After two decades of economic growth, the 2008 financial crisis hit Spain hard. There were revealed then the institutional weaknesses and the structural distortions of an economy that had relaxed its reform agenda after a great impulse due to its entrance into the European Union and the Eurozone. Similarly to the US and other countries, the loan boom of the beginning of the 90s fed a housing bubble that stimulated demand, employment and public revenues. However, once the Great Recession exploded, this unsustainable model fell down as a house of cards. Since then, housing prices have slowly gone back to more reasonable levels, with a fall of 45 percent in real terms. In between, unemployment has reached outstanding levels, reaching a peak over 25 percent in 2012-2013. Public debt went from 40 to 100 percent of the GDP, given the decreasing tax revenues, an excessive public deficit and a total lack of budgetary discipline in the public sector.
The financial system’s rescue, to which a number of EU partners contributed, manifested the weakness of semi-public entities. For this reason, although private banks proved their resistance in adverse circumstances, regional saving banks fell down, disappearing over 40 out of 50 of them.
In the last 4 years, a number of structural adjustments have reinforced Spain’s perspectives for recovery. Economic freedom, however, is still stuck in lower levels to those observed before the crisis. In order to liberalize the economy and stimulate its competitiveness and dynamism, certainly more efforts are needed.
A Government that is too big
When the former president José Luis Rodriguez Zapatero and the Socialist Party (PSOE) began his second term in 2008, the government’s agenda before the crisis was to first deny its existence, despite the fact that all macroeconomic indicators pointed to a strong downfall of the economy.
After a while, the Executive turned to action, but instead of facing the complex fiscal situation of the country cutting spending, it turned to stimulus measures which made the situation even worse. Finally, in 2010 a number of austerity policies were introduced (they included a 5 percent cut in public servant and freezing the pensions) but most of this adjustment fell on taxpayers’ in the form of higher VAT, income tax, corporate tax, etc.
At the end of 2011, the new government of the People’s Party (PP) of Mariano Rajoy impulsed an agenda to reduce the deficit, even though the cut in spending were lower than the tax raises. In fact, between 2012 and 2013, the PP Government passed over 30 tax raises.
According to official statistics, the impact of all tax raises passed since the beginning of the crisis amounts to over 50,000 million euros; that is, 5 percent of the Spanish GDP. This important increase in the tax effort has meant a great burden for economic growth. It is also worth mentioning that many regional have followed a similar agenda, raising taxes in 120 different occasions. Furthermore, city councils have also increased municipal taxes, which has led to a 40 percent raise in property tax revenues.
Tax reforms made between 2014 and 2015 by the People’s Party Government have begun to correct this situation. However, taxes are still detracting 38 percent of the economy’s resources and they fall on an ever-decreasing tax base (due to unemployment and shadow economy). Meanwhile, the public sector still spends nearly 44 percent of Spain’s GDP.
With a budget deficit close to 6 percent of the GDP in 2014 and 5 percent in 2015, it is clear that a new round of budgetary consolidation is needed. Moreover, public debt is reaching 100 percent of the GDP; over 60,000 euros per occupied Spaniard. Therefore, the earlier Spain reduces its deficit, the better. To achieve that goal, it is especially important to check the public spending of regional governments.
The threat of populism to property rights
In general, property rights are reasonably well protected in Spain. However, in the last years, some politicians have publicly supported the expropriation of bank properties. And what is more important, property rights are threatened by the emergence of Podemos, a new populist and communist party which got 22 percent of votes in the General Elections of December of 2015. In fact, the electoral programme of Podemos calls for the expropriation of various assets held by banks and also points to the nationalisation of a number of sectors of the economy.
At the same time, corruption scandals keep on undermining the respect and credibility of the rule of law. Political parties are seen by the public opinion as the institutions most affected by corruption, which is particularly linked to the funding of electoral campaigns. This has damaged the results of PP and PSOE in the polls. Moreover, Podemos’ leadership has also been involved in scandals due to vast amounts of money being received from Venezuela.
Improve and broaden the labour law reform
The main reason for the unemployment rate to go over 20 percent in a number of instances in the past three decades is the excessive rigidity of the Spanish labour law. This legislation has fostered an unfair system, insofar as it protected some full-time jobs at the expense of a much more unfavourable scenario for part-time jobs. There are also two other problems. First, job flexibility has been very limited by the great power of collective bargaining. And second, lay off costs have historically been one of the highest in Europe. Young workers have suffered the consequences of this system the most, with unemployment rates over 50 percent.
The labour law reform of 2012 brought more flexibility to the job market. The power of collective bargaining has been greatly reduced, which makes wage adjustments easier and helps maintain employment without lay offs. Furthermore, firing cheaper has led to more indefinite hiring which has contributed to the creation of one million new jobs in the past two years. This is also reflected in the fact that Spain has improved its position in the Doing Business Index of the World Bank, as it ranked 39º in 2007, and 33º in 2015.
All this must push the next government to improve and broaden the labour law reform. But there is still a long way forward in a number of fields. For instance, the Market Unity Law is crucial to reduce bureaucracy and ease entrepreneurship. The tax model of regions such as Madrid, where tax cuts have been greater, must be emulated by the remaining regions to generate a better environment for enterprises and workers.
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Terry Miller and Kim R. Holmes. 2009 Index of Economic Freedom, Scores, 1995- 2009, page 439 (N.B. time period covered was July 1, 2007 through June 30, 2008—before full onset of 2008 crisis), (Washington, DC: The Heritage Foundation and Dow Jones and Company, Inc., 2009)
Ayala Sorenssen, F. The socialists denied the crisis 50 times. ABC http://www.abc.es/20101128/economia/veces-gobierno-negocrisis-201011261629.html
Llamas, M. Rajoy and Zapatero approve a tax hike of 51.000 million on families and companies. Libre Mercado http://www.libremercado.com/2013-10-05/rajoy-y-zapatero-asestan-unsablazo-fiscal-de-51000-millones-a-empresas-y-familias-1276501037/
Llamas, M. City Councils raised the IBI and other taxes in order to ease the real estate collapse. Libre Mercado http://www.libremercado.com/2014-03-12/los-ayuntamientos-disparan-elibi-y-las-tasas-para-paliar-el-desplome-urbanistico-1276512835/
Mercado, F. A foundation, linked to the new political party Podemos, received €3.7m from Hugo Chávez, El País http://elpais.com/elpais/2014/06/18/inenglish/1403082454_361529.html