“Spain has been under one of the highest tax pressures in the entire European Union,” says Spanish economist Sergio Brabezo, naming one of the top problems of the Spanish economy. Also, the high unemployment is becoming a structural problem, which has not differentiated between PP and PSOE governments, being the country that currently has the highest unemployment in the European Union and the second highest in youth unemployment. Furthermore, the accumulated level of debt is worrying.
Besides being an economist, Sergio Brabezo holds a PhD in information sciences and he is a deputy in the Assembly of the Community of Madrid.
We spoke about the factors that hold back the Spanish economical potential, and why the Central and Eastern European countries can overtake the Iberian countries’ economy.
What is the current state of the Spanish economy?
In order to give a correct analysis of the Spanish economy, it is necessary to divide the study into two fundamental aspects: the state of the country’s accounts and the situation of the labor market.
Regarding the first aspect, I highlight the importance of inflation, deficit and public debt. In relation to public debt, Spain is at historic highs, exceeding the European Union average, with a government debt close to 120 percent, while in the Eurozone it is around 106 percent. This significant difference underlines Spain’s current situation compared to the European average.
As for the deficit, Spain has a deficit that is almost double the European average, reaching almost 6 percent, while in the European Union, in the euro zone, we are talking about 3 percent.
In addition, inflation, that tax that affects the most vulnerable sectors, is also at historic levels, reaching 7.5 percent, while in France, our neighbor, inflation stands at 5.3 percent. These indicators reveal a critical economic and financial situation in Spain, even worse than in the rest of the European Union.
Turning to the labor market, the unemployment rate in Spain is a cause for concern, at over 13.3 percent, although this figure is considered one of the best in a long time. However, the concern is that, at a time of high inflation and high unemployment, when inflation decreases and public spending is reduced, unemployment could rise significantly in Spain.
The situation is worrying because countries with high public spending tend to have low unemployment, as the state boosts the economy and generates more money availability, encouraging consumption.
However, in the case of Spain, we face the difficulty of being unable to produce what is necessary to meet market demand, pointing to deep structural problems in our labor market that have been dragging on for decades.
How is Spain handling inflation?
Inflation closed 2023 at 7.5 percent, reaching its highest level since 1985. However, cumulative inflation over the last year stands at 12.8 percent, while core inflation is around 5.2 percent. Any analysis of an economy with inflation above 2 percent reveals a risky situation.
In this context, Spain appears not to have managed inflation adequately at home. While our French neighbors closed the year with an inflation rate of 5.2 percent, Spain recorded 7.5 percent. These are objective data that point to poor inflation management in Spain.
One of the main problems facing Spain is the minimum wage, which has experienced an aggressive increase in a short period of time. From 2018 to the end of 2023, the minimum wage has increased by 18 percent. However, the consequences have been remarkable: the real wage has decreased by 2.6 percent. This is because the relevance of the wage lies in its purchasing power, not in the nominal figure.
It is essential to remember that, even if we seek to increase the minimum wage, if prices continue to rise, the real purchasing power of workers is affected, with serious consequences, since consumer products are essential for families. This contributes to the increase in inequality and poverty in the country.
In this context, Spain appears to be resorting to measures typical of the socialist approach, attempting to curb inflation by increasing public spending. However, it is recognized that this strategy is inconsistent. Although Keynesians may see increased public spending as a solution to generate economic growth and mitigate the effects of inflation, it is essential to consider the possible consequences and evaluate its long-term effectiveness.
But as we are seeing, that is impossible. When we see a fall in real wages it means that inflation eats up any kind of artificial growth that the state itself can make.
Did the so-called “Iberian exception” taken with the increase in electricity and gas prices work?
The executive carried out a series of actions that they called ‘The Iberian Exception.’ However, the title of these actions does not reflect the reality of the actions implemented by the Government of Spain. Why? Because what this government really did was to intervene in the type of electricity market we have.
Spain has a regulated electricity market and a free electricity market. Most people, approximately 90 percent, participate in the free electricity market. In this free market, the price of electricity fluctuates according to demand, supply, production, among other factors. On the other hand, in the regulated market, the Spanish government established a fixed rate or regulation.
The measure consisted of curbing price increases in the regulated market and encouraging citizens to move from the free market to the regulated market to benefit from this intervention, which stabilized electricity prices. According to data provided by the government, consumers on the regulated price saved around €1.7 billion thanks to this Iberian exception.
However, those consumers in the free market who changed their contracts had to pay an additional €2.8 billion. In summary, the net impact of these actions on electricity for all users has resulted in them paying more than 1.1 billion euros extra. Ultimately, this strategy is revealed as an artifice that proved more costly for Spanish citizens.
Many economists, such as Juan Ramón Rallo, claim that Spain is one of the countries in the European Union with the highest tax wedge, is it true?
Spain is facing a situation in which the State represents more than 50 percent of the national economy. This reality entails the unavoidable need for the State to demand a high level of taxation from citizens, especially those in the private sector, in order to finance the extensive public sector.
In more specific terms, it is important to note that Spain has around 20 million workers, five of whom receive income from the State, either as civil servants or public employees.
This translates into approximately 15 million people employed in the private sector, taking into account that Spain’s total population exceeds 47 million.
When examining other tax aspects, such as labor taxes, it is essential to recall the OECD’s annual Taxi Widgets report. Spain ranks above the OECD average, about six percentage points higher than other countries with lower labor taxes.
Spain employs a subtle strategy in attempting to disguise social contributions as if they were not a tax on labor. However, in performing the calculations necessary for a realistic analysis of worker spending and their contributions to the state, the OECD adds both social contributions and personal income tax. In practice, this methodology reveals that Spanish workers are paying almost six percentage points more than the OECD average.
At the tax level, focusing on corporate income tax in Spain, we observe an effective rate of 20.6 percent, after discounting various bonuses that companies may receive. In comparison, other countries such as Ireland have a rate of 12.5 percent, while Finland has a rate of 19.6 percent.
It is crucial to note that the Nordic countries, known for their aggressive stance on taxation, are benchmarks in this area, and Spain ranks above these countries. Taken together, these two types of taxation significantly impact the labor market and companies themselves, contributing to Spain bearing one of the highest tax pressures in the entire European Union.
Spain has highest unemployment in the European Union and the second highest youth unemployment rate in the EU. What is the reason for this?
Although clues have already been provided in previous questions, the first of these lies in the fact that our minimum interprofessional wage in Spain because it is practically identical to the most frequent wage, known as wage fashion.
This scenario implies that entering the labor market becomes a considerable barrier, especially for those without experience in a specific sector or industry. An individual with no experience faces numerous obstacles to enter the labor market, since an employer, having to choose between someone with no experience and someone with experience at practically the same wage cost, will logically opt for the latter.
Analyzing the next point, an obvious problem arises: a labor market disconnected from training, as discussed above. The disconnection between the labor market and training comes, in part, from universities whose employability rate for their students is low, which implies that more specialists are being trained in areas with scarce job opportunities. This leads to an increase in unemployment and government spending on training with no obvious return.
Consequently, education ceases to be an investment and becomes an expense. Without a return on investment, education loses its investment character and difficulties arise for the creation and expansion of enterprises, especially small and medium-sized ones.This is related to high levels of taxation, restrictive regulations and complications for collaboration and cooperation between different companies and sectors.
The socialist coalition seeks again to raise the minimum wage, is it a good idea?
A further increase in the minimum wage is not advisable. In Spain, economic activity is not experiencing significant growth, so an increase in labor costs and expenses could lead to the bankruptcy of many companies.
Labor costs represent approximately 40 percent of a private company’s total budget, while in the public sector this percentage ranges between 50 percent and 60 percent, depending on the sector. In those sectors that demand a larger number of employees and do not easily allow their replacement by other forms of organization, structures or technological innovations that reduce the need for personnel, the impact would be more severe.
Employment in these sectors represents a significant proportion, between 40 per cent and 60 per cent, in contrast to 40 per cent in private enterprise.
An increase in the minimum wage would again hurt businesses, and would be especially devastating for sectors that are highly sensitive to cost increases, such as the primary sector.
Furthermore, it is crucial to recognize that certain areas of Spain, such as Madrid, Barcelona or even regions such as the Basque Country, could absorb an increase in the minimum wage due to their economic robustness. However, other less economically powerful autonomous communities, such as Extremadura, Castilla León, Castilla-La Mancha and Asturias, would not be able to assume this cost increase.
This situation would be detrimental, especially for autonomous communities or regions with a more limited growth capacity.
The community of Madrid is the one that has grown the most, why is that?
Despite the general situation in Spain, I would like to highlight three fundamental aspects. First, the legal certainty, then political stability and finally economic equilibrium that the governments of the Community of Madrid have maintained for more than 25 years under the administration of right-wing parties.
These three fundamental principles translate into an environment of stability and certainty, crucial aspects for both the labor market and companies.
This condition attracts investment and promotes sustained growth, supported by a policy of tax minimization in the region. Although taxes are managed at the national level, the autonomous communities in Spain have certain margins for action. Madrid has opted to keep these taxes at the legal minimum, thus favoring a greater flow of investment and robust economic growth.
These three pillars, together with moderate taxation, have led to spectacular growth in Madrid in recent years. It is important to note that Madrid has overtaken Barcelona in terms of GDP per capita, total GDP and average salary. The results speak for themselves: political stability, legal security and financial equilibrium are vital elements for economic development.
Czech Republic, Estonia, Slovenia have already surpassed Spain in GDP per capita, why is that?
Several factors contribute to this outcome.
First, economic policies. The aforementioned countries may have implemented more effective economic policies that foster growth, innovation and competitiveness. Their policy decisions could be more conducive to attracting investment and promoting sustainable economic development.
Second, market reforms. Reforms in areas such as labor markets, taxation and business regulations can have a significant impact on economic performance. If the aforementioned countries have carried out successful reforms in these areas, it could explain their higher GDP per capita compared to Spain.
Third, investments in education and innovation.
Countries that prioritize education and innovation tend to experience higher economic growth.
If the Czech Republic, Estonia and Slovenia have made substantial investments in these areas, it could contribute to their economic success.
Fourth, infrastructure development. The quality of infrastructure, including transportation, communication and technology, plays a crucial role in economic development. If these countries have invested in modernizing their infrastructure, it could improve their productivity and economic output.
Fifth and finally, flexibility and adaptability. A country’s ability to adapt to economic changes and global challenges is vital. If the Czech Republic, Estonia and Slovenia have demonstrated greater flexibility to adjust to economic changes, this could contribute to their higher GDP per capita.
Czech Republic, Estonia and Slovenia have outperformed Spain in terms of GDP per capita and Spain should consider implementing those same reforms to increase its economic competitiveness.
Do you think that if Spain continues on its current course, more EU countries could overtake it? Poland and Hungary are one step behind Spain in purchasing power parity
It is only a matter of time before these two countries overtake Spain, as they are demonstrating outstanding performance, especially in the economic sphere, unlike Spain, which seems to be taking the opposite direction.
The divergence in economic strategies between Poland and Hungary, which are making positive progress, and Spain, which is taking counterproductive measures, suggests that, without a course correction, Spain will continue to deteriorate on all economic indicators.
Javier Milei, current president of Argentina, wants to reduce taxes, deregulate and liberalize the economy, do you think he will be able to solve the situation that Argentina has suffered?
Javier Milei, the current leader in Argentina, advocates tax reduction, deregulation and liberalization of the economy. Do you think these measures could solve the complex situation Argentina is going through?
Milei represents the only viable economic path for the country, seeking to repair the damage caused by more than 80 years of socialism.
The path chosen by the president is the right and necessary one for his country. He embodies the way out that must be undertaken and shows a firm disposition to carry it out. His determination is crucial in both the economic and political spheres. However, it is realistic to recognize that the task of repairing the damage accumulated over so many years will be extremely challenging in a four-year term of office.
Although the task looks complicated, it is undeniable that Milei is forging a determined path. In these four years, thanks to the quality of the measures implemented in Argentina, it is expected that an economic ecosystem conducive to the country’s growth and resurgence will be generated, thus fulfilling Javier Milei’s promises.