Spain It was an example to the IMF that its reforms work. But the complacency seems to have been exhausted. Although the Fund praises the recovery of the Spanish economy, its growth higher than the European average, the strong job creation, the considerable private debt reduction and the gains in competitiveness, it also warns that there are risks. Public debt, unemployment and job insecurity are high. And the country has not adopted reforms that address their problems since 2013. In addition, it warns of the risk that the Government of Pedro Sánchez reverses them, although he observes that it will be difficult to be in a minority.
In line with its usual recipe, the agency calls for additional "reliable" fiscal measures in order to cut the public deficit. Recommends pension reforms because if your hikes are only linked to inflation the deficit will skyrocket. Criticizes the rise of 22% in the minimum wage because it will harm the employment of young and low-skilled. It considers the Google rate, the financial rate and the tax reduction for SMEs to be distorting. And he defends that it is better to raise the reduced VAT and the green and special taxes. Once again, he advocates making the indefinite contract more attractive by cutting the cost of compensation.
"The 2019 Budget needs to include a package of reliable adjustment measures," says the annual report on Spain of the International Monetary Fund (IMF), known as Article IV. Some of the measures proposed by the Government will have "an uncertain outcome, particularly those that refer to new taxes and policies." Consequently, the institution led by Christine Lagarde considers it important to "limit the risk that the Budget falls short", "add measures" and "be prepared to be able to adopt a contingency plan".
Increase collection by VAT and green taxes it is "preferable" to the initiatives included in the Budget, the document says. The digital rate and the financial one say that they can provide income, but that they are distorting and that it is better to coordinate internationally to avoid the flight of taxable bases to other countries. And on the reduction of the tax on SMEs, he affirms that it supposes a disincentive to the growth of the companies. In the event that the accounts do not give, "options on the side of expenses should also be identified," he suggests.
According to his projections, with the unchanged accounts including the rise of pensions and the improvement of the salaries of the civil servants, the public deficit will remain in 2019 at 2.4% of GDP, far from the 1.3% demanded by Brussels. and the 1.8% to which the Executive of Pedro Sánchez aspires. The technicians of the Fund validate that the objective for next year is set at 1.8%. But they consider it "critical" to achieve that 1.8%. Even if the 2018 Budget were to be extended in 2019 without additional spending decrees, the budget gap would be 2% of GDP. The agency does not say how the deficit would be with the Budget announced by Sánchez. The methodology of the Fund does not allow to evaluate measures on whose approval there are doubts. But in any case it demands additional measures.
Mattress to deal with turbulence
The IMF insists on taking advantage now that there is a bonanza to reduce the deficit and the debt. It is about being able to have a mattress with which to deal with turbulence. Otherwise, "Spain would be forced into a pro-cyclical adjustment if the economy is hit by a shock", He says. And he argues that this objective is compatible with the reduction of the inequality sought by the Sánchez Executive. According to the agency based in Washington, the ideal would be to enter more VAT and have a better design of taxes, raising green and special taxes and eliminating deductions to get additional income. With this improvement in the collection, a part could be dedicated exclusively to the most vulnerable.
Reducing the deficit is essential, especially since growth will slow down as the cycle loses strength. Due to the worse behavior of the foreign sector this year, the IMF lowers its growth forecasts from 2.7% to 2.5%, and the projection of 2019 leaves it the same, at 2.2%.
The other basic point to ensure the sustainability of public finances are pensions. According to the Fund, it is true that social acceptance of the reforms must be ensured. But if only the revaluations of benefits are linked to the evolution of inflation, then the Social Security deficit will increase between three and four points of GDP by 2050. That is to say, the current hole will triple.
And it will put even more pressure on a few generations of young people which are the ones that, in the opinion of the Fund, have suffered most from the crisis. Among the reforms that urgently need to be addressed, he cites the incentives to work more years, index the retirement age to life expectancy, raise income for self-employed workers and high salaries or additional savings. "While there is room to finance some additional spending on pensions, the margin is quite limited given the already high social contributions," reads the document. Or said in Roman paladino, it is not enough just with the income. In its particular jargon, the Fund speaks of a "sustainable package".
Regarding the labor market, the IMF advocates maintaining the essence of the labor reform. He argues that it is necessary to tackle temporality and that it is necessary to narrow the differences in costs between temporary and indefinite. But that should not be done making the eventual expensive, then the inevitable conclusion is that you have to "reduce the costs of hiring and compensation for dismissal for permanent workers". Among those costs includes clarifying the list of causes for which layoffs are declared null. It also points to the creation of the so-called Austrian backpack, which means that the employer pays a part of the dismissal in advance every month so that it accumulates in a backpack that the worker can carry with him. In order to defend the reforms carried out, the IMF mentions an own study in which it calculates that only the labor reform of 2010 contributed to a fifth of the improvement of exports until 2013.
The Fund places special emphasis on the fact that salary increases must be undertaken in line with productivity increases. For it says that "it is decisive that companies can continue to set wages according to their business conditions", which now the Executive of Sanchez wants to return to unions and employers.
Regarding the 22% rise in the minimum wage for next year, the Fund believes that "it will put at risk the employment opportunities of young people and the least educated". "The ratio of the minimum wage to the average wage will rise rapidly to become one of the highest in the EU. Therefore, it is justified to allow greater differentiation with the minimum wage, "he concludes. On the contrary, it does explain that increases in the minimum wage were beneficial in 2017 and 2018 because they affected "a small number".
Regarding Spanish banks, he praises the progress made, but remember that he still accumulates a high level of delinquency and that is behind its European peers in solvency levels.