June 20, 2021

The OECD warns that public debt will skyrocket to 171% of GDP in 2050 if pensions are not reformed


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The OECD, the Bank of Spain and the Tax Authority have issued a warning to the Government about the impact that demographic aging can have on public finances. According to the OECD, if pension spending is not controlled, public debt can skyrocket in thirty years to 171% of GDP. This is what the body led by Ángel Gurría assures in his new report on Spain, in which he draws four scenarios: one in which spending is not controlled and debt rises to this level, in which they do not incorporate the measures to link pensions to the CPI that the Government is considering, and that would raise spending even more if they are not offset by other policies; another in which interest rates rise to 1% from 2022 and in which liabilities in 2050 scale to 154.6%; another with high GDP growth in which 86% of debt is reached in thirty years and another that includes measures that compensate for spending linked to aging in which liabilities stagnate at 116% by then.

For its part, the Fiscal Authority projects that if measures are not approved to increase additional income, spending on pensions will also fatten the debt in a similar environment, 165% of GDP in its case, within its latest debt observatory. The OECD calls for several measures in this regard: from raising the effective retirement age to increasing the number of years for calculating the pension. «The effective retirement age can be increased even further discouraging early retirement and introducing new incentives. extend working life, for example, by increasing the number of contribution periods required to obtain a full pension, and should be accompanied by measures to retrain older workers, “he says.

For every two retirees, three active people in 2050

The Bank of Spain itself has also warned this morning that Spain will experience the largest increase in the dependency ratio in Europe. This is how the general director of Economics and Statistics, Óscar Arce, has described it in the «I Forum on Aging and Life» of the Age and Life Foundation, explaining that «the expected increase in the relative weight of the population over 65 years of age on the population of working age is unparalleled in the recent history of our country. The Bank of Spain estimates that in thirty years for every three people over 65 there will be only three assets.

Along with this message, the OECD describes a series of reforms that it demands from the Government at the same time that it raises its growth forecasts for Spain due to the improvement of expectations due to vaccination. Compared to its March estimates, the OECD now expects GDP to grow by 5.9% in 2021, two tenths more than before, and 6.3% in 2022, up to one point and a half above its previous forecasts. In this way, the Spanish economy would recover its pre-crisis level in 2022, as the Executive also predicts, which foresees a growth of 6.5% in 2021 and 7% in 2022.

Increase in VAT, fuel taxes …

However, the institution also calls for the recovery to be accompanied by profound reforms with “political and social agreements“To ensure its continuity. Among them, it claims that when the recovery is underway, the Government announce a fiscal consolidation plan with tax increases for when the improvement of the economy is established.

Within the tax menu, ask for a hike in fuel and emissions taxes and eliminate the joint declaration in personal income tax, in both cases, accompanying them with measures that compensate the poorest households. It also asks for an increase in VAT on products with reduced and super-reduced rates, since it finds that most of the loss of collection by these bonuses remains in the hands of high income.

Evaluation of spending, especially regional

This rise in income, yes, must be accompanied by a complete evaluation of public spending. Specifically, the OECD points to autonomous spending and warns that the ‘spending reviews’ carried out by Airef and commissioned by the Government have a “limited” effect. “The composition and efficiency of public spending can be improved to create margins for greater public investment in the medium term. Despite the need to re-prioritize spending, the use of ‘spending reviews’ is limited. The lack of policy evaluation, even at subnational levels of government, can be a barrier to a shift in spending towards more productive uses, ”the agency claims.

“Slow” deployment of the Minimum Living Income

He also reviews that Spain is the fourth country with the most working poor, with 13%, after Turkey, Mexico and Chile and well above 8% of the OECD. In this sense, it draws attention to the fact that the crisis has been primed with young people and temporary workers and evaluates one of the Government’s star measures: the Minimum Vital Income, on which the Executive set the goal of reaching 850,000 families and until April had reached 250,000, suggesting, in the words of the OECD, that “Deployment has been slow”.

In this sense, it also asks monitor increases in the Minimum Interprofessional Salary (SMI), which in 2019 rose 22% to 900 euros and in 2020, 5.5%, to 950 euros. The institution confirms that it still represents 47% of the median salary, compared to the 60% target, but asks to evaluate the effects of the previous increases before continuing with increases that, in any case, must be “gradual” and in line with productivity. .

More active policies and fewer contracts

Also claim a simplification of contract modalities and increase spending on active employment policies. Because Spain is one of the OECD countries with the highest unemployment and lowest spending in this heading. On the business side, he urges the Government to accelerate the distribution of the 7,000 million euros in direct aid and demands that it not extend the bankruptcy moratorium to prevent zombie companies.

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