The IMF warns that political fragmentation in Spain threatens economic growth

The Spanish economy has resisted the attacks of the inflation crisis, the rise in interest rates, the low growth of the European Union and geopolitical conflicts. It has emerged from these economic disruptions better than its European partners. But the political tension and the polarization and fragmentation that Spanish politics is experiencing emerges as one of the great threats to the future performance of economic activity. This is stated by the International Monetary Fund (IMF) in the preliminary work of its traditional Article IV on Spain – the document where it analyzes the economic performance and risks of the countries -. The agency's technicians point out that “a prolonged internal political fragmentation could hinder the implementation of structural reforms and fiscal consolidation, which could eventually worsen business confidence, investment and growth, particularly if financial conditions tightened.”

The warning occurs in a context of maximum parliamentary instability, with an Executive supported by a fragile majority and in full offensive by the Popular Party, which has raised the decibels in Parliament to levels that have not been remembered for years. Since the beginning of the year, the Government has suffered at least two setbacks in Congress by its partners and everything indicates that the regional elections, especially in Catalonia, will be crucial for the stability of the country. The warning made by the IMF does not imply that, today, political polarization has already had an adverse effect on the economy or that it is taken for granted, but it does highlight it as one of the major risk factors.

Even so, the growth of the Spanish economy has so far exceeded expectations and international organizations have been raising their forecasts. This same Friday, the International Monetary Fund (IMF) has improved its GDP estimate for 2024 by four tenths, to 1.9%. However, it has also warned that national political tension can hinder this progress.

Other dangers highlighted by the organization led by Kristalina Georgieva are the lower than expected impact of European funds, increasingly deep geoeconomic fragmentation and an abrupt global or euro zone slowdown. Although it expects inflation to continue to fall towards the 2% target proposed by the European Central Bank by mid-2025, it also sees upside risks including a rebound in global energy prices and persistent increases in labor costs due to the wage pressures or a low level of productivity.

Despite the problems, the IMF seems confident that the resistance shown by the Spanish economy in recent years will continue to bear fruit in 2024. Domestic demand will be the fuel for the national locomotive, so that the quarterly growth rate—around of 0.5%— observed last year will continue in the coming months. In addition, an increase—albeit moderate—in real income and savings should support consumption, while the disbursement of Next Generation funds and the relaxation of financial conditions are likely to boost private investment. The new projection not only dispels doubts about a possible slowdown, but also keeps intact its estimate for 2025, when it expects GDP to grow by 2.1%.

According to projections, the Consumer Price Index (CPI) will continue to decline despite the fact that the withdrawal of support measures to alleviate the effects of the energy and food crisis will produce specific price increases. In addition, the unemployment rate will continue to decrease to approximately 11%, although analysts consider that additional policies to the 2021 labor reform are needed if greater employment stability is to be achieved in Spain. Specifically, the document points out that “increasing unemployment benefit contributions by employers with higher staff turnover could discourage excessive transitions between activity and inactivity under discontinuous permanent contracts, which in turn should be subject to more monitoring.” accurate using additional statistical information.”

A tax reform with more taxes

The organization recognizes that the Government has done its homework in terms of fiscal consolidation. However, debt remains high and it is expected that, as inflation normalizes and the rise in tax revenues attenuates, the fiscal deficit and public debt will remain at around 3% and 104% of GDP, respectively. , in the absence of additional measures. For this reason, the IMF recommends that the Government maintain a restrictive fiscal policy in the medium term that allows for healthier public accounts.

Specifically, fund staff believe that a three percentage point reduction in the deficit is possible between now and 2028 through a fiscal adjustment of around 0.6 percentage points. To achieve this, the country has in favor the tax on extraordinary profits for banks and electricity companies, as well as the elimination of anti-crisis measures. However, other structural measures are needed, such as the elimination of VAT exemptions, harmonizing rates between products and increasing environmental taxation in Spain to the levels of the rest of the European Union countries.

To remedy the possible negative impact that this could have on households with the lowest incomes, the expansion of active employment policies (PAE) and an increase in the supply of affordable apartments is suggested. Here he once again calls attention to the Government, asking it to thoroughly evaluate the effects that the rent cap has had in Catalonia before implementing the measure, approved by the Housing Law, throughout the country. The warning comes from the possible reduction in supply and the access problems that the measure may cause for the most vulnerable population.

The document specifies that in the event that temporary taxes on banking and the energy sector become permanent, the tax bases must be readjusted in order to minimize the negative effects on the market.

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