IMF 2015 Article IV Concluding Statement

Source: IMF
Type of item: Recommendation / Analysis
Date: 8/6/2015

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission').

Spain has rebounded strongly and employment is increasing, helped by past reforms. However, the level of unemployment is still painfully high and vulnerabilities remain. Sustaining job-rich growth at the current pace, further reducing public and private indebtedness, and maintaining confidence will require additional fiscal efforts and structural reforms.

The collective efforts of Spanish society are the foundation upon which the recovery has been constructed.

Assessment:

1. GROWTH AND COMPETITIVENESS

1.2 Internationalization

- While the number of exporting firms has increased significantly since the crisis, the government strategy for boosting Spain's internationalization could do more to help SME enter export markets and remain competitive.

2. COMPETITION AND REGULATION

2.3 Red tape and business environment regulation

- The Market Unity Law has begun to address some of the obstacles for firms to grow and raise productivity.

3. LABOR MARKET

 3.1 Labor market regulations

- Labor market reforms and moderate wage growth have supported employment and helped Spain regain competitiveness lost during the pre-crisis boom.

- The 2012 reform has increased room for workers and firms to adjust wages and hours worked, and it is important to use this increased flexibility to promote employment during good times and protect it in bad times.

- The new incentives for permanent hires are promising, but the cost of dismissing a permanent worker is still much higher than that for a temporary one, and this gap should be closed.

4. FINANCIAL SYSTEM:

 4.1 Recapitalization and Restructuring

- The progress achieved by financial sector reform, supported by the European Stability Mechanism, has been confirmed by the positive outcome of the ECB's comprehensive assessment.

4.2 Other financial measures

- The recently introduced "fresh start" is a significant step to facilitate deleveraging of consumers and entrepreneurs acting in good faith.

5. FISCAL POLICY AND PUBLIC ADMINISTATION

5.2 Fiscal consolidation and fiscal reform

- Continued gradual and growth-friendly fiscal consolidation, well coordinated across all levels of governments, will help maintain strong market confidence.

- The recent corporate tax reform is set to reduce obstacles for companies' growth.

- Spain has continued to bring down its fiscal deficit as the economy has recovered, but the level of public debt is very high and still increasing.

- Bring the deficit down further will require a concerted effort across all government levels through more ambitious and better specified measures than currently envisaged.

 

This document includes the following recommendations in the corresponding reform areas

2. COMPETITION AND REGULATION

2.3 Red tape and business environment regulation

- Measures to accelerate the implementation of the Market Unity Law can help generate crucial economies of scale, both in domestic and external markets, which would increase long-term growth and employment.

- Careful review and assessment of all size-related rules and regulations is needed to eliminate unwarranted obstacles to companies'growth.

- In insolvency law, due consideration should be given to fully involving public creditors in restructuring processes and making obligations to them subject to discharge after liquidation.

2.4 Professional services

- Moving ahead with the long-delayed liberalization of professional services would make it easier for firms to enter markets and would foster competition, including by addressing regional differences in regulatory requirements and practices.

3. LABOUR MARKET

3.1 Labor market regulations

- Keeping wage growth in line with productivity and external competitiveness is key for sustaining job creation.

- Wage developments still do not adequately reflect differences in business conditions across firms.

- Remaining regulatory and legal obstacles to firm-level bargaining and opt-out should be removed.

- The new incentives for permanent hires are promising, but the cost of dismissing a permanent worker is still much higher than that for a temporary one, and this gap should be closed.

- A single contract with tenure-based dismissal costs in sectors without high seasonal turnover can be introduced to reduce the gap in the cost of dismissing a permanent and temporary worker.

- Reducing legal and administrative uncertainties in collective dismissals and streamlining the application of objective criteria for fair dismissals would also help support permanent hiring.

3.2 Active Labour Market policies

- Programs to improve the skills of the long-term unemployed need to be closely monitored and evaluated, including by the transparent use of regional coverage and enforcement data.

4. FINANCIAL SYSTEM

4.2 Other financial measures

- Efforts should continue to strengthen SME's access to market-based financing.

- Non-bank financing should be developed further, including via alternative exchanges, venture capital, and securitization, while improving transparency and accuracy of financial reporting.

- To maximize the positive effects of the "fresh-start", uncertainties regarding the post-liquidation payment plan and revocation of the fresh start should be clarified.

- In insolvency law, due consideration should be given to fully involving public creditors in restructuring processes and making obligations to them subject to discharge after liquidation.

5. FISCAL POLICY AND PUBLIC ADMINISTRATION

5.1 Economic Governance

- Continue to improve the monitoring and enforcement of regional fiscal targets, rules, and access to debt mutualization mechanisms under the Budget Stability Law and related instruments.

- Consideration could also be given to introducing alternative tax-based mechanisms to help finance regions in bad times.

- Addressing design drawbacks in the regional finance system that limit regions' capacity and incentives to consolidate.

- Allowing regions' fiscal targets to differ—in a rules-based and transparent fashion—taking into account structural differences in adjustment needs and capacity.

5.2 Fiscal consolidation and fiscal reform

- Bring the deficit down further and ensure debt is put firmly on a downward path will require rising excise duties and environmental levies, and gradually reducing value added tax (VAT) preferential treatments.

- At the regional level, additional fiscal savings could be generated—for example, by reducing the costs of providing public health and education services and, as recommended by the Tax Reform Expert Committee last year, by increasing regions' responsibility to co-pay for these services.