planned to introduce a similar reform.
Some existing hiring incentives, which facilitate temporary employment, are effective in meeting their objective during crisis periods, but the effects are modest and temporary, and mostly benefit middle-skilled people (AIReF, 2020[56]). Furthermore, while training contracts help young people with low education, the effect is small, and their uptake by firms is relatively low. Hence, the hiring incentives should be streamlined to be targeted to most vulnerable groups, give more weight to improving training contracts and facilitating their use by firms, as a stepping stone to more permanent jobs.
Figure 1.22. Temporary contracts do not translate into permanent jobs
1. Rate of very short contracts among fixed-term contracts.
2. Euro area, 19 countries.
3. Less than primary, primary and lower secondary educational attainment (ISCED levels 0-2).
4. Employees on temporary contract in year t-1 but declaring having been hired on a permanent contract in year t.
Source: Eurostat, "Detailed annual results of the Labour Force Survey", "Employment, Labour Force Statistics series" and "Labour transitions by type of contract" databases.
According to the OECD Employment Protection Legislation (EPL) indicators, the regulatory framework for unfair individual dismissals of regular workers is less stringent in Spain (ranked 12th out of 37 OECD countries). However, the indicator for the enforcement of unfair dismissals, which includes the maximum time to make a claim, the burden of proof, ex-ante validation of the dismissal and pre-termination resolution mechanisms, is relatively more restrictive in Spain, with a ranking of 28th (OECD, 2020[22]). Empirical evidence on effective firing costs (Jimeno, 2018[57]) is in line with employers’ perceptions that the long duration and uncertain outcome of court proceedings remain a barrier. Hence, the enforcement mechanisms and legal certainty surrounding dismissals of regular workers could be further improved. This could also facilitate firm restructuring needs that might rise in the next phase of the recovery.
Minimum wages
The recent increases of 22% in 2019 and 5.6% in 2020 have brought the ratio of minimum to median wages close to the OECD average (Figure 1.23). An initial evaluation with incomplete data suggests that the adverse effect on employment was low in 2019, but was concentrated on women, the youth and in regions with lower per capita income (AIReF, 2020[58]). As data become available, a complete evaluation of the effect of the recent increases on both employment and poverty should be conducted.
Figure 1.23. Minimum wages have recently increased
Ratio of minimum to median wage, 2019
Source: OECD Labour Market Statistics.
Cross-country evidence suggests that moderate and progressive increases in the minimum wage tend to have a limited impact on employment and could even have long-term positive impacts on productivity as it forces firms to improve their working process or move towards higher value-added products. However, negative impacts on employment could be higher with substantial and sharp increases, especially for low-skilled workers (OECD, 2018[59]). In January 2021, a temporary commission of experts, including academics, social partners and government officials, was established with an aim to set up a path to reach the government target of 60% of the average wage (42% in 2019) by 2023. In the context of crisis, which has disproportionately affected workers that are more likely to earn the minimum wage, such as the youth and low-skilled, any increase should be gradual and be in line with changing labour market conditions and productivity. For example, the process of setting minimum wages in Germany and the United Kingdom includes a systematic monitoring of its potential impact by specific independent bodies mandated to evaluate and provide recommendations (Low Pay Commission UK, 2018[60]; Eurofound, 2018[61]; Vacas-Soriano, 2019[62]). A similar permanent and independent commission could be established in Spain.
Female employment
The labour market performance of women has been improving, with a lower gender wage gap and labour force participation gap than the OECD average. Nevertheless, the female labour participation rate at 53.9% was much lower than the 64.3% for men in 2019. Unequal distribution of family care responsibilities and the limited public resources for childcare are the main barriers.
Early childhood education and care (ECEC) can contribute to higher female labour market participation, as recent research has identified a long-run child penalty in earnings of 28% after ten years in Spain (De Quinto, Hospido and Sanz, 2020[63]). ECEC can also improve future skill formation, especially for children from disadvantaged backgrounds (OECD, 2017[64]). In 2018, enrolment was almost universal for children aged 3 and older, and 38% for those aged below 3 years old, higher than the OECD average of 26%. However, regional disparities in participation are large (OECD, 2019[65]; Ministry of Education, 2019[66]). The share of households reporting that they would like to use more formal childcare but cannot afford it is high and children spend less time in childcare (Figure 1.24). The authorities plan to launch an eight-year plan to extend ECEC participation. The recovery plan will use part of the EUR 1.6 billion allocated to the modernisation of the education system to ECEC for children aged 0 to 3. These efforts should prioritise removing financial barriers for disadvantaged households and areas.
Another potential explanation for the low female labour force participation could be existing tax disincentives for second earners (AIReF, 2020[28]). While most OECD countries use individual based income taxation, Spain offers the option for joint declaration with a reduction in order to adapt taxes to the composition of household income. While this set-up benefits households with one income earner, it creates disincentives for second income earners, which tend to be women. Hence, this tax disincentive should gradually be removed, with a transitional regime in place to reduce the impact on vulnerable families.
Figure 1.24. There are gaps in childcare provision, despite high participation rates
1. Data refer to the share of households with young children (ages 0-5) who report an unmet need for (more) formal childcare services, and state the main reason for the unmet need as "cannot afford it". Income level is based on the household's position in the national income distribution. "Low income" households are those in the first three deciles, and "high income" those in the top three deciles of disposable income.
2. OECD refers to the average of the presented countries.
3. Data refer to children using centre-based services (e.g. nurseries or day care centres and pre-schools, both public and private), organised family day care, and care services provided by (paid) professional childminders, regardless of whether or not the service is registered or ISCED-recognised.
Source: OECD (2020), “Is Childcare Affordable?” Policy Brief on Employment, Labour and Social Affairs, OECD, Paris; and OECD Family Database.
Making growth more inclusive and greener
Spain plans to use the EU funds to advance the structural transformation to a more digitalised, inclusive and sustainable economy (Box 1.3). Long-standing reform needs to lower inequalities, which were already high before the crisis, should be prioritised.
Lowering inequalities
Minimum income guarantee
A national minimum income guarantee scheme (MIS) was introduced in May 2020, which is expected to reach 850 000 households, most of which live in extreme poverty (30% or less of median income), topping up income to a level between EUR 461 and EUR 1 015, costing about EUR 3 billion per year. In April 2021, 250 000 households had received the new benefit, suggesting that the roll-out has been slow. Part of the explanation is that the crisis brought forward the planned introduction of the scheme and the ongoing rigorous evaluation to reach the right people. In February 2021, modifications were introduced to facilitate access to homeless people and other vulnerable groups, by making the definition of “co-existence” more flexible. Monitoring, identifying and removing unnecessary barriers to access should systematically be continued.
The scheme can help lower the longstanding gap of low adequacy and coverage of regional MIS, as recommended in the 2017 Economic Survey of Spain (Figure 1.25), and regional disparities. A number of features, such as the targeting to vulnerable households, with strict criteria of eligibility based on annual income, number of children and assets, and regular evaluation by the Fiscal Council, are welcome. These evaluations should include the review of existing benefit programmes to prevent unnecessary overlapping. As this is a non-contributory benefit, the scheme will be financed through transfers to the social security budget within the context of the state budget plans, so the financing needs should be incorporated in the medium-term fiscal plan.
Figure 1.25. The national minimum income guarantee will support the existing regional schemes
1. This does not reflect the effects of the new national minimum income guarantee scheme.
Source: OECD, Social Statistics; (Hernández, Picos and Riscado, 2020[67]).
The law that introduced the scheme includes an obligation to develop work incentives, but they still have to be designed. The income in the current year is evaluated annually to recalibrate the benefit in the next year, but the extent of recalibration is still under analysis by the authorities and is expected to be completed in the first half of 2021. Until then, a 100% effective marginal tax rate on the declared income of the recipients is applied to the benefit in the following year. Work incentives would be effective if the initial loss of the benefit when taking up employment is not as high as the salary, until a sufficient income has been reached. This can also prevent unwanted consequences, such as switching to informal jobs. Easy and flexible entry and exit to the scheme can also incentivise recipients to take up employment.
The involvement of regions will be crucial, as eliminating the existing regional MIS could diminish part of the poverty reduction achieved by the national MIS, especially in regions with high rates of extreme poverty. However, the complementarities with the regional policies are not yet fully developed. Hence, the creation of the MIS Monitoring Committee involving different levels of government is welcome. Coordination with regions will also be crucial to ensure that the recipients have similar treatment in terms of training and activation policies as the unemployed, which should be made an integral part of the design of the scheme (Conde-Ruiz et al., 2020[68]; AIReF, 2019[69]). Regions that choose to eliminate their existing schemes should be encouraged to use these funds for training of recipients.
Rent affordability
There has been an increase in the share of residential rentals, especially for younger households and temporary workers in recent years (López-Rodríguez and Matea, 2019[70]). In some regions and big cities, a less proportional increase in the supply of rentals relative to demand led to sharp rises in rental prices until the pandemic hit, with around half of private market low-income tenants overburdened by rent costs (Figure 1.26). In 2019-20, the government took measures to regulate the prolongation of obligatory extension of rental contracts, update rental rules and limits on the value of guarantees given by tenants to landlords, and created a state system of reference index of rental prices, which can help improve private rental markets. The Budget 2021 significantly increased funding for housing policies, and the recovery plan allocates EUR 1 billion for rental public social housing.
Among the different policy options to improve affordability for vulnerable groups, a higher supply of social housing implies lower trade-offs than subsidies and rent controls (OECD, 2020[71]). Spain has low spending on social housing and the share of rental social housing as a share of total housing stock in 2019 was one of the lowest in the OECD, at 1.1%, compared to the OECD average of 6%. In recent years, there has been a shift towards social rental housing in the orientation of public housing policy, such as the Plan 20 000, which aims to increase social housing for rent on publicly owned land. The shift to rentals in social housing from ownership is welcome, as they are less likely to impede labour mobility. However, given its high fiscal costs, it is important to ensure that good governance rules are in place to reach those most in need. Means-testing to track changes in eligibility conditions should be made regularly and households above eligibility thresholds encouraged to move out by progressively aligning their rents to market prices.
According to an OECD rent control indicator, reflecting the number of regulations that restrict rent levels and increases, Spain has more stringent regulations than the OECD average (OECD, 2021). It is important to weigh the expected benefits of strict rent regulations on existing tenants in the short-term against possible longer-term drawbacks. These could include a potential decline in residential mobility by locking-in tenants, lower rental supply for future tenants, while not necessarily benefitting those households who are in greatest need (OECD, 2020[72]). The authorities are currently developing a new housing law, considering several policy tools to regulate high rents in some areas. Rental regulations should be designed to strike a balance between tenants’ and landlords’ interests, create security of tenure and encourage the supply of rental housing for all socio-economic groups.
Figure 1.26. Rent affordability is a concern for some groups
Source: (López-Rodríguez and Matea, 2019[70]) and OECD, Affordable Housing Database.
Health
There are regional differences in terms of doctors per 100 000 inhabitants in Spain (Figure 1.27). Depopulation in rural areas, combined with ageing, is likely to pose a challenge for the provision of basic services, such as healthcare. Hence, the recruitment and working conditions of health workers could be further improved. The wide use of temporary employment leads to large turnover and transition to permanent jobs is low (EC, 2020[55]). Doctors are among the occupations facing skill shortages (CEDEFOP, 2016[73]), and one-third of doctors were aged over 55 in 2017. One challenge is that the number of medical graduates exceeds the number of available postgraduate specialty training places to allow new graduates to complete their training (Bernal et al., 2018[74]). Despite some recent initiatives to increase the number of training places, there is a need to better align educational and health authorities’ views on medium-term needs. The criteria to open medical schools, and planning of postgraduate training should be improved.
The development of e-health can be an important tool to address growing needs, especially in areas where resources are more scarce. Spain ranks relatively well in the provision of on-line health services online (EC, 2020[75]; Bertelsmann Stiftung, 2020[76]). However, in contrast to some other OECD countries, there is no national legislation, strategy or policy on the use of telemedicine (Oliveira Hashiguchi, 2020[77]). The formation of a single coherent strategy to provide clarity on the many aspects (e.g. clinical, legal, financial, ethical) related to telemedicine could be a driver for further use.
Figure 1.27. There are regional differences in terms of health resources
Number of physicians per 100 000 inhabitants, 2017-2018
Note: National data refer to 2018, while regional data refer to 2017.
Source: Eurostat Health Statistics.
Reform of the teaching profession for higher basic skills
Early school leaving rates at 17.3% in Spain remain higher than the EU average of 10.2%, which contributes to lower basic skills, especially for those from disadvantaged socio-economic backgrounds (OECD, 2018[3]). The new education law (LOMLOE), passed in December 2020, includes measures to reduce school segregation and limit grade repetition, which can help lower early school leaving rates, as recommended in the 2018 Economic Survey of Spain. The law also states that a plan for teacher recruitment and training has to be prepared within a year. This element should be designed and implemented swiftly as it remains an important gap in the Spanish education system.
Teachers in Spain face job instability, with 33% of secondary school teachers having a fixed-term contract, higher than the OECD average of 18%, and 27% of them have contracts of one year or less (OECD, 2020[78]). The high share of interim teachers makes it difficult to build stable teams in schools (EC, 2019[79]) and can lower opportunities for training. Improving the guidelines for access to the teaching profession can help reduce the share of temporary teachers.
There is room to improve training of teachers. Only 48% of teachers report that they were trained in all three core elements (content, pedagogy and classroom practice of subjects they teach) in their initial training, well below the 79% in the OECD (OECD, 2019[80]), although the share is higher at 68% for teachers who have been teaching for 5 or less years. The crisis has highlighted the importance of the use of ICT for teaching, but only 38% of teachers reported that it was included in their formal training, compared to 56% in the OECD, although the share is 86% for new teachers. Such training is planned as part of the recovery plan, together with increased funding for digital infrastructure in schools (see Chapter 2). The share of teachers citing the lack of relevant professional development options and participation incentives as barriers are higher than the OECD average (Figure 1.28, Panel A).
Teacher training should be strengthened in terms of content and links to career development, via effective mentoring, monitoring and appraisal. In Spain, 25% of teachers work in schools in which teachers are never appraised (7% in the OECD), mentoring as a formal arrangement is scarce, and the links between feedback and changes in teaching practices and career advancement are low (Figure 1.28, Panels B-C). This could partly reflect the fact that there is no formal national teacher appraisal system. Introducing an appraisal and feedback framework, which allows teachers to progress in their career and develop more effective teaching practices, should be a priority.
Figure 1.28. Teachers can be supported further via mentoring and training
1. Includes teachers who agree or strongly agree that the following elements present barriers to their participation in professional development.
2. For example, qualifications, experience and seniority.
3. The data refer to Alberta province for Canada and England for the United Kingdom.
4. For instance, an increase or decrease in his/her teaching load, administrative/managerial responsibilities or mentor responsibilities.
Source: OECD, TALIS 2018 Database.
Table 1.9. Past OECD recommendations on social, labour market and education policies
Making further progress in the fight against corruption
Corruption distorts competition, the allocation of resources and access to public goods, which can discourage business dynamism, investment and innovation, and raise inequalities. The overall levels of perceived corruption are relatively high in Spain (Figure 1.29). While the share of Spanish firms perceiving corruption as a serious problem when doing business, at 50%, is higher than the EU average of 37%, the specific forms of corruption they perceive varies, from petty corruption (e.g. facilitation payments to obtain licences or permits) to grand corruption (e.g. private interests in large-scale public contracts) (EC, 2019[81]).
Overly complex regulations and opacity in policy-making can make it easier for some individuals or groups to engage in corrupt activities. The regulatory decision making process in Spain has improved over the past years, as regulatory plans are made publicly available on the Transparency Portal launched in 2014, and the Office on Regulatory Coordination and Quality, a new oversight body, was established in 2017 (GRECO, 2019[82]). Nonetheless, the quality of regulatory policy and governance remains relatively low, which is mainly due to weak ex-post evaluation of regulations (Figure 1.30). Methodological aspects (e.g. impact assessment), oversight and quality control should be improved to ensure that the absence of adequate ex-post evaluation does not underestimate the costs of regulatory measures and disproportionately benefit certain interest groups.
Corruption in public procurement increases direct costs, while crowding out competitive firms, and lowers the quality of public investment. The public procurement framework in Spain was improved by the law on public sector contracts, aimed at simplifying proceedings and increasing transparency (OECD, 2018[3]). Since 2018, progress has been made in the new governance structure by the creation of an Independent Office for Procurement Regulation and Oversight, which publishes annual reports, and other bodies that facilitate the implementation of the framework were given additional resources. The 2018 framework has also improved the system for needs assessment, where Spain was lagging behind, according to the 2017 World Bank data on Benchmarking Public Procurement. Efforts to improve the implementation of the framework should be continued.
Figure 1.29. Efforts to fight corruption must be increased
Note: Panel A shows the point estimate and the margin of error. Panel C shows individual indicators, which underlie the "Control of Corruption" indicator by the World Bank. Panel D shows sector-based subcomponents of the corruption indicator by the "Varieties of Democracy" Project.
Source: World Bank, Worldwide Governance Indicators, the Economist Intelligence Unit; the World Economic Forum; the Gallup Organisation; the French Ministry of Economy and Agence francaise de Developpement; Political Risk Services; Global Insight; Varieties of Democracy Institute, University of Gothenburg and University of Notre Dame; Transparency International.
Spain has undertaken several initiatives in recent years, including the 2013 Regeneration Plan, to promote public integrity, which is also essential to control corruption. These include stronger regulations of senior officials to limit conflicts of interest and improved transparency in political party funding. However, these measures are more of a piecemeal approach, and implementation is lagging, as conflicts of interest among high ranked officials through revolving doors are not effectively controlled (GRECO, 2019[82]). A comprehensive and effective integrity strategy, which would effectively prevent and control, for instance, corruption related to public contracts associated with revolving doors, should be adopted. The new OECD Public Integrity indicators and the OECD Recommendation on Public Integrity (OECD, 2017[83]) would be useful in the design of such a strategy.
Figure 1.30. Policy frameworks can be strengthened to prevent corruption
Ex-post evaluation of regulation, index from 0 (worst) - 4 (best), 2017
Note: Score for ex-post evaluation in the OECD Indicators of Regulatory Policy and Governance (iREG).
Source: OECD (2020), Government at a Glance (database); and International Budget Partnership (database).
The Spanish legal framework to fight corruption was strengthened over the past years, through amendments to the offence of foreign bribery and increases in applicable sanctions, and more effective and legally certain confiscation of proceeds, including the creation of the Asset Recovery and Management Office in 2015. Following the recommendations made by the OECD Working Group on Bribery would further improve the fight against corruption, including through enhanced enforcement of foreign bribery cases. For example, Spain could develop guidelines for investigators and prosecutors on the investigation, prosecution and sanctioning of transnational corruption, including the application of confiscation measures (OECD, 2015[84]). Furthermore, the compilation of detailed statistics on the criminal, civil and administrative sanctions imposed for domestic and foreign bribery can help the assessment of the adequacy of sanctions imposed in practice (OECD, 2015[84]).
The independence of the judiciary is key to ultimately enforce regulation and tackle corruption effectively. International reports highlight that judges and prosecutor services in Spain are of high quality and, with the exception of some isolated cases, there is no substantial evidence of corruption of individual judges or prosecutors (GRECO, 2013[85]; GRECO, 2017[86]). Spanish judges have also been internationally recognised for having a strong spirit of public service and dedication to public duty (GRECO, 2017[86]). The Spanish Constitution and legal framework outline a solid legal grounding of judicial independence by enshrining independence, impartiality and irremovability of judges (Article 117, Spanish Constitution).
In this context, the General Council of the Judiciary (CGPJ) is the constitutional body entrusted with the task of ensuring the independence of the Judiciary, by exercising key functions, such as appointments, promotions, inspection of the functioning of the courts and tribunals and the disciplinary liability of members of the judicial career (Article 122.2, Spanish Constitution) (CGPJ, 2020[87]). The composition of the CGPJ and the way in which its Members are elected have been a recurring subject of debate because of how it could influence the degree of its independence with respect to the powers that elect them (Government of Spain, 2020[88]). At present, the majority required to elect the Members of the CGPJ is three-fifths of each of the legislative Houses. The Spanish Government underlined in its submission to the 2020 EU Rule of Law report that the requirement of a qualified majority of three-fifths guarantees the convergence of diverse political forces, and avoids the election of a CGPJ that responds to a specific and temporary parliamentary majority, reinforcing its independence from political power (Government of Spain, 2020[88]). Given the qualified majority requirement, it has been difficult for the current diversified Parliament to reach an agreement on the new composition that is subscribed by three-fifths of the Chambers. For this reason, since December 2018, the Council has been exercising its functions ad interim.
In an attempt to address the deadlock, two parliamentary groups proposed a reform to enable a reduction of the qualified three-fifths majority requirement in a second voting round to an absolute majority. Following substantial national and international concerns on the effects of the reform on the Council’s independence, it was suspended in October 2020. A second reform, currently being considered in the Spanish Parliament, proposes the creation of an ad interim regime for the Council when its five-year term has expired (Spanish Congress, 2020[89]). If approved, it would limit the powers of the Council until its renewal. Following these successive proposals, a primary effort should be to ensure that, given the public visibility and high political tension surrounding the reforms, the CGPJ stays and is perceived as fully independent from politisation. An essential requirement to prevent corruption is to ensure the impartiality and independence of the Council governing the judiciary power. If the governing structure of the judiciary suffered from a loss of trust from citizens and individual judges, this could have a negative impact on the prevention of corruption in Spain and compromise the perceived independence of judges on the bench in the long term (GRECO, 2019[82]). Its independence should be assured, promoted and protected at all times to continue the fight against corruption in Spain effectively.
Making growth greener
Over the past decade, Spain reduced its carbon and energy intensity (Figure 1.31, Panels A-B), but a number of key environmental and climate challenges remain. For example, Spain has one of the highest levels of water stress in the OECD (Panel C), while water tariffs in general do not cover amortised costs (OECD, 2020[90]), which requires more efficient price signals, as discussed in previous economic surveys. Reducing emissions from agriculture, transport and increasing energy efficiency, especially in buildings, will also be key, as these sectors account for a large share of non-emission trading scheme emissions (Panel D).
Environment is one of the main pillars of the national recovery plan. The Law on Climate Change and Energy Transition, the National Integrated Energy and Climate Plan, the Just Transition Strategy, the Energy Poverty Strategy, the National Climate Change Adaptation Plan and the Long-term Strategy for a modern, competitive and climate neutral economy in 2050 will feed into the plan (Government of Spain, 2021[31]). This section concentrates on two aspects of the ecological transition agenda, which can also support the near-term recovery.
The 2020 National Energy and Climate Plan targets by 2030 a 23% reduction in greenhouse gas (GHG) emissions compared to 1990, 42% share of renewables in energy end-use, 39.5% improvement in energy efficiency and 74% share of renewable energy in electricity generation (Government of Spain, 2020[91]). Without new measures, Spain would miss its target for sectors not included in the ETS by 10%. This ambitious ecological transition is estimated to require EUR 241 billion in investment by 2030. Frontloading investment towards sectors that can accelerate the green transition, as is planned in the national recovery plan, can simultaneously address recovery and climate objectives (OECD, 2020[92]; OECD, 2020[93]). However, it will be important to conduct a cost-benefit analysis of these investments. There is also scope to create “green” jobs in Spain, as low-carbon transition is expected to mitigate job polarisation by creating middle-skilled, middle-paying jobs, especially in the construction sector (CEDEFOP, 2018[94]; Eurofound, 2019[95]).
Figure 1.31. Environmental pressures remain in a number of areas
1. OECD values are rough estimates based on linear interpolations and partial data.
Source: OECD Green Growth Indicators; and European Commission (2020), EU Energy in Figures: Statistical Pocketbook (database).
In the past few decades, Spain has increased its energy diversification, with a growing share of renewable energies 15% of primary energy supply in 2019, according to OECD indicators), but there is a need to increase investment to meet 2030 objectives, notably in buildings. Due to the milder climate, Spain has a relatively low share of energy consumption by buildings, but the energy efficiency of buildings according to a metric based on heat loss is low ( (De Groote et al., 2017[96]); Figure 1.32, Panel A). A comparison of building energy renovation trends in 2012-16 shows that the primary energy savings from renovation of buildings in Spain was less than the EU average (EC, 2019[97]).
The new strategy for energy upgrading in the building sector has 2050 targets of a cumulative reduction in energy consumption compared to 2020 of 37.3% in residential buildings. The strategy focuses on the renovation of 1.2 million houses during the first decade (until 2030) (Ministry of Transport, 2020[98]). New rules would also increase the requirements for energy savings in public buildings. While the Spanish plan is well-developed compared to other EU ones (BPIE, 2020[99]), there is still a need to provide more detailed information (m2 of buildings, energy savings/m2, investments) to allow a more comprehensive evaluation of the ambition, effectiveness and feasibility of the measures (EC, 2020[100]). Effectively implementing these plans would not only result in energy savings, but also support employment. For example, in 2012-16, the number of employees involved in the renovation of residential buildings was 360 321 (EC, 2019[97]). The recovery plan allocates EUR 7 billion for the rehabilitation of housing and for urban renewal to improve energy efficiency and increase the use of renewable energy among others.
Figure 1.32. Investment in building renovation can be frontloaded
1. Higher value refers to less efficient buildings. The U-value is a measure of heat loss through a building shell element, calculated as an average of floor, roof, walls and windows efficiency for residential buildings.
2. A is the most efficient energy performance certificate (EPC).
Source: European Commission (2020), EU Buildings Database.
Another way to facilitate building renovation is more widespread utilisation of energy performance certificates (EPC), which can deliver a demand-driven market signal for energy efficiency, as the share of existing buildings with EPCs in Spain is relatively low. In addition, the share of non-residential buildings with the least efficient rating is relatively high (Figure 1.32, Panel B). Some European countries have introduced EPC registers, while this exists only in some regions in Spain. The role of EPCs in facilitating renovations could be improved, for example, with the introduction of optional “building renovation passports” (France, Germany), and the use of one-stop shops (Ireland, Denmark) to reduce regulatory complexity (EC, 2020[101]). Imposing minimum energy efficiency standards for rental properties could also be considered (Economidou, 2014[102]).
Poor building standards also create some risks for banks through their real estate loans, but the lack of data on household energy efficiency prevents a complete assessment of such risks (Delgado, 2019[103]). For example, minimum energy performance standards have helped banks to review the energy performance of their asset portfolios in the Netherlands (EC, 2018[104]). Once granular data are available in Spain, the authorities could require financial intermediaries to report their climate-related exposures in this area.
While air pollution is below the OECD average in terms of exposure to PM2.5 particles, poor air quality, as measured by NO2 concentration in ambient air, is high in international perspective, especially in major cities, such as Madrid and Barcelona (EC, 2019[105]) (Figure 1.33, Panels A-B). For example, road traffic accounts for up to 90% of NO2 levels in Madrid city (Borge et al., 2014[106]), with strong implications for health (Izquierdo et al., 2020[107]). Almost 7 000 premature deaths in Spain were attributable to NO2 in 2018 (European Environment Agency, 2020[108]). Improvements in air quality can increase resilience to future shocks, by lowering acute respiratory illnesses (OECD, 2020[109]). Estimates show that Spain experienced the greatest NO2 reduction between 15 March and 30 April due to the lockdown, reaching 47% in Madrid (Figure 1.33, Panel C) and 59% in Barcelona (European Environment Agency, 2020[108]). This highlights the large scope to improve sustainable transport, which could be achieved with electric vehicles in public and private transport.
Figure 1.33. Sustainable transport can contribute to better air quality
Source: OECD (2020), Green Growth Indicators (database); and European Environment Agency (2020), Air quality database.
Spain has an ambitious target of 5 million electric vehicles for 2030 and the Draft Law of Ecological Transition and Climate Change proposes compulsory low-emission zones before 2023 for municipalities over 50 000 (Ministry of Transport, 2020[110]). The recovery plan allocates investment of EUR 6.5 billion towards these goals.The Plan for the automotive industry (EUR 3.75 billion) from June 2020 includes EUR 450 million for the renewal of the existing fleet of vehicles, including the public fleet. The MOVES II and III programmes allocate EUR 100 million and EUR 400 million to the acquisition of alternative energy vehicles, the deployment of electric charging infrastructure, and shared electric bicycle systems. Given the high scope for public investment and already well-developed plans in this area, investment in sustainable transport, as is planned in the national recovery plan, could be frontloaded. These could include higher investment in infrastructure and financial incentives for zero or low emission vehicles.
Table 1.10. Recommendations on macroeconomic and structural policies
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Annex 1.A. Progress on structural reforms
This Annex reviews action taken on recommendations from the November 2018 Survey.