The OECD recommends that Spain eliminate anti-crisis support measures, increase VAT and a fiscal adjustment to reduce debt

The OECD has been the last of the large multilateral organizations to recommend that Spain withdraw the anti-crisis support measures to mitigate the effects of inflation.. This has been asked of the country in a detailed report on the Spanish economy published this Wednesday. A suggestion to which they add a request to the Government to implement a plan to reduce the deficit and debt that includes measures such as raising the reduced VAT rates and environmental taxes.

The agency points out that anti-crisis support measures have helped mitigate the impact of inflation on households and companies, but “they should end now”. “Fiscal support to mitigate the high cost of living should now be withdrawn completely and quickly to help limit fiscal costs,” they say in the document.. The OECD emphasizes that most of the measures adopted have been generalized and not directed at the most vulnerable, which is why it proposes that if any more have to be adopted, they should focus on the most vulnerable.. “If more support is needed for the poorest, it should come through a new minimum income guarantee,” they point out.

The OECD thus joins the call to withdraw the support that other organizations such as the European Central Bank (ECB), the IMF and the European Commission have already made.. Even the Government itself assumes that it will be difficult to maintain the support packages also in 2024 if it wants to comply with the European fiscal discipline that will return next year. However, completely withdrawing the support measures will likely cause a resurgence in inflation at the beginning of next year due to the rise in electricity and gas bill prices.

In fiscal matters, the OECD recommends that Spain undertake an adjustment process estimated at around 6.8 billion euros to ensure that the debt is reduced in the coming years.. The organization demands from Spain a consolidation plan that accelerates the reduction of the deficit. In fact, they point out that although the imbalance in the accounts has been reduced in recent years – in the same line as in the eurozone – most of this decrease is due to “cyclical and specific reasons.”. The structural deficit has barely moved from 3%.

In this adjustment process, in which the OECD believes that more income and more “efficiency” in spending can be achieved, the organization sees room to raise VAT or environmental taxes, which are below the EU average. In this sense, they recommend gradually eliminating products with reduced rates, which especially benefit high-income households, to align them with the general VAT.. On the other hand, they also point out that some taxes on labor or capital could be cut, to alleviate the lowest incomes.

The organization warns Spain that pension spending will suffer “a considerable increase” in the coming years in light of the reform recently approved by the Government, despite the income compensatory measures that accompany it. In this sense, the OECD believes that it would be preferable to take measures that reduce the generosity of the system, such as linking the legal retirement age to life expectancy, a measure that would foreseeably delay the retirement age even further.

Promising results of labor reform

Regarding the behavior of the economy in the last year, the OECD points out that Spain “has resisted well” the onslaught of the war in Ukraine. Although GDP will slow next year, the national economy will remain “resilient”, supported by national demand and European recovery funds.

In this period, employment growth has been robust and the labor reform offers “promising results” in reducing temporary employment, especially among young people, they argue.. Of course, although the unemployment rate has reduced, it is still the highest in the OECD.. “The widespread lack of work reflects structural problems that require the continuation of the reforms currently underway,” they add.

OECD economists also focus on the problems faced by young people, who suffer unemployment rates that double the national average and who have seen their salaries devalued considerably over the last two decades.

In this sense, the organization recognizes that the strong increases in the minimum wage approved since 2018 have contributed to raising the income of young people and have reduced wage inequalities.. However, they warn that these increases may have harmed job creation for some population groups, including young people.. Therefore, they ask that future increases in the SMI be conditional on the evolution of the labor market and the productivity of the Spanish economy.