Claudia Ramírez Bulos
OECD
OECD Economic Surveys: Spain 2025
Abstract
The Spanish economy has shown resilient and steady economic growth in the last years, surpassing European peers. Economic growth accelerated in 2024, driven by strong private consumption partly due to a growing labour force, the recovery in the tourism sector, and investments from the EU recovery and resilience funds and increased government spending. The rebound in economic activity was accompanied by lower inflationary pressures. Growth is expected to remain robust but moderating in the coming years amid increased external risks. The housing sector is under stress and policy actions are needed to unlock residential investment. Public finances have improved in Spain amid a declining fiscal deficit, while public debt remains high despite its downward trend since 2021. Complying with fiscal rules while addressing long-term fiscal pressures requires continued efforts to increase public spending efficiency, tax reforms to enhance revenue, and strengthening the fiscal framework.
After a slow recovery following the pandemic, the Spanish economy has performed strongly in the last few years, with a growth rate of 3.5% in 2024, surpassing European peers (Figure 1.1, Panel A). Spain’s post-COVID recovery has been more balanced than previous recoveries, and growth is less dependent on foreign capital, with a positive current account, lowering external vulnerabilities. Job creation has been strong across both services and industry sectors, accompanied by labour and total factor productivity gains. Between 2022 and 2024 net migration reached record levels, contributing significantly to employment and GDP growth. Robust economic activity has been accompanied by steady disinflation and declining unemployment, even if unemployment remains the highest in the OECD. GDP growth will remain robust, but gradually moderate to 2.9% in 2025 and 2.2% in 2026 and 1.8% in 2027. Since 2021, Spain’s per capita GDP growth has exceeded 9% cumulatively, which is more than two and a half times the growth rate of the Eurozone, however Spain’s GDP per person still has not caught up to the level of peer countries (Figure 1.1, Panel B). This lack of convergence reflects weak labour productivity growth, even if productivity per hour has improved since the pandemic, largely explained by secular sluggish total factor productivity growth and capital stock per worker (Figure 1.1, Panel C). The employment rate remains below peer countries and the population is rapidly aging. Public debt is still high and ensuring fiscal sustainability will become more challenging amid growing spending on pensions, health, climate adaptation and mitigation, and defence. Strengthening the fiscal framework and advancing structural reforms that raise the still low employment rate (Chapter 3) accelerate investment, and boost productivity growth (Chapter 2) are needed to ensure fiscal sustainability and lift long-term growth.
Note: Panel A: seasonally and calendar adjusted data. Panel B: EU-27 and OECD refer to simple averages of 27 and 38 countries respectively throughout the period.
Source: Eurostat; World Bank WDI; OECD Economic Outlook database.
1.1.1. Growth rebounded in 2024 and is projected to moderate in the coming years
1.2. The Spanish economy has held up remarkably well. After growing 2.5% in 2023, the Spanish economy expanded by 3.5% in 2024, driven by strong private consumption —on the back of a growing labour force, — the post-Covid recovery in the tourism sector, investments from the EU recovery and resilience funds and increased government spending (Figure 1.2, Panel A). Economic activity remains strong in 2025, driven by robust gross capital formation and private consumption. A strong labour market and wage growth are supporting steady gains in real disposable income and consumption (Figure 1.2, Panel B). Housing credit to households and credit to firms is growing healthy, supported by monetary easing.
1.3. High international uncertainty and rising trade costs—driven by weakening external demand—took a toll on business confidence in early 2025. However, PMI indicators have recovered since June and signal expansion, after trending downward in early 2025 both in services and manufacturing, and the economic sentiment indicator has recently recovered (Figure 1.3, Panels A and B). Meanwhile, turnover among Spanish firms dipped slightly from March to June, but increased slightly between July and September, according to the Bank of Spain’s Business Activity Survey, pointing towards steady growth.
Source: OECD Economic Outlook database.
Note: Panel A: S&P Global Spain Purchasing Managers' Index; values above 50 indicate expansion.
Source: S&P Global; Eurostat.
1.1.2. The labour market is strong, but structural challenges remain
1.4. The labour market continued to perform strongly through 2024 and 2025. Employment grew by 2.2% year on year in Q3 2025 (Figure 1.4, Panel A), supported in large part by sustained migration. Foreign workers now make up 14.4% of total employment accounting for 44% of new jobs in 2025, with a relatively high employment rate of the foreign-born population, though their skills could be better used (Chapter 3). The unemployment rate continued falling to 10.5% in September 2025, while this is a notable improvement, it remains well above the European Union average of 6% and the OECD at 5% (Figure 1.4, Panel B) and with notable regional disparities. Increasing job vacancy rates, combined with strong economic growth and falling unemployment, may be showing signs of labour market tightness. At the same time temporary employment declined notably to around 16% in 2024, closer to the EU average, from 25.4% at the end of 2021, thanks the 2021 labour market reform (Box 1.1).
1.5. The minimum wage has risen sharply, reaching EUR 1,184 per month in 2025, a 4.4% increase since 2024. Since 2018, the minimum wage has grown by 60.9% in nominal terms and 30.2% in real terms helping to protect low-income workers purchasing power (Figure 1.4, Panel C). However, this pace outstrips inflation and productivity growth. Previous evidence suggests limited or unclear effects on employment. Yet, as the minimum wage in Spain’s has significantly increased, negative effects on employment may begin to emerge. Thus, future increases should be carefully calibrated to avoid unintended negative effects on employment, particularly for vulnerable groups such as low-skilled, youth, and older workers, as recommended in the 2023 OECD Economic Survey of Spain. Strengthening the independence and the technical capacity of the Minimum Wage Commission, as recommended in previous Surveys (OECD, 2021[1]) (OECD, 2023[2]), by giving it a mandate to advice on minimum wage changes in line with labour market conditions and productivity could help ensure minimum wage setting mechanisms reflect economic conditions, productivity and labour market disparities. For this, it is essential to continue strengthening the Minimum Wage Commission’s resources, while ensuring that both trade unions and employers take part. Improved data systems are also needed to track individual workers’ wages in real time (OECD, 2024[3]).
1.6. Despite recent reforms and improvements (Box 1.1), labour market challenges continue and reducing Spain’s unemployment and raising employment should be a priority. Unemployment remains significantly above the OECD average (Figure 1.4, Panel B), with youth and women disproportionally affected and there are signs that remaining unemployment is mostly structural. Spain’s employment rate for 15-64-year-olds at 66% in 2024 persists well below that in peer countries. Despite stronger growth since 2020, employment remains lower among youth and women (Figure 1.4, Panels D and E). Average earnings are low compared to other OECD countries (Figure 1.4, Panel F), reflecting weak firm productivity, low skills and skills mismatches (See Chapter 2). High unemployment largely reflects structural issues, including low incentives to return to work for the unemployed, skill mismatches and active labour market policies that have yet to achieve their full potential, concerns raised in past OECD Economic Surveys of Spain. Furthermore, Spain has exhibited important regional disparities in labour market outcomes, with the gap between the best- and worst-performing regions in terms of unemployment and employment ranking among the highest in the OECD. Northern and central regions continue to benefit from lower unemployment and higher job quality, reflecting more diversified and industrialized economies, while southern regions lag behind, with tourism and hospitality dominating economic activity.
The government has introduced several reforms aimed at addressing structural weaknesses in the labour market. These include:
The 2021 labour market reform: restricts the use of temporary contracts and shrinks the menu of employment contracts. It also modifies the framework for collective bargaining and simplifies the procedure for companies to take advantage of the ERTE short-time work scheme. In addition, the new RED Mechanism for Employment Flexibility and Stabilisation will allow companies to cut working hours in case of cyclical downturn or difficulties specific to their sector.
The 2022 VET reform: introduced a unified, flexible, and modular system designed to modernize training and link it more closely to job market needs. The work-based component has been reinforced, and adult VET is now fully integrated into the national qualifications system, with recognition and validation of prior learning playing a central role.
The 2023 employment law: seeks to provide personalized support and guaranteed services in favour of re-employment, and upskilling and reskilling programmes as part of the Recovery, Transformation and Resilience Plan (RTRP).
The 2023 Royal Decree-Law on hiring incentives: aims to support employment via reductions in social security contributions or other instruments, with a focus on hiring vulnerable unemployed persons or those with low employability, and to encourage the transformation of permanent part-time and permanent discontinuous contracts into full-time and permanent ordinary contracts.
The May 2024 unemployment benefit system reform: The reform increases the monthly unemployment benefit to EUR 570, extending eligibility to previously excluded groups (such as individuals under 45 without family responsibilities). It also allows recipients to combine unemployment benefits with employment income for up to 180 days, provided their salary does not exceed EUR 2,250 per month. Additionally, the reform eliminated the mandatory one-month waiting period after exhausting contributory benefits and prohibited automatic dismissal due to permanent disability. The reform started to be implemented in April 2025.
Reforms under discussion:
Mandatory digital time tracking and right to disconnect: From 2025, companies are required to implement digital systems for tracking employee working hours, instead of using manual methods. Additionally, the right to digital disconnection has been reinforced, ensuring employees are not contacted outside working hours.
Reform of occupational risk prevention law: The reform is aimed at adapting regulations to intensify the prevention of risks associated with the use of technologies, exposure to chemical substances, high temperatures, climate related risks, and psychosocial risks to ensure a safer and healthier work environment for all employees.
Source: Ministry of Labour and Social Economy.
Note: Panel B: unemployment rates are calendar and seaonally adjusted.
Source: OECD Economic Outlook database; OECD Labour force statistics; OECD Employment protection legislation database, 2020 edition.
1.7. The recent reform of the unemployment benefit system improved the scheme’s generosity and beneficiaries’ work incentives by reducing the benefit amount over time, making benefit receipt temporarily compatible with work, and establishing personalised activation itineraries. This is a positive step towards improving re-employment prospects, in line with recommendations in the 2023 Economic Survey of Spain. Strengthening activation requirements for recipients and extending the period where work income can be combined with the unemployment benefit receipt beyond the current 6 months, can further encourage a return to work and enhance job matching.
1.8. Spain is implementing several initiatives to improve active labour market policies and strengthen the public employment service system, including through reforms and investments under the RTRP, which also seek to increase coordination and promote the exchange of good practices. The aim of these initiatives is to provide better job search assistance, career guidance, work-experience programmes, and up-skilling and re-skilling support (OECD, 2025[4]). However, a key challenge is to consolidate and scale these approaches across the territory. Digital tools to support guidance, such as the Send@ platform, are also being developed. Nevertheless, more counsellors are needed at the public employment service, which are often understaffed, and they must be well trained to guide jobseekers effectively towards offers and policies adapted to their situation. While the 2021 labour market reform addressed excessive use of temporary contracts, the OECD has long recommended that dismissal procedures for permanent contracts be streamlined and clarified, particularly for small firms, to reduce hiring risks and encourage more permanent job creation (OECD, 2021[1]) (OECD, 2023[2]).
1.9. Increasing access to quality childcare, especially for vulnerable children, could boost female employment. To reduce persistently high youth unemployment and increase employment, Spain should keep strengthening vocational education and training, and improving the effectiveness of active labour market policies targeted at young people, as highlighted in previous OECD surveys. Efforts in recent years are already showing results in expanding work-based learning opportunities (Box 1.1). Following the 2022 reform, the VET system is now rolling out a fully dual model—where over 35% of training occurs on the job and early indicators show raising employer engagement and improving training alignment to labour market needs. Sustaining the growth in employment among older workers should continue to be a priority, as discussed in Chapter 3.
1.1.3. Health-related inactivity has risen sharply
1.10. The sharp rise in temporary sick leave (incapacidad temporal, IT) in Spain poses growing economic and policy challenges (Figure 1.5, Panels A and B). In 2023 alone, over 369 million workdays were lost to sick leave, equivalent to more than one million workers absent each day, according to estimates by the Instituto Valenciano de Investigaciones Económicas (IVIE, 2025[5]). This represents a 52% increase since 2018 and the annual economic cost of absenteeism is estimated at EUR 81.6 billion in 2023, equivalent to 5.4% of GDP, up from 4% in 2018. Much of the increase took place over 2023 and 2024 and is due to the sharp rise in long-duration cases (over 365 days), which doubled over the period and now account for more than a third of total low workdays, despite representing less than 3% of cases. A small group, about 7 %, accounts for half the sick-leave processes. If left unaddressed, the issue risks becoming more entrenched and costly, particularly as Spain’s population continues to age and the prevalence of chronic and mental health conditions rises. Without action, sick leave could weigh even more heavily on productivity, public finances, and labour market participation in the coming years.
1.11. The increase in temporary sick leave is broad-based, affecting all age groups, regions and sectors, but is pronounced among younger workers and in long-duration and repeat cases. Mental health and musculoskeletal conditions now account for more than half of all lost workdays, with mental health–related leave rising by 111% over five years. Long-term cases (over 365 days) have doubled, and more than half of absent workers in 2023 experienced multiple episodes during the year.
1.12. This trend, as in many other OECD countries, is driven by several structural and institutional factors. First, the public health system constraints have worsened since the pandemic: while Spain’s population has grown significantly since 2019, the number of primary and specialist care physicians has not kept pace. Delays in appointments and referrals have lengthened sick leave durations, as certificates are often extended while workers wait for diagnosis or treatment. Regulatory changes in 2023 made sick leave automatically renewable at 365 days, in part to manage bottlenecks, while extensions up to 730 were already in place before 2023. Second, many collective agreements require employers to top up sick pay to 100% of wages from day one, well above the 60% based covered by the Social Security, raising costs and weakening return-to-work incentives. Third, fragmented governance, split between regional health services and the national Social Security administration, combined with limited oversight capacity, especially from INSS inspectors, has further reduced the system’s ability to manage and contain sick leave effectively. In response, the Ministry of Social Security has established a roundtable to coordinate reforms, and since July 2024, mutual insurance funds (mutuas), which oversee work-related injuries, have begun participating in the evaluation of non-occupational sick leave cases. Additionally, the Government asked the fiscal council to examine the causes of the evolution of temporary disability spending in the second phase of the 2022-2026 Spending Review.
1.13. Addressing the rise in temporary sick leave will require a comprehensive strategy to strengthen oversight, medical capacity, and coordination. A first priority is to expand both healthcare and inspection capacity by hiring more primary care doctors, particularly in mental health, and increasing the number of INSS medical inspectors. Pay scales for inspectors should be made more competitive to attract talent, and the lengthy process for recognising foreign medical degrees, currently taking up to four years, should be fast-tracked. Although these measures imply fiscal costs, they are likely to be outweighed by the economic savings from reducing unnecessary or prolonged sick leave. Second, consideration could be given to further extending the role of the mutual insurance funds (mutuas) which could take more responsibility in evaluating and issuing discharges for sickness absences for common contingencies, making use of their existing infrastructure and extending their role to cases of longer-term temporary incapacity (i.e., absences of one year or longer) where appropriate. Finally, supervisory processes should be reformed so that the INSS begins case reviews much earlier—well before the current 12-month threshold—and adopts proactive tools such as automatic control letters. Routine extensions of sick leave should be limited unless medically justified, to ensure that resources are targeted where truly needed and return-to-work is encouraged.
Note: Break in the series in 2021 in Panel A. Data in panel B refer to the general regime.
Source: Eurostat; Umivale Activa and Instituto Valenciano de Investigaciones Económicas, Estudio socioeconómico de la evolución de la incapacidad temporal y la siniestralidad en España, June 2025.
1.1.4. Investment is recovering
1.14. Spain’s investment levels have stabilized at around 20% of GDP, lower than the OECD and peer countries levels, but closer to those observed before the extraordinary investment surge of the 2000s driven by the housing boom (Figure 1.6, Panel A). Gross fixed capital formation returned to its pre-pandemic level by early 2023 (Figure 1.6, Panel B), along with the strong real GDP growth and the implementation of the of EU Next Generation (NGEU). Investment in machinery and equipment returned to 2007 levels, while spending on intellectual property has significantly expanded, reflecting a shift toward knowledge-intensive assets (Figure 1.6, Panel B).
Source: OECD Economic Outlook database; INE.
1.15. Spain’s Recovery, Transformation, and Resilience Plan (RTRP) has supported near term growth and helped crowd in private investment, particularly in digital and green sectors (Figure 1.7, Panel A). Spain has implemented most of the Plan's reforms and 69% of the funds had been disbursed by August 2025 (Figure 1.7, Panel B). Furthermore, survey data suggests that nearly half of participating firms would not have invested without EU funds (Bank of Spain, 2025[6]). Additionally, Spain has requested up to EUR 84 billion in loans aiming to support investment in the green transition, digitalization, housing, and regional development. However, only 15% of investment-linked objectives, particularly in sustainable mobility and digitalization, have been met so far and updated ECB projections suggest a smaller impact on potential growth than initially expected. The gains from reforms and investments included in the RTRP would lead to 1.2% and 1.4% additional GDP growth by 2026, the final year of the programme, with positive effects persisting beyond 2026, ranging from 0.7% to 1.4% by 2031 (Bańkowski, 2024[7]), below previous calculations of around 3% by 2026 (Bańkowski, 2022[8]). This underscores the importance of not only absorbing and deploying the large volume of funds by 2026 but also addressing deep-rooted impediments to investment, including administrative bottlenecks.
1.16. Looking ahead strengthening investment will depend on improving the business environment, by streamlining regulation, improving administrative efficiency and strengthening intergovernmental coordination and boosting the capacity, especially of SMEs, to innovate and grow (Chapter 2). Faster RTRP project execution and sustained reform momentum will be essential to convert one off stimulus into lasting gains.
Source: ELISA portal, Government of Spain, August 2025.
1.1.5. Inflation is low and will continue to decline
1.17. Despite an uptick toward the end of 2024, disinflation continued for both headline and core inflation in the first half of 2025, before picking up slightly in the third quarter. Headline inflation fell steadily through 2024, largely reflecting lower energy prices. By September 2024 inflation reached a low of 1.7%, ticking up temporarily to 2.8% by December (Figure 1.8), driven by rising fuel costs and the gradual phase out of temporary government subsidies introduced in 2022 to shield households from the inflationary shock. As energy prices stabilized, most measures were gradually phased out throughout 2024—including the reduced VAT on electricity and gas, and the zero VAT on essential food items—while public transport subsidies were reduced and targeted to benefit younger users until the end of 2025. Spain’s harmonised inflation rate was 3.2% in October 2025, and average headline inflation is expected gradually decline to 2.3% in 2026 and 1.8% in 2027.
Source: Eurostat.
1.18. Core inflation has slowly declined since September 2023, reaching 2.7% in September 2025. Even if the nominal wage growth averaged 5.0% in 2024, outpacing inflation, second round effects on inflation have remained contained. The 2023 tripartite agreement on collective bargaining supported moderate salary increases in 2023-2025, containing wage pressures. Business surveys suggest that firms still anticipate further price increases in the short run, both in services and industry. Nevertheless, core inflation is expected to continue to recede slowly in 2026 and 2027 reaching 1.8% on average in 2027.
1.1.6. The external sector holds firm amid raising tariffs and uncertainty
1.19. Despite modest growth among Spain’s main EU trading partners, the external sector was resilient in 2023 and 2024 (Figure 1.9, Panel A). The current account surplus rose further from 2.7 of GDP in 2023 to 3.2% in 2024. Stable imports and rising exports increased the current account, with a strong momentum in service exports. Tourist arrivals and spending reached record highs, with revenues rising by 15.9%, outpacing the 10% increase in tourist arrivals, suggesting high average spending. Non-travel service exports, including business services, transport, telecommunications, and IT also expanded robustly (Figure 1.9, Panel B). The trade deficit narrowed due to a sharp decline in energy import prices.
Source: OECD Economic Outlook database; Bank of Spain.
1.20. Spain’s direct exposure to U.S. tariffs is limited, as its exports are mostly diversified and directed toward Europe (Figure 1.10, Panels A, B, C and D). Bilateral goods trade with the United States accounts for less than 5% of exports and around 1% of GDP in 2024, resulting in a moderate economic impact of the increased US tariffs. However, higher uncertainty can further affect business confidence, while some sectors such as agri-food, chemicals, and machinery and transport equipment may be more affected (Figure 1.10, Panels E and F). Spain’s integration into global value chains, means that the indirect effects could be somewhat greater. Some Spanish components are used in goods exported by other EU countries to the U.S. and tariffs can reduce demand for Spanish intermediate goods. Overall, export growth is expected to slow in the next two years due to weak demand in key trading partners, as discussed below.
1.21. In response to heighted global trade tensions, the government announced a Trade Response and Relaunch Plan worth EUR 14.1 billion (0.9% of GDP) in April 2025 to protect workers and companies affected by the rise in tariffs, reorient their production capacity and boost their presence in new markets. The plan includes guaranteed credit lines through the Official Credit Institute (ICO), loans via the industrial investment fund, the use of RTRP funds, as approved by the European Commission, and the possibility for companies to request the implementation of labour flexibility measures to maintain employment (RED). Support measures should be temporary, targeted, and well-designed, if higher tariffs are permanent, firms will need to adapt to the new trade environment and permanent support can be counterproductive and dampen incentives for firms to adapt. Moreover, the government has announced it will seek new trade agreements, prioritising the ratification of the agreement with Mercosur, as well as reinforcement with strategic partners to diversify export markets.
Source: UN Comtrade database; OECD International Trade Statistics.
1.1.7. Growth will remain strong but will moderate
1.22. GDP growth is expected to reach 2.9% in 2025, 2.2% in 2026 and 1.8% in 2027. Domestic demand will remain the key driver of growth, amid weakened external demand (Table 1.1). Private consumption will be supported by a robust labour market, real income gains and falling headline inflation. Investment is expected to rise over 2025-2026 underpinned by lower financing costs and the continued implementation of the Recovery, Transformation and Resilience Plan. Export growth is projected to slow, reflecting weak demand from key trading partners and the imposition of an effective U.S. tariff of over 16% on Spanish goods.
1.23. The outlook is overshadowed by significant uncertainties and downside risks, both external and domestic. On the external side, as in most OECD countries, risks largely stem from escalating trade measures globally, which could further dampen external demand for Spanish exports, increase uncertainty and delay investments globally and in Spain. A decline in global risk appetite could raise financial markets’ volatility and financing costs for Spanish firms, tightening credit conditions and weighing on investment and growth. An intensification of regional conflicts could increase commodity prices, leading to a negative terms-of-trade shock, higher inflation, and a worsening of the current account balance.
1.24. Domestically, political fragmentation could complicate the timely implementation of needed structural reforms and fiscal measures and hinder the effectiveness of fiscal policy if Spain’s deficit reduction fails to meet its targets or if investor concerns about sovereign risk arises. Additionally, weak investment remains a risk, potentially driven by ongoing supply constraints in construction, prolonged uncertainty at both national and global levels, or delays in the implementation of NGEU funds. On the upside, a more rapid and efficient implementation of RTRP funds could boost investment, and an unwinding of the high savings rate could lead to stronger consumption. Finally, several large potential shocks could alter the economic outlook (Table 1.1). For example, climate-related shocks, such as the floods in Valencia in October 2024, that had a significant impact at the local level, can pose a serious threat to Spain’s economy. More frequent and intense weather events, such as droughts, floods, and heatwaves can also affect labour productivity (Costa, H. et al., 2024[9]), disrupt agriculture, damage infrastructure and strain water systems (see Chapter 4). These events can also trigger inflationary pressures and weigh on tourism and transport.
Annual percentage change unless specified, volume (2020 prices)
Source: OECD (2025), OECD Economic Outlook database.
1.2.1. Banking system resilience has strengthened
1.25. Spanish banks remain well capitalised with higher levels of solvency than before the pandemic and lower NPL ratios (Figure 1.11, Panel A and B). Bank profitability has improved significantly, with a noticeable increase of net interest income in the domestic market (Figure 1.11, Panel C). However, this strong profitability has not translated into a large improvement in their Tier-1 ratio, which is above minimum requirements, but below the OECD average (Figure 1.11, Panel D). This partly reflects that excess capital has been managed mostly via shareholder distributions, such as dividends and share buybacks, suggesting that there is space for strengthening banks’ capital position.
1.26. While overall financial stability risks are contained, the uncertain global environment and potential shifts in financial conditions call for a cautious approach. According to the Bank of Spain and the IMF stress tests, the banking sector is well-positioned to withstand severe and prolonged global shocks, however, the impact varies across banks and could result in a significant contraction in credit (Bank of Spain, 2025[10]) (IMF, 2025[11]). The Bank of Spain has acted proactively by introducing a countercyclical capital buffer (CCyB) of 0.5% of risk-weighted assets for exposures located in Spain in the fourth quarter of 2024, effective by October 2025. This will increase to 1% the following year. Given current capital levels and profitability, banks are expected to meet the buffer without reducing credit supply. Authorities should continue encouraging prudent provisioning, retention of earnings and moderate dividend policies to proactively strengthen buffers.
Note: EU-27 excludes Bulgaria, Croatia, Cyprus, Germany, Malta, and Romania.
Source: IMF Financial Soundness Indicators Database.
1.2.2. Integrating climate related risks into financial supervision
1.27. Extreme climate related weather events are frequent in Spain (Chapter 4), posing risks to financial stability that should be systematically assessed and integrated into routine supervisory practices. Spanish financial authorities recognize climate change as a major challenge and are committed to a low-carbon transition by aligning with NGFS guidelines and incorporating climate risks into financial oversight frameworks. They are also developing tools to better identify and monitor these risks, including stress tests. To evaluate both transition and physical risks, Spain’s macroprudential authority (AMCESFI) published its first report on climate-related financial risks in 2023 (AMCESFI, 2023[12]). While the report found only moderate short-term impacts on the banking sector, risks are unevenly distributed and expected to grow with further climate disruption. In parallel, the Bank of Spain has issued clear expectations for credit institutions to embed climate and environmental risks into their strategies, governance, risk management, and disclosures—aligned with European Central Bank guidance (Bank of Spain, 2025[13]). These steps and commitments are important and welcome. Going forward, efforts should focus on continuing to monitor and assess climate risks while ensuring that climate risk oversight is gradually integrated into routine supervisory processes.
1.2.3. Private sector balance sheets are sound
1.28. The financial health of the non-bank private sector has improved, supported by the robust performance of the economy, job creation, and deleveraging. Households have reduced their debt levels while benefiting from job creation, robust real income growth, and excess savings accumulated since the pandemic. Corporate liquidity and profitability have increased, and firms’ debt repayment capacity has returned to pre-pandemic levels contributing to continued deleveraging (Figure 1.12, Panel A). By the end of 2024, lending to both households and non-financial firms had resumed moderate growth (Figure 1.12, Panel B).
1.29. Despite these positive trends, some areas warrant monitoring and surveillance. The share of private sector loans requiring special surveillance decreased in 2024, but non-performing loans in consumer credit increased by 3.9% (Bank of Spain, 2025[10]). Individual insolvency filings are growing, reflecting the new proceedings following the insolvency law enacted in September 2022, including the new special insolvency procedure for small businesses (aimed at making these procedures more attractive for such businesses), though corporate insolvencies remain low. These developments do not signal systemic risks but highlight the importance of cautious lending practices. Also, continuous evaluation of the evolution of insolvencies across agents is required, as currently done by the Bank of Spain.
1.2.4. Housing market developments require ongoing monitoring
1.30. While rapid housing price growth does not point to overheating and financial stability risks, a sustained easing of financial conditions could fuel stronger housing demand and further price pressures warranting close monitoring. The housing market has gained momentum since mid-2024. In 2024, housing transactions reached their highest level since 2007 supported by lower interest rates, strong job creation and growing population. This has led to a recovery in housing purchases and new mortgages, with house prices rising by 12.7% year-on-year growth in Q2 2025 alongside rental price increases (Figure 1.12, Panel C and D). Mortgage lending remains cautious, following strengthened prudential oversight of the housing market since the global financial crisis, which has helped contain credit risks and enhance the resilience of the financial system. Nevertheless, the high share of variable rate mortgages (about 70% of the stock), exposes households to interest rate volatility. In recent years most new mortgages have been granted at fixed rates, helping reduce risk overtime. Loan-to-income (LTI) and loan service-to-income (LSTI) ratios held relatively stable in 2024 (Bank of Spain, 2025[10]). Continued monitoring of lending standards is essential to avoid the build-up of vulnerabilities. Banks apply lending criteria, typically limiting LTV to 80% for residents and 60–70% for non-residents. Pre-emptive borrower-based measures, such as stricter loan-to-value (LTV) and debt-to-income (DTI) ratio caps for mortgages, which would be more binding in more stressed regional markets, could be considered if signs of easing lending standards emerge, as these take time to affect lending behaviour. Also, enhancing monitoring by strengthening data collection on regional price dynamics, rental markets, and non-bank lending to identify emerging risks could be helpful.
Note: Panel A: data on firms' debt refer to consolidated debt.
Source: Bank of Spain; Ministry of Housing and Urban Agenda; Eurostat.
1.31. Many people struggle to access affordable housing in Spain. Sustained housing demand pressures are not being matched by an adequate increase in housing supply. Only 345 000 construction permits were issued from 2022 to 2024 well below net household creation of 604 000 (Figure 1.13, Panel A). The housing shortage, estimated by the Bank of Spain at around 600,000 units in 2022–2025 has been driven largely by migration, and rising household formation in urban and tourist areas both of which have intensified demand (Figure 1.13, Panels A and D).
1.32. The rental market is particularly strained. Rental demand has surged, notably in urban and tourist areas, while rental prices have outpaced the incomes of many lower-income households. Homeownership remains high at 75%, but the share of renters has grown significantly since 2015, especially among youth and foreign-born residents. The number of years required to save for a home has risen to over 20 years. Traditionally in Spain, social housing, has been intended for owner-occupiers and social rental housing remains limited at just 3% of the housing stock (Figure 1.13, Panel B), far below OECD and EU averages. While ownership is high, many low-income households face difficulty servicing mortgage payments. These dynamics, among other factors, have contributed to Spain having one of the highest rates of housing-related poverty risk in the euro area (Figure 1.13, Panel C).
1.33. Supply has failed to respond adequately due to three main barriers. First, there is limited availability of buildable land in high-demand areas (Bank of Spain, 2024[14]). For land to become buildable, it must go through urban planning processes, and local authorities must approve land use changes, development plans, and infrastructure provisions. Even when land is designated for development, the conversion process is slow and uncertain, involving multiple administrative layers and legal approvals. Obtaining permits can take up to two years, as developers must navigate a complex approval process involving municipal, regional, and national authorities. In some regions, land scarcity is not physical, instead, it is linked to lengthy urban planning procedures, lack of transparency and unpredictable outcomes that reduce investor appetite and raise costs (Alves et al., 2023[15]). Decentralised competencies and limited coordination between regional and local governments delay project deadlines and disincentivize investment. As of 2024, there have been no significant urban developments in recent years that have substantially increased the supply of build-ready land in large cities (Bank of Spain, 2025[16]). Second, productivity in the construction sector has fallen over the past decade. Coupled with large increases in material and labour costs and labour shortages, this has undermined viability of many projects, particularly in affordable and rental housing segments, and reduces incentives to develop in complex environments particularly for affordable segments with low expected returns. Moreover, lending standards for real estate and construction loans are tight (Figure 1.13, Panel E). Third, there are weak incentives for affordable housing supply, such as low profitability due to high land and construction costs, as well as legal and policy uncertainty due to frequent changes in housing regulations that create an unpredictable investment environment. Despite legal mandates, such as minimum social housing shares in new developments, limited public investment and weak private returns deter long-term commitments from developers, stifling supply growth, while overall gross fixed capital formation in construction remains subdued (Figure 1.13, Panel F).
1.34. Over the past few years, the Spanish government has taken a proactive approach to addressing housing challenges adopting a mix of demand and supply side policies (Box 1.2). On the supply side, the government has proposed the reform of the Law on Land and Urban Rehabilitation with the aim to streamline and accelerate urban development processes, which are currently lengthy and complex due to multilayered administrative procedures. The draft reform aims to simplify planning approvals, clarify land classification to determine what land is “developable,” and reduce bureaucratic bottlenecks, key barriers that have constrained housing supply, but is still pending. Also, the government launched programmes to promote industrialised or off-site building of houses that are expected to reduce construction times by up to 60% and lower costs, aiming to build 15,000 homes annually in the next decade intended for social or affordable rental units. It also committed to expand the stock of social and affordable housing and unveiled the Social Housing Promotion Facility Plan, aiming to build 43,000 social and affordable rental homes (Table 1.4). While these are welcome intentions, the scale appears insufficient. To reach the EU average, Spain would need roughly 1.5 million social rental units, which means building or converting over 850,000 additional units (213,000 new or converted units per year over the next 4 years). Despite these efforts, affordability pressures persist, highlighting the need for further action.
1.35. On the demand side, initiatives include the 2023 Law on the Right to Housing, which introduced rent caps in stressed areas, strengthened rental protection and expanded eligibility to rental support. While these demand side policies are well intentioned, their effectiveness is often limited without an increase in housing supply, as suggested by international experiences from the US (Susin, 2002[17]) the UK (Gibbons and Manning, 2006[18]), and France (Fack, 2006[19]). Evidence from Barcelona’s earlier rent freeze (2020) suggests that rent caps reduced rental supply with some landlords withdrawing properties or shifting to short term rentals (Monràs and García-Montalvo, 2022[20]).
1.36. A balanced long-term strategy is needed that tackles both supply constraints and demand pressures, while improving coordination across government levels, in particular between regional governments and city councils. Further increasing the supply of affordable housing remain central. Priority should be given to advancing the Land and Urban Rehabilitation Law and to streamlining and digitalising land development procedures to unlock buildable land, especially in high demand areas and to ensure predictable zoning and legal certainty to make land buildable to attract investment. Efforts to streamline procedures should be complemented by promoting a more widespread adoption of digital services to improve processing time and efficiency. Such reforms take time to show an effect on supply and may not address the needs of vulnerable households in the short term. Spain should therefore also expand investment in social housing beyond what is currently planning.
1.37. Leveraging for- profit and non-profit actors could help expand social and affordable housing more sustainably and at a lower fiscal cost. Spain lacks a tradition of limited profit housing providers, which play a crucial role in other OECD countries (Box 1.3). Setting up such schemes at scale would, however, take a long time. To broaden supply and reduce reliance on public social housing construction in the longer term, Spain could explore developing a sustainable governance model for affordable housing that ensures financial self-sufficiency, transparency, and accountability in managing resources while promoting long-term planning. In particular, Spain could pilot revolving funds, e.g., by setting up a scheme as a “proof of concept.” While the design of such schemes varies, they can include a share of the revenues generated from rental income which are reinvested to finance new social rental housing, sometimes coupled with low-interest public loans rather than direct subsidies. Such schemes, have proven successful to develop affordable housing in several OECD countries, limiting reliance on public funds over the long term. Spain’s new public housing agency could also play a central role in managing and expanding the affordable rental stock.
1.38. Spain has also proposed a tax on vacant homes and new taxes on property purchases by non-EU buyers to address housing pressures, particularly in tourist-heavy areas. Currently, there is an estimated 3.8 million empty properties, but these are mostly located in places where people do not want to live due to limited job prospects or because they are located far from services and amenities, with 33% of all properties in towns with less than 1000 inhabitants, and only 18% of empty homes in middle or large cities where 53% of the population lives. Moreover, while well intentioned, such measures are complex to implement. Portugal’s experience with the tax on vacant homes shows that enforcement challenges and limited local capacity can weaken effectiveness. Spain can learn from Portugal’s experience by clearly defining vacancy, and adopting a tax system that increases based on the duration of the vacancy and the location, allowing municipalities to define urban pressure zones and adjust tax rates accordingly to ensure measures are tailored to local housing market conditions. To strengthen enforcement and accurately identify vacant properties, utility consumption data and property registries can help.
1.39. With the stock of social housing still limited and only gradually expanding, housing allowances can play an important role in helping low- and middle-income households afford rental payments. However, Spain currently provides limited rental assistance often through regionally provided programmes, and the system remains fragmented, underfunded and poorly targeted. A more effective system would consolidate existing programmes into a national housing allowance scheme that is means tested and linked to local rents. This would ensure better targeting, improve equity and reduce distortions. Any expansion of housing allowances should be coordinated with measures to boost housing supply, as poorly targeted subsidies in a tight housing market risk driving up house prices and rents, disproportionally benefitting landlords who capture a significant share of the subsidy through increased rents (Chapelle, Arumi and Gobbi, 2023[21]).
Law on the Right to Housing (2023): Built on existing tenant protections by introducing rent caps in stressed housing markets, a new rent index to replace CPI adjustments from 2025, and stricter rules for large landlords (defined as owning more than 10 residential units) such as lower cap rent and higher vacant property penalties than for small landlords. The law mandates that landlords bear agency fees, extended eviction notice periods for vulnerable tenants and promoted the expansion of social and affordable housing by preventing the reclassification of subsidised housing to ensure they remain in the subsidised sector for longer and increasing land reserves for affordable housing.
Amendments to the Law on Land and Urban Rehabilitation (Ley del Suelo y Rehabilitacion Urbana- pending): The amendments aim to simplify and accelerate urban planning and land development procedures to make more land buildable. It also aims at strengthening legal certainty by clarifying competencies across levels of government. Third, it aims at promoting energy efficient and sustainable building practices, especially in urban renewal projects.
Social Housing Promotion Facility Plan (2024): Aims to build 43,000 affordable rental homes through public-private partnerships, financed by EUR 6 billion in government loans and guarantees. The plan supports projects that expand the stock of energy-efficient, socially rented housing, including financing for land and construction, with a guaranteed scheme covering up to 50% of eligible loans to incentivize investment.
PERTE for Industrialised Housing (2025): Allocated EUR 1.3 billion over the next decade to promote off-site construction methods for social housing, targeting 15,000 new social homes per year.
Valuation Order “Orden de Tasadoras”: The Ministry of Economy, Trade and Business updated the property appraisal regulation to modernize valuation standards for financial purposes in June 2025. One of the main changes in the new regulation is that it shortens the timeframes for developers to access financing by allowing the use of simplified urban planning licenses, allowing construction projects to begin much earlier than before. The reform introduces sustainability criteria, enhances traceability, and integrates digital assessment methods, streamlining procedures.
Public Housing Company (2025): Establishment of a state-owned enterprise dedicated to the promotion, development, and management of housing. This company aims to increase the stock of affordable public housing and ensure it remains accessible over time. Will start managing approximately 3,300 housing units and 2 million square meters of residential land. Additionally, 13,000 housing units from the Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (SAREB) will be transferred to this new public enterprise, with the ultimate objective of reaching a total of 40,000 units.
Restriction of Short-Term Rentals (May 2025) and proposed tax measures: Ordered the removal of over 65,000 unlicensed Airbnb listings to free up housing for residents. Announced plans to tax empty homes, impose a 21% VAT on short-term tourist rentals, and tax up to a 100% tax on property purchases by non-EU buyers to deter speculation.
Source: Government of Spain.
Note: Panel A: EU-27 excludes Bulgaria, Croatia, Cyprus, Greece, Italy, Luxembourg, Malta, and Romania. Panel C measures the share of people living in rented housing whose income falls below the national at-risk-of-poverty threshold.
Source: OECD Affordable Housing Statistics; Eurostat; INE; Bank of Spain, Ministry of Housing and urban agenda; OECD Economic Outlook database.
Countries like Austria, the Netherlands, and Denmark rely on public housing companies or regulated non-profit associations to own, develop, and manage social housing over the long term. These entities are tasked with: Maintaining affordability through regulated rents. Ensuring eligibility via means-testing and regular reviews. Reinvesting rental income into housing maintenance and new developments. In these models social housing is financed with revolving funds or earmarked revenues, such as rent revenues recycled into new construction, earmarked land value taxes or property levies, or preferential public loans. This ensures long-term financial viability without constant reliance on the general budget.
Good governance frameworks clarify responsibilities across national, regional, and local governments, and set:
Rules for allocation and means-testing.
Conditions for staying in public housing (e.g., income thresholds).
Maintenance and reporting obligations.
Denmark: Denmark’s social housing sector accounts for about 20% of the national housing stock and houses more than one-sixth of the population. The sector is financed through a mix of tenant contributions, municipal support, and loans, with surplus funds channelled into the National Building Fund for renovation and social initiatives. Denmark’s National Building Fund operates independently from the state budget. It is funded by a share of tenants’ rents and housing associations’ mortgage contributions.
Austria: The social housing sector (Geförderte Wohnungen) or municipal housing (Gemeindewohnungen), are managed by different providers that follow the same cost-based rent-setting rules and eligibility criteria. Funding for construction and renovation comes from a combination of public grants, low-interest loans, and tenant contributions, with the provinces playing a key role in allocating resources and setting housing policy. The business model of housing associations is based on cost-recovery and a continuous re-investment of any surpluses into new construction or renovation. Any surpluses generated are strictly regulated.
The Netherlands: One of Europe’s largest social housing sectors. Around 30% of the total housing stock is owned and managed by non-profit housing associations, which operate under a regulated framework to ensure affordability and social objectives. Access to social housing is means-tested and rents are subject to government controls. In recent years, the sector has faced challenges related to rising construction costs, land scarcity and pressure to accommodate a growing population.
Source: Social Housing: A Key Part of Past and Future Housing Policy, OECD 2020.
1.4.1. Public finances have improved, and a mild fiscal consolidation is expected in the coming years
1.40. Public finances have continued to improve with the fiscal deficit and public debt falling, yet the underlying structural deficit remains barely unchanged and public debt is still high. The overall fiscal deficit declined by 0.3 percentages points to 3.2% of GDP in 2024, outperforming the government’s 3% deficit target when excluding the emergency response to the DANA floods (0.4% of GDP). This improvement was largely driven by the phase-out of temporary anti-inflation and energy support measures (0.4% of GDP in 2024), contained net primary expenditure (Figure 1.14, Panel A and B), and robust tax revenue growth (8.4% in 2024). Tax revenue grew on the back of employment growth and higher nominal wages, that combined with no indexation of the personal income tax brackets, led to nominal tax revenues growing faster than the income base (Figure 1.14, Panels C and D). The debt-to-GDP ratio declined to 101.8% in 2024 from 109.5% of GDP in 2022, in line with recommendations in the 2023 OECD Economic Survey of Spain, outperforming OECD and national projections. However, it is still high compared to the average of Euro Area economies and OECD countries (Figure 1.15, Panel, A). Moreover, even though the headline fiscal deficit has narrowed, the underlying structural deficit remains largely unchanged at near 3% of GDP (Figure 1.15, Panels B and C).
Note: OECD average excludes Colombia, Iceland, New Zealand, and Türkiye.
Source: OECD National Accounts database; European Central Bank; Eurostat; OECD Economic Outlook database.
1.41. The government deficit is projected to decline to 2.5% of GDP in 2025 and 2.3% in 2026 and 2027, below the government’s forecast published in the annual progress report in April 2025. These projections incorporate DANA-related aid measures (0.2% of GDP) and the extension of public transportation subsidies in 2025, as well as an increase in defence spending to 2% of GDP in 2025 and 2026 (additional EUR 10.5 billion). Despite these ongoing expenses, the fiscal deficit is projected to narrow due to higher revenue and a mild expenditure consolidation. Most of the government spending consolidation in 2025-27 is explained by lower spending on capital transfers and payments related to the phase-out of the remaining energy-related measures, combined with higher revenue stemming from job creation, higher salaries, and recently announced tax measures. In the absence of a full budget law, a series of tax measures were approved by Congress in December 2024 to bolster revenues including the introduction of a Global Minimum Tax of 15% for multinational firms, an increase in the top bracket on personal capital earnings, and a rise of excise taxes on tobacco and e-cigarette. In addition, the windfall tax on financial institutions was created, aiming to last for three years while the temporary energy company and bank levies were not renewed.
Source: OECD Economic Outlook database.
1.42. Even if the fiscal deficit and public-debt-to-GDP are expected to decline in 2025-27, continued consolidation remains essential to place gross public debt on a downward trend in the medium term, comply with the EU fiscal rules, accommodate rising spending pressures from defence, population ageing and the green transition in the medium term, and create space for growth-enhancing spending. Given the economy’s strong growth momentum, it would be advisable to accelerate the pace of deficit reduction, as in 2024, to strengthen fiscal sustainability, while sequencing deficit reductions to lower fiscal debt, as the impact in debt reduction during the first years is usually limited. The growth momentum, the almost closed output gap, the expected support from NGEU funds and the monetary policy easing would facilitate this acceleration. This would allow Spain to faster rebuild fiscal buffers to respond effectively to future shocks or downturns, which could be helpful in a context of increased downside risks.
1.4.2. Addressing medium- and long-term fiscal risks
1.43. Spain’s public debt remains elevated despite recent improvements and looking ahead long-term fiscal pressures are expected to rise due to population ageing, primarily in pension spending and, to a lesser extent, healthcare and long-term care, the costs of the green transition and stepped-up spending in defence. Debt interest payments would also add pressures. Pension spending is projected to increase from 12.9% of GDP in 2023 to 16.1% in 2050, while healthcare and long-term care spending will rise from 7.4% of GDP in 2023 to 9.4% in 2050, according to Spain’s fiscal council.
1.44. The government’s medium term fiscal plan (MTFSP), which was endorsed by the European Commission, outlines a path to reduce the fiscal deficit from 3.5% of GDP in 2023 to 0.8% by 2031 and bring debt from 102.5% of GDP in 2024 to 90.6% by 2031 (Figure 1.16, red line) (Government of Spain, 2024[22]). This plan entails a steady improvement in the structural fiscal balance of 0.4 percent of GDP per year on average in 2025-2031 (2.4% overall) through tax measures and improvements in spending efficiency. The proposed cap on public spending growth – averaging 3.4% in 2025-28 and 3% until 2031 – is designed to keep expenditure below revenue growth. This path would be achieved through tax measures and improvements in spending efficiency. However, the plan lacks sufficient detail on the concrete policy measures to achieve these goals which combined with limited information on the forecast in the budget beyond the current year, limits the usefulness of the medium-term budget as a planning tool, highlighting the need to reinforce the fiscal framework going forward.
1.45. To maintain debt on a firmly declining trajectory and create room for growth enhancing spending, Spain should combine a credible medium-term strategy with gradual fiscal consolidation and policies to foster potential growth. This strategy should include enhancing the fiscal framework, addressing pension system challenges, reducing inefficient spending, improving tax revenues, and maintaining a strong economic and labour market performance.
Enhancing the fiscal framework
1.46. Spain’s fiscal framework has seen improvements in recent years. Further strengthening the budgetary framework and ensuring its effective enforcement would enhance public spending efficiency and quality, helping Spain address growing expenditure pressures. The national fiscal framework is underpinned by the Spanish Constitution, the 2012 Budgetary Stability and Financial Sustainability Law, the pension expenditure rule introduced in 2023 that imposes an upper limit on pension spending, and adherence to the European fiscal framework, which provides external oversight and discipline. At the national level, this framework has been adapted to reflect Spain’s administrative decentralization.
1.47. A major institutional advance was the creation of the Independent Authority for Fiscal Responsibility (AIReF) in 2013. AIReF has significantly enhanced fiscal oversight and contributed to evidence-based policymaking through spending reviews. Its broad mandate covers monitoring the budget cycle, compliance with fiscal rules, assessment of economic forecasts, and independent policy costing. Reflecting Spain’s highly decentralized fiscal system, AIReF also devotes substantial resources to monitoring subnational government finances (Caldera Sánchez et al., 2024[23]).
1.48. Despite these strengths, key institutional challenges persist due to Spain’s high administrative decentralization and the complexity of applying multiple fiscal rules simultaneously. Spain’s fiscal system is highly decentralized: the Constitution grants autonomous communities significant spending powers and partial taxation authority. Spain’s fiscal framework should be further aligned with the new EU fiscal framework to enhance credibility and support medium-term fiscal consolidation. While the new European fiscal framework allows flexibility in achieving deficit and debt targets through nationally defined expenditure paths (i.e., not disaggregated by subsectors), Spain’s national fiscal rules remain based on old parameters. The national expenditure rule also differs from the European rule, both in scope and methodology. For example, it includes annual spending caps at the regional level and excludes certain expenditures—such as social security, one-off items, and temporary revenue measures—that are covered under the European rule. This mismatch creates implementation difficulties and legal uncertainty. According to Spain’s fiscal council, compliance with the national spending rule would not ensure compliance with the EU rules from 2027 onwards.
1.49. To ensure consistency and credibility, the national fiscal rules should be revised to mirror the EU framework and ensure consistency and coherence among both. In particular, the yearly fiscal target of the national rule should focus on primary spending growth net of revenue measures, in line with the European rules and the medium-term fiscal plans that the government submits to the European Commission. This would also support the implementation of Spain’s medium-term fiscal structural plan. Additionally, the government should publish a more detailed and transparent medium-term fiscal strategy that clearly spells out how it intends to meet its targets, including underlying policy measures and risk assessments. This would bolster transparency and confidence.
Addressing long-term ageing pressures
1.50. Spain, as many other OECD countries, faces growing fiscal pressures from population ageing due to rising pension in the next two decades, and to a lesser extend health and long-term care (Figure 1.17). Ageing related spending is expected to increase by 5.2 points of GDP until 2050, mainly driven by higher pensions, followed by health and long-term costs, particularly in the 2030s and 2040s (AIReF, 2025[24]). According to Spain’s fiscal council (AIReF), pension spending in Spain is projected to increase in the following two decades but remaining within the limits established by the pension expenditure rule set as part of the pension reform.
1.51. OECD estimates suggest that under current policies, the debt to GDP ratio would decline temporarily but debt would significantly increase over the medium term (Figure 1.16, purple line). The fiscal and pension reforms proposed in this Survey (Table 1.5) are policy measures that would put debt on a declining path. This includes reforming pension and unemployment benefits to ensure medium term fiscal sustainability, while lowering the tax burden on low-income workers, broadening the VAT base, and increasing environmental taxes (Figure 1.16, orange line). Combining these fiscal efforts with an ambitious package of selected structural reforms as the one recommended in Table 1.6 would place debt on a firmly downward path (Figure 1.16, blue line).
Public debt Maastricht definition
Note: These are illustrative scenarios for the public debt Maastricht definition. The red line displays Spain’s fiscal plan until 2031 as projected in Spain’s Medium-Term Plan published in 2024 (Government of Spain, 2024[22]). Scenario A assumes real GDP growth and inflation to follow OECD projections over 2025-26 as in Table 1.2 and after that real GDP growth follows assumptions of the OECD Long-Term Model as described in Guillemette and Turner (2021). Nominal GDP growth is assumed to average at 3.7% over 2027-60. The scenario sets the primary deficit at 1.2% of GDP on average over the 2027-60 and adds the costs of ageing as described (AIReF, 2025[22]). As a result, the primary balance deteriorates by 3.1 percentage points of GDP over 2027-60. Scenario B adds to the assumptions in (A) the estimated effects of the set of fiscal and pension measures outlined in Table 1.5. The scenario reaches a primary fiscal surplus of 2.6 % of GDP by 2040. Scenario C adds to the assumptions in Scenario B, the implementation of an ambitious package of selected structural reforms as the one recommended in Table 1.6. leading to an improvement of the primary surplus of 1.7% per year on average over 2027-60.
Source: OECD calculations.
Note: This exercise illustrates possible ways Spain could raise and allocate additional tax revenues in the next decade. This is not an exhaustive list of policy recommendations to be implemented, and actual revenues and spending will depend on the specific reforms adopted. They are based on the following assumptions and estimations: i) an increase in environmental taxation to reach the EU average from 1.6 % of GDP to 2% of GDP , ii) reducing the tax wedge for low income households to improve work incentives, iii) lower property transaction taxes by 0.1% of GDP to reach OECD average, iv) broadening VAT base and limiting exemptions while compensating lower-income households based on (OECD, 2023[2]); v) increasing tobacco and alcohol taxes to reach OECD revenue levels of 0.7% of GDP; vi) reforming the unemployment assistance by removing age-based differences and eliminating pension contributions for recipients, would yield savings of 0.7% of GDP assuming lower cash subsidies and SEPE’s retirement contributions of 70% of current beneficiaries aged 50 or above who would not qualify for the assistance and half of them re-entering the labour market as discussed in Chapter 3; vii) reinstating a life expectancy adjustment mechanism based on (AIReF, 2025[25]) and extending the reference period to 35 years for the computation of pension rights by 2050 to ensure financial sustainability broadly based on (Devesa et al., 2021[26]), viii) implement the recommendations in the fiscal council spending reviews as estimated in (OECD, 2023[2]); ix) OECD estimates considering that Spain gets closer to the European top percentile expenditure on social housing; x) an increase in support to business R&D as a share of GDP by 0.1 percentage points; xi) an increase in active labour market spending as a share of GDP by 0.2 percentage points; xii) additional investment in adaptation based on national adaptation plans from Spain, and OECD estimations of additional public investment on grid infrastructure and energy storage (Chapter 4).
Illustrative estimated impact of selected reforms on GDP by 2040 relative to the baseline
Note: Simulations based on the OECD long-term growth model (Guillemette and Château, 2023). Potential output estimation is based on a Cobb-Douglas production function with constant returns to scale based on the OECD long-term growth model. Scenario 1 assumes closing employment rate gaps of people 55 years and older with OECD averages by 2050 assuming that work incentives are enhanced and active job search requirements and tailored training to older workers are improved. Scenario 2 assumes an improvement in anti-corruption measures and governance indicators which corresponds to a gradual increase of the Rule of Law indicator from the World Bank “Worldwide Governance Indicators” from 0.7 to 1.4 (the OECD median) by 2050. Scenario 3 assumes the OECD PMR indicator reduction of 0.08 by 2030 through better administrative requirements for limited liability companies and personally owned enterprises and communication and simplification of administrative and regulatory burden to reach the top 5 in each category. Scenario 4 assumes that R&D expenditure reaches 2% of GDP by 2030. Scenario 5 assumes a reduction of 2 pp of the tax wedge by 2030, and Scenario 6 assumes increasing ALMP by 5 percentage points of GDP per capita per unemployed by 2030.
Source: Simulations using the OECD long-term model (Guillemette and Château, 2023).
Ensuring the long-term sustainability of pensions
1.52. The pension system in Spain will provide high future net replacement rates at average earnings at 86.3% for men compared to 63.2% on average for OECD countries based on measures legislated by 2025 according to estimates by the OECD (OECD, 2025[27]). This has helped to keep old-age poverty close to OECD averages, at around 13.1%. However, under the current scheme, the system’s long-term sustainability is at risk due to growing demographic pressures, particularly in the following two decades (Figure 1.17, Panel A), increasing pension-related expenditures compounded by lower expected tax revenue as population ages. Despite recent reforms to Spain’s pension system —including increases in social security contributions, increases in the legal retirement age, the introduction of mechanisms like the Intergenerational Equity Mechanism (IEM) and the reform of the special scheme for self-employed workers (who will fully transition to the general regime based on actual incomes by 2032) —a sizable funding gap persists. The pension system’s financial sustainability is to be examined by the fiscal council every three years, following the 2021-2023 reforms by agreement with the European Commission. While AIReF’s first review in March 2025 did not trigger the system’s safeguard clause, introduced in the 2023 reform to help regularly monitor the pension system’s sustainability, the agency’s independent opinion highlighted a widening gap between pension expenditures and social security contributions over the coming decades, partly because of the 2021-2023 reforms. Additionally, in July 2025, a new examination by the fiscal council has been requested bringing it forward to before June 1, 2026, instead of 2028—to incorporate the latest macroeconomic data and GDP revisions, and to exclude government transfers from the pension sustainability estimates.
1.53. Despite high rates of contributions, the gap between pension spending and social security contributions will widen in the coming two decades without further reforms (AIReF, 2025[24]) (IMF, 2025[11]). Spain now covers 70% of annual pension outlays with contribution revenues; the remainder is largely met by transfers from the Treasury, which surged from EU 15.6 billion in 2019 to EUR 41.6 billion in 2024 (about 3% of GDP). AIReF projects, under current rules, an average pension expenditure of 14.5% of GDP for the period 2023-2050 and in its first assessment of the pension expenditure rule introduced in 2023 it confirmed that no further measures are required to be adopted. However, pension spending will still raise by 3.2 percentage points of GDP between 2023-2050, reaching 16.1% of GDP in 2050. This will create a growing stock of implicit liabilities that are not provisioned for today (Figure 1.17, Panel B). Additionally, since pensions are now fully indexed to inflation and there is no automatic adjustment for people living longer, the system gets more expensive over time. By eliminating the “sustainability” factor, which linked benefits to life expectancy in 2021 and by uprating pension benefits to consumer price inflation the system has postponed fiscal adjustment while amplifying its eventual scale.
Note: Implicit transfers refer to those additional financial resources needed from the central government—or other Social Security funds—to cover pension spending beyond what contributions and explicit budget transfers can cover.
Source: (AIReF, 2025[24]).
1.54. To strengthen the long-term sustainability of the pension system, reforms will be needed, that prioritize employment friendly measures. Rather than imposing additional increases in social security contributions that could further raise the labour tax wedge, with potentially adverse effects on employment, Spain must expand efforts to further support longer working lives. The government could consider introducing a life expectancy adjustment mechanism, either linking the statutory retirement age to life expectancy at retirement, or adjusting pensions based on life expectancy, as the eliminated “sustainability factor” did, or through another mechanism. Re-activating the pension revaluation index and the sustainability factor would therefore mean smaller annual rises for all pensions and a one-off downward adjustment for future entrants. Based on recent estimates (AIReF, 2025[25]), the revaluation of pensions with the CPI from 2022 implies an increase in expenditure of 2.7 points of GDP by 2050, while the elimination of the sustainability factor would imply an increase in expenditure of 1 point of GDP by 2050.
1.55. By fully implementing the gradual extension of the contributory period to the best 29 years, as legislated during the 2023 reform, Spain moves closer to OECD best practice, but the reference period for the computation of pension rights may need to be further extended, for instance to 35 years, to ensure financial sustainability, as discussed in the 2023 Economic Survey of Spain (OECD, 2023[2]). Chapter 3 outlines labour market reforms that can support later retirement by improving incentives, skills and working conditions for older adults. Without further reforms and if pension deficits continue to be met by general revenues, maintaining pension benefits will come at the expense of other priorities, crowding out other priority spending.
1.56. The current safeguard clause designed to ensure that future pension adjustments automatically trigger corrective measures—such as revenue increases or spending cuts—if the system's financial sustainability deviates from its projected path, is useful to regularly monitor the pension system and trigger a public debate. However, it has important limitations, as warned by the fiscal council and other international organisations (AIReF, 2025[24]) (IMF, 2025[11]). It is based on static assumptions, covers a fixed period (2022-2050), and is highly sensitive to long term projections. AIReF notes that meeting the clause’s thresholds doesn’t guarantee sustainability, as pension costs continue to rise. All these limitations highlight the need to amend the rule to ensure it has a forward-looking valuation of fiscal pressures from pension spending, absent additional measures to strengthen the pension system. Computing it considering a rolling window rather than a fixed period from 2022-2050 and focusing on the future evolution of the gap between expenditures and revenues, rather than exceeding the established threshold of 13.3% of GDP —which is the upper limit for public pension spending relative to the country's economic output— can be useful.
Improving spending prioritization
1.57. Public spending stood at 45.4% of GDP, which is in line with OECD average of 44.7% in 2023. However, the composition of expenditure remains heavily skewed toward current transfers (Figure 1.18, Panel A), particularly pensions and unemployment compensation. Public investment in Spain declined significantly due to the fiscal austerity policies implemented during the global financial crisis. Although it has gradually recovered in recent years—partly due to the disbursement of European funds—investment in education, public services, and economic affairs remains comparatively lower than the OECD and EU average (Figure 1.18, Panel B), underscoring the need to create space for growth-enhancing spending.
1.58. Raising further spending efficiency is essential to support fiscal sustainability while enabling higher investment in growth enhancing areas. Spending reviews can play a helpful role in identifying areas where resources can be allocated more effectively. Since 2017, Spain has institutionalised spending reviews under the independent fiscal council (AIReF), and governance has improved with the creation of a dedicated unit in the Ministry of Finance to track the implementation of spending reviews recommendations. Recent reports suggest a growing uptake of AIReF’s recommendations with the implementation of 217 of the 357 recommendations made from 2022 to 2025, with 58 of them still in progress and 82 rejected. However, reviews have limited scope in reducing mandatory spending and even if the Ministry of Finance is legally required to publicly disclose any justification for not acting on an assessment issued by the fiscal council, there is no legal obligation to follow through on their recommendations.
1.59. True gains in spending efficiency and ultimately on fiscal sustainability will depend on broader reforms. The government has committed to reducing permanent expenditure by at least 0.1% of GDP per year by 2028 based on spending reviews, which is modest. This is welcome, yet other options, as outlined in the 2023 OECD Economic Survey could be considered, such as better targeting of social programmes, and enhancing the cost-efficiency of active labour market policies (OECD, 2023[2]). Without addressing the underlying drivers of spending, especially persistently high unemployment and growing pension costs, this target will be difficult to meet. Efforts to reinforce policy evaluation are welcome and could help prioritise effective programmes. But more decisive action is needed to rebalance the budget towards growth enhancing spending.
Note: Panel A: Expenditures are deflated by the GDP deflator. Education, health and social expenditures protection are defined according to the COFOG classification. Panel B: Average gross fixed investment as a percentage of GDP over 2015-22. Economic affairs cover transport, communication, fuel and energy and other industries.
Source: OECD National accounts database.
Rebalancing the tax mix towards less distortionary taxes
1.60. Spain’s tax system faces several deficiencies that hinder productivity and revenue performance. Spain’s tax-to-GDP ratio at 37.3% of GDP in 2023 is higher than the OECD average of 33.9% and lower than the EU at 39%. However, it places a high burden on labour taxes, particularly social security contributions, yet below that of other countries such as France (43.8%), Italy (42.8%) and Germany (38.1%), discouraging employment and job creation while consumption taxes remain low. Property taxes represent 2.3% of GDP, slightly higher than the 1.7% on average across OECD countries (Figure 1.19). Revenue gains in 2024 were largely cyclical and recent tax changes — such as the introduction of the global minimum tax, a revised bank windfall tax, the reform to tax e-cigarette liquids and other tobacco-related taxes and minor green tax adjustments— provide limited long term yield, estimated at 0.3% of GDP in 2025, and below 0.2% of GDP in 2026 and 2027 (Bank of Spain, 2024[28]). Permanent tax measures adopted in the period 2021-2023 had already contributed to collect extra revenues amounting to 0.4% of GDP. However, a broader reform is needed that rebalance the tax mix towards less distortionary taxes, in line with the recommendations from the OECD’s 2023 Economic Survey of Spain and the 2022 Experts White Book.
1.61. First, the value-added tax (VAT) system remains fragmented, with extensive reduced rates and exemptions that undermine both revenue collection and neutrality (Figure 1.20, Panels A and B). Harmonising VAT rates —especially for non-essential items like restaurants and hotels and particularly alcoholic beverages sold in these establishments— and reducing exemptions could yield higher revenue, getting closer to the OECD average. These changes could be paired with targeted transfers to low-income households to ensure fairness and mitigate distributional effects.
1.62. Second, even if personal income taxation is progressive, it could be improved to enhance work incentives and support equity. High marginal effective tax rates, particularly for lower-income families with children reduce employment incentives (Andrew, Evans and Tran-Nam, 2020[29]; Maag, Steuerle and Chakravar, 2012[30]). Spain's tax wedge—the gap between total labour cost and take-home pay—at 40.6% for single workers in 2024 is above the OECD average of 34.9% and slightly below the EU average of 41.7%. However, for the average married worker with two children it is higher at 39.5%, compared to the OECD and EU averages of 31.8% and 37.6%, respectively (Figure 1.20, Panel C). Reducing the labour tax wedge for low-income earners by lowering social security contributions in this group, while gradually phasing out benefits to strengthen work incentives without penalising earning gains is advisable. Transfer taxes in Spain are among the highest rates in the OECD. Reducing this tax would help to increase residential mobility, as recommended in the 2023 Economic Survey of Spain, but should be done gradually.
Distribution of total tax revenue, % of GDP, 2023
Note: EU-27 excludes Bulgaria, Croatia, Cyprus, Malta, and Romania.
Source: OECD, Global Revenue Statistics database.
1.63. Third, there is scope to increase environmental taxation. Despite a wide array of energy-related levies, overall environmental tax revenue remains low and fragmented, and Spain lags other EU countries (Figure 1.20, Panel D). However, further efforts are needed to meet environmental targets and to raise tax revenue. Equalizing diesel and gasoline excise duties, strengthening energy and vehicle taxation, and improving coordination across levels of government could raise around 0.7% of GDP and support decarbonisation goals (IMF, 2024[31]) (Chapter 4). This should be accompanied by measures to protect vulnerable groups, such as targeted subsidies or lump-sum transfers. The Spanish government has recently announced an extension of several tax incentives aimed at promoting environmental sustainability and reducing carbon emissions. For instance, benefits for individuals and businesses purchasing plug-in electric vehicles, as well as those installing electric vehicle charging stations were extended in 2025.
1.64. Fourth, taxes to discourage unhealthy behaviours could be used more intensively. About one third (31%) of all deaths in Spain in 2019 were attributed to behavioural risk factors, similar as other OECD countries, including tobacco smoking, dietary risks, alcohol consumption and low physical activity (OECD, 2023[32]). In a welcome reform, a tax on e-cigarette liquids and other tobacco-related products was introduced to align the tax treatment of tobacco and e-cigarettes and combat the rise in their use, primarily among young people. These are welcome steps, but further measures might be needed to combat tobacco consumption among young people. Alcohol consumption has increased since 2010, while taxes on distilled spirits, beer and wine which remain among the lowest in the European Union and could increase (OECD, 2023[2]).
1.65. Improving tax compliance also remains critical. Spain has made progress, notably through expanded e-invoicing and digital payments. Plans to roll out a national invoicing platform by 2027 are welcome and should proceed swiftly to support SME compliance and reduce VAT gaps (Figure 1.20, Panel A).
Note: Panel A: the VAT revenue ratio compares the actual VAT revenues collected to the theoretical maximum that could be raised if the standard rate were applied uniformly to all consumption and full compliance. Panel C: the tax wedge refers to the income tax plus employee and employer contributions less cash benefits. Panels A and C: EU-27 excludes Bulgaria, Croatia, Cyprus, Malta, and Romania.
Source: OECD (2024), Consumption Tax Trends; OECD (2025), Taxing wages.
1.66. Despite legal reforms, public perceptions of corruption in Spain remain high and have deteriorated over time, with a steady decline since 2013 (Figure 1.21, Panel A, B and C). This persists despite reforms to strengthen its legal framework to fight corruption over the past decade and notably in 2023 with the adoption of Law No.2/2023 on whistle-blower protection. While Spain performs relatively well in some areas, such as corruption risk management and audit, conflict of interest, political finance, and is a top performer in transparency of public information (Figure 1.21, Panel D), significant gaps remain.
1.67. Notably, until recently, Spain lacked a strategic approach to anti-corruption and integrity and was one of the few OECD countries without coverage for public integrity risks in its strategic framework (OECD, 2025[33]). This absence has been the subject of public debate. On 9 July 2025, the Spanish Government announced a new 15-point “State Plan for the Fight against Corruption” (Plan Estatal de Lucha contra la Corrupción), based on recommendations from the OECD and other institutions. The plan includes reforms such as the creation of an independent integrity agency, the enactment of a new law on transparency and integrity in lobbying—directly addressing regulatory gaps identified by the OECD—, and the deployment of artificial intelligence tools to strengthen risk detection in public procurement. If adopted and effectively implemented, these measures could contribute to addressing several of the integrity challenges identified throughout this chapter.
1.68. Spain lacks an enforceable regulatory framework that clearly defines lobbyists and lobbying activities, as well as a supervisory body overseeing lobbying transparency. Furthermore, there is no lobbying register that discloses relevant information about lobbyists (Figure 1.21, Panel D). While the planned lobbying law and register are welcome (OECD, 2024[34]), progress has been slow so far.
1.69. Public procurement remains a major vulnerability. The share of direct contract and single bidding is high and has increased from 17.7% in 2011 to 45.1% in 2021. Furthermore, the number of calls for bids remains low, infrequent and, when they do take place, are slow (Figure 1.22). While the proportion of corruption related complaints in procurement has declined from 11% to 7.2% in 2021, several corruption allegations have emerged in recent years. Priorities should include full implementation of the National Public Procurement Strategy 2023-2026, enhanced use of e-procurement, and the creation of a unified open data platform to enable better monitoring and accountability.
1.70. Oversight of EU recovery funds can be strengthened. Spain’s anti-fraud plan under the RTRP includes risk assessments, fraud indicators and mandatory internal controls in administrations receiving funds. However, Spain´s audit and control system could be further strengthened by including some additional elements such as the appointment of a dedicated compliance officer, and the establishment of secure and independent reporting channels. Strengthening this system is essential to safeguard the integrity of public investment and protect against fraud and misuse.
1.71. Spain must also improve enforcement of foreign bribery offenses. While legislative progress has been made, including the law to protect whistleblowers in 2023, enforcement remains low relative to Spain’s international footprint. The OECD Anti-Bribery Convention has called on measures to lower the evidentiary threshold for investigations and to improve prosecutorial capacity (OECD Working Groups on Bribery, 2025[35]). Raising awareness and strengthening compliance in the private sector, especially among SMEs, is critical for closing implementation gaps.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: OECD Anti-Corruption and Integrity Outlook 2024.
Note: Decision speed refers to the number of days between the deadline for receiving offers and the date the contract is awarded. The European Commission indicates that these indicators “are affected by country-specific factors” and “should be interpreted carefully, ideally in the light of additional quantitative and qualitative information”.
Source: European Commission.
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