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Spain should boost productivity and improve opportunities for young people

by LLB political Reporter
25th Oct 23 1:08 pm

Strong government support to businesses and households has helped Spain weather the effects of the COVID-19 pandemic, and of rising energy and food prices brought by Russia’s war of aggression against Ukraine.

Policy should now focus on rebuilding fiscal space, raising productivity and reducing social disparities, including by creating more opportunities for young people.

The latest OECD Economic Survey of Spain says that robust economic growth is projected to reach 2.5% this year and 1.5% in 2024. Private consumption will drive growth at a moderate pace, while external demand is expected to weaken. Lower energy prices and policy measures to contain inflation, like the “Iberian exception”, helped to bring down inflation, which stood at 3.3% in September 2023. But core inflation was still high, at 3.9%, and food price inflation even higher, at 10.5%.

“Spain should build on its solid economic growth to boost productivity and help young people realise their potential,” OECD Chief Economist Clare Lombardelli said, presenting the Survey in Madrid alongside Spain’s Secretary of State for the Economy Gonzalo García. “Rebuilding fiscal space, improving education and stepping up efforts to tackle environmental challenges will be key to driving sustainable long-term growth and prosperity.”

Stronger and sustained fiscal consolidation is needed to maintain Spain’s high public debt on a downward path. Pension and health-related outlays are set to rise in the longer term, substantial investments are needed to accelerate the green transition, and the government has committed to boosting defence spending.

To make space for these future spending pressures and to finance growth-enhancing investment, fiscal consolidation should rely on increasing tax revenues and improving spending efficiency. Furthermore, the sizeable public support that helped mitigate the inflationary shock on businesses and households should now end.

Boosting productivity is a key challenge. Low investment in research and development, inadequate public spending on education and training, and an insufficient stock of ICT capital drag down productivity growth. Continuing with an effective implementation of the investment and reforms under the national Recovery, Transformation and Resilience Plan will help overcome these deficiencies and boost productivity and growth.

Employment growth has been strong and the 2021 labour market reform is showing promising results in shifting workers from temporary to permanent contracts, especially for the young. The unemployment rate has come down but remains the OECD’s highest at 11.5% in September 2023. Pervasive joblessness reflects structural issues that require continuing reform efforts.

Income inequalities remain significant and poverty, especially among women, is high compared with other OECD countries. One in four people in Spain were poor or at risk of poverty and social exclusion in 2022, and child poverty, remains the highest in Western Europe, at 21.8%. Social benefits should be targeted towards those most in need, notably low-income families with children. Improving the take-up of the minimum income guarantee would help reduce poverty. Improving women’s and especially mothers’ labour market integration should also remain a priority to reduce income inequalities.

The Survey includes a focus on increasing opportunities for young people. Enhancing education, facilitating youth labour market participation, supporting entrepreneurship, and boosting access to housing are crucial to fully realise Spain’s growth potential and reduce the risk of poverty among young people.

Many young people in Spain leave the education system with low skills, limiting their job prospects. The transition from school to work is difficult. The unemployment rate of people under 25, at almost 27%, is one of the highest in the OECD. Youth entrepreneurship should also be fostered through better mentoring, training and access to financing.

To address its environmental challenges, Spain needs to do more to reduce its dependence on fossil fuels. Spain should step up the shift towards greener transport modes, improve storage and grid interconnections, and keep promoting renewable energies. The base for environment-related taxation can be broadened, including by phasing out exemptions and gradually increasing the tax rate on emissions, while compensating partially and temporarily the most vulnerable.

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