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Contents | Executive Summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of Spain published on 23 January 2007.
Contents
Fiscal consolidation is proceeding at a good pace, although more ambitious budget targets would be desirable
For a number of years the authorities have been pursuing a fiscal consolidation policy that is more aggressive than those conducted by most other EU countries. This has partly counterbalanced the expansionary effect of the prevailing easy monetary conditions. Fiscal results have improved markedly, and in 2005, for the first time in 30 years, the public accounts showed a surplus of 1.1% of GDP, which was well above the target set. This performance will no doubt be bettered in 2006, with a projected surplus of 1.4% of GDP – again substantially above the official forecasts, largely for cyclical reasons. The more restrictive stance of macroeconomic policy in 2005-06 has, however, scarcely curbed domestic demand. Although the impact of the higher ECB interest rates could make itself felt more in 2007, such restraint will be partially offset by tax reductions of 0.4% of GDP for households and firms. Against this background, growth of activity could reach 3% or more both in 2007 and 2008, rates still in excess of the OECD estimate of potential growth. Without any residual spare capacity from the earlier slowdown, continuing demand pressures are likely to result in a slightly positive output gap, hindering any narrowing of the inflation differential. It would therefore be appropriate to ensure that the fiscal stance remains as restrictive as it has turned out in recent years so as to alleviate domestic demand pressures and also meet longer term imperatives. In this light, more ambitious budget targets are called for.
More balanced growth requires measures to stabilise the housing market
Stabilisation of the property market, the prices of which have doubled in real terms since 1998, would also reduce macroeconomic and financial risks. This would be assisted by a decline in the inflation differential, which would allow for a rise in the currently very low level of real interest rates. It is also important, however, to correct the property market distortions that spur demand and make it more difficult for less well off and younger households to enter the housing market. Many dwellings remain vacant and the rental sector is very limited, which also works against regional labour mobility, thereby hindering further falls in unemployment. These problems appear to have prompted the measures adopted recently to develop the rental housing market. However, until such time as the main property market dysfunctions have been overcome, these measures are likely to have only a limited effect. From this point of view, it would no doubt be more effective and less costly to gradually do away with the various forms of assistance to home ownership that are still available so as to balance the incentives between renting and purchasing and moderate demand pressures. On the supply side, improved legal security of relations between owners and tenants would help to ensure that more effective use is made of the housing stock.
But it also involves improving the functioning of product markets
Reducing the consumer price inflation differential with the euro area, which has reached a cumulative 10 percentage points since 1997, is a priority objective. The erosion of competitiveness that is implicit in this trend is worrying in that, vis à vis the countries of the Economic and Monetary Union (EMU), any depreciation in the real exchange rate that might be needed in order to make good this imbalance in the future risks a prolonged period of slow growth. While some part of the inflation differential can be associated with benign price-convergence mechanisms, the evidence is that these mechanisms account for only a small part of the total. More buoyant activity relative to potential than in the euro area is undoubtedly a significant part of the story. But just running a weaker economy is not a desirable solution. Rather, if Spain is to achieve continuing high resource utilisation with lower inflation, it must enhance the flexibility of product markets. The interaction between insufficient competition and the strong pressure exerted by domestic demand has in recent years prompted excessive increases in profits in the sheltered sector. Similarly, because of the relatively higher energy intensity of Spanish production and lower taxation of oil products, recent energy price rises have had a larger impact on underlying (and overall) inflation than in the euro area. Tackling remaining market dysfunctions would reduce prices in the long run, as improved supply conditions lead to lower costs and mark-ups and higher productivity gains.
The wage formation process needs to be reformed
The price increases generated at the sectoral level have been passed on and propagated by the wage formation system, even if the latter has not been the fundamental source of inflation. Real wages have fallen over the past few years, partly as a result of the strong rise in immigration, which has enhanced labour market flexibility. However, nominal wage growth has been systematically higher than in the euro area, even though wages have been initially negotiated on the basis of the 2% European Central Bank inflation reference rate. The reason is that an increasing number of collective agreements include inflation catch up clauses. Moreover, these agreements, which are negotiated at intermediate (provincial or sectoral) levels, contain very broad administrative extension clauses that firms can evade only with great difficulty. On the one hand, such practices are unsuited to EMU membership, since they do not guarantee increases in unit labour costs similar to those in the rest of the zone. On the other, they restrict wage differentiation between firms with different productivity levels and reinforce nominal wage inertia. In a context of eventually weaker domestic and overall demand, such a wage determination process would hamper the resilience of the economy and its capacity to adjust by improving its competitiveness through a fall in relative unit labour cost. The social partners had earlier agreed to discuss wage bargaining reforms, but the prospects are poor. Given the current framework, the best approach would seem to be to move the system towards greater decentralisation and flexibility. In particular, the conditions for firms to opt out of collective agreements should be relaxed.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded (also available in Spanish). It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Spain 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Spain Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Claude Giorno and Eduardo Camero under the supervision of Peter Jarrett.
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