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The Spanish economy has grown strongly in 2016, led by domestic demand spurred by easy monetary policy in the euro area and a fiscal stimulus. The expansionary phase is expected to continue in 2017 and 2018, with domestic demand leading the recovery, albeit at a slower pace as some factors that have contributed to boost consumption, such as low oil prices and lower taxes, will recede. Inflation will gradually pick up as the effects of low oil prices diminish, but pressures will remain moderate due to still high unemployment.
The unemployment rate is declining, but remains high, at about 19%. While falling, high long-term and youth unemployment pose particularly acute challenges. More effective active labour market policies and re-skilling are needed, along with a recovery in demand. Boosting living standards in the medium term hinges on increasing productivity via higher investment in innovation, strengthening skills and more intense competition.
After the significant easing of fiscal policy in 2015 and 2016, the fiscal stance will provide modest support over the projection period. With public debt around 100% of GDP and the deficit still at slightly below 5% of GDP, the scope for fiscal expansion is limited. It is nevertheless important to stimulate growth by shifting spending towards growth-enhancing outlays, such as education, active labour market policies and R&D, which are all below those in peer countries after having fallen substantially since the crisis. The structure of taxation remains tilted towards labour income which penalises growth and employment, and the tax burden should be shifted towards consumption and environmental taxes.
Economic Survey of Spain (survey page)