2016 IMF Article IV Consultation with Spain

Source: IMF
Type of item: Recommendation / Analysis
Date: 30/01/2017
Upcoming commitment expected by: 30/01/2017

Spain's weak productivity performance has been linked to the dominance of many low productive small firms and inefficient allocation of resources.

 

The analysis suggests that policy factors have played an important role for firm productivity and growth. Specifically, policy factors, in particular those related to strictness of product and service market regulation, size-related tax incentives and finance constraints are negatively correlated with firm productivity level and growth, and firm growth.

This document includes the following recommendations in the corresponding reform areas

1. GROWTH AND COMPETITIVENESS

1.1 R+D and the knowledge society

·         Increasing the efficiency of R&D incentives and enhancing the private R&D investment

·         Further enhancing firms' innovation capacity through addressing the remaining weaknesses with public R&D spending efficiency and weak public-private sector cooperation

·         A move up in the exports value-chain would require Spanish firms to step up their investment in intangibles such as R&D. The latest available data for investment in intangibles is from 2010 and show that Spain was one of the poorest performers in the EU-15.

 

1.2 Internationalization

·         A move up in the exports value-chain would require Spanish firms to step up their investment in intangibles such as R&D, training and advertising.

·         Progress in labor and product market reform would increase firm competitiveness and would ease entry into exporting activities by removing obstacles to firm growth

·         Policies targeted to increase firms' international competitiveness (such as fostering R&D and innovation in general) would also contribute to continue reducing Spain's domestic and external imbalances.

 

1.3 Enterpreneurship

·         Improving the access to equity and credit financing, in particular for innovative start-up companies barriers to entrepreneurship such as license and permit systems, tends to hamper entrepreneurial activity, market entry and growth of small firms in Spain

 

1.4 Education

·         Addressing the quality of labor input through education reforms would also be important to sustain TFP growth and encourage innovation.

 

2. COMPETITION AND REGULATION

2.1 Competition enforcement

·         Lowering regulatory barriers to foster competition in product and service markets

 

2.2. Regulation of product and service markets

·         Reduce barriers to entry in the service sector, and licenses and permit systems

·         Further progress in product market reform would increase firm competitiveness and would ease entry into exporting activities by removing obstacles to firm growth

 

2.3. Red tape and business environment regulation

·         Reduce the cost of doing business

·         Further reducing and eliminating size-related rules and regulations (in reporting, auditing, and labor-related regulation) that create small business trap and can hurt productivity and growth

·         Regulatory entry barriers and administrative burden from licensing requirements and market fragmentation across regions by preventing creative destruction are found to be detrimental to productivity and productivity growth.

·         Addressing the delays in the implementation of the Market Unity Law and lowering the regulatory barriers and the administrative burden faced by firms from the three government layers would enhance firm TFP dynamics

 

2.4 Professional services

·         Pressing ahead with the long delayed liberalization of professional services would enhance firm TFP dynamics.

3. LABOUR MARKET

3.1. Labour market regulations

·         Further reducing and eliminating size-related rules and regulations (in reporting, auditing, and labor-related regulation) that create small business trap and can hurt productivity and growth

·         Addressing labor market duality through further labor market reforms

·         Further progress in labor market reform would increase firm competitiveness and would ease entry into exporting activities by removing obstacles to firm growth

4. FINANCIAL SYSTEM

4.1 Recapitalization and Restructuring

·         Continued efforts to strengthen banks' capital and funding positions will enhance the system's resilience to shocks and the capacity to support growth over the medium run

·         Encourage banks to increase high-quality capital through retained earnings. Bolstering banks' capital would be prudent to safeguard financial stability and ensure adequate capital in light of new regulatory initiatives. Additional capital would also help ensure sufficient credit provision to financially-sound corporates and households as credit demand picks up.

·         Banks may need to adjust their liability structures to fulfill new regulatory requirements, such as Minimum Requirements for Own Funds and Eligible Liabilities (MREL) and Net Stable Funding Ratio (NFSR).

 

4.2. Other financial measures

·         Improving the access to equity and credit financing, in particular for innovative start-up companies and small and innovative firms. That would be critical to maintain robust investment growth, including sustained growth in R&D investment, therefore enhancing firms' TFP growth

·         Low availability of venture capital in Spain is particularly important for increasing R&D investment. The low R&D investment is leading in turn to lower productivity growth

·         Financing constraints, derived from excessive reliance on bank financing, prevent firms from investing and growing that in turn result in inefficient resource allocation, thereby affecting productivity level and growth

·          "Fresh start" to individuals use has been relatively limited so far. A stock taking exercise of the framework's functioning would thus be beneficial as certain design changes could likely help the deleveraging process.

5. FISCAL POLICY AND PUBLIC ADMINISTRATION

5.2. Fiscal consolidation and fiscal reform

·         The current size-related tax incentive structure does not favor young companies in Spain, as they have lower tax benefits, compared to older firms

·         Size-related tax incentives affect negatively and significantly TFP level, TFP growth, and growth in value added.

·         Tax incentives are on average more harmful than helpful for productivity level and growth as they create disincentives for firms to grow, resulting in "small business trap"

·         Continued fiscal consolidation would help to gradually reduce vulnerabilities from the highly negative net international investment position.

·         Gradually reducing the fiscal deficit so as to increase external resilience and addressing Spain's large net external debtor position

·         Weak compliance among regional governments has hampered Spain's fiscal consolidation efforts.

·         Subnational fiscal rules in Spain have been significantly strengthened. However, such procedures have not been fully implemented, undermining fiscal compliance


5.3. Reform of the Public Administration

·         Need to improve macro-fiscal forecasting at the central and subnational level to minimize unanticipated common shocks

·         Assessment on whether and, if so, how reforms on regions financing system and spending mandates, including minimum spending standards, may increase fiscal autonomy and reduce vertical fiscal imbalances

·         Adoption of differentiated regional fiscal targets to improve the feasibility of fiscal adjustment plans, without undermining incentives to implement such plans in the first place

·         Rules-based automatic enforcement mechanisms to ensure fiscal compliance during election years and, especially in good times.