Spain emerging from recession but broad reforms needed

Spain is slowly emerging from the deep recession that followed the global financial crisis, but must  now enact major reforms to improve government finances and create jobs, according to a new OECD report.

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The OECD’s latest Economic Survey of Spain says that while GDP losses from the recession were similar to those seen in other major economies, government finances and employment were much harder hit than elsewhere.

Spain’s government deficit is projected at 9.2% this year, 6.3%  in 2011 and 4.4% in 2012, according to forecasts from the November OECD Economic Outlook.

Unemployment, which is expected to hover near 20% this year, will drop slightly in 2011, to 19.1%, and then again to an expected 17.4% in 2012, according to the report.

The OECD sees economic growth bouncing back from this year’s projected 0.2% contraction, with GDP forecast to jump by 0.9% in 2011 and 1.8% in 2012.

The survey recognises that Spain has launched substantial fiscal consolidation plans and significant steps to address long-standing shortcomings in the labour market. The OECD calls for broadening and deepening of these measures, as well as further efforts to remove barriers to competition in products markets.

Specifically, the OECD says Spain must reform its pension system, including an increase in the legal retirement age and restrictions to subsidised early withdrawal from the labour market.

It should also consider switching the tax burden from labour to consumption and property taxes, the OECD said.

On the employment front, Spain should ensure that excessive severance pay for workers in permanent contracts is reduced substantially, at least for all new hiring. To bring the unemployed back to work Spain should also consider abolishing the legal extension of collective bargaining outcomes to all businesses.

Job search incentives for unemployment benefit recipients should improve as should the performance of regional public employment services. Intermediate vocational education needs to made more accessible for youth.

The Survey concludes with a chapter on water policy, including recommendations that Spain improve pricing, to better reflect costs, and strengthen governance.