Spain’s economy is in a favorable phase, with GDP growth that surprises on the upside and leads among the major euro-area economies. But one thing is the short‑term cycle and another is the longer‑term structure. The Bank of Spain’s Annual Report, published this Tuesday, highlights the uncertainties that, in its view, cloud the outlook for the Spanish economy and that affect pensions, the labor market, taxes, public accounts, housing access, business size, productivity, education, and social inequality.
“Spain has gone more than a decade without restoring a sustained convergence in per‑capita income with the rest of its European partners,” notes the Bank of Spain governor, Pablo Hernández de Cos, during the report’s presentation. “To reverse these trends will require ambition and broad political agreements that enable the necessary reforms to be solidified over time.” He also warned, echoing the International Monetary Fund, that “a lack of consensus in a context of high political fragmentation can hinder the design and implementation of structural reforms and the fiscal consolidation plan, harming future growth prospects.”
Adjustment in pensions
In the public pension system, the Annual Report sees the likely need to adopt new adjustment measures starting in 2025, either raising contributions or reducing benefit levels. This would occur if, by March 2025, Airef certifies that pension spending has reached 13.3% of GDP. In 2023, spending reached 13.1%, and the European Commission’s recent projections warn of faster growth than the government had anticipated.
The European Commission’s Ageing Report 2024 anticipates that the last pension reform in Spain, which guarantees wage indexation with the consumer price index, will push pension spending to 17.3% of GDP by 2050. Airef projects 16.2% in 2025, and the Bank of Spain estimates a range of 14.3% to 16.9%, depending on growth scenarios.
The reform pushed by former minister Jose Luis Escrivá included a safeguard clause so that when spending exceeds 13.3% of GDP, adjustment measures would be triggered within five years, either on the revenue side (new contributions) or on the spending side (benefit cuts). The Annual Report of the Bank of Spain warns against further social security contributions rises, since each percentage point increase would reduce employment by about 50,000 jobs after four years. “If activation of the safeguard is necessary, adjustments would likely come from higher social contributions, which could hurt employment and competitiveness,” stated the Bank of Spain’s president.
More workers from immigration
The demographic driver behind pension expenditure growth is the so‑called dependence ratio. Today, people aged 64 and over account for roughly 26.6% of the population, with Eurostat projections pushing the dependence ratio toward 53.8% by 2053.
According to the Bank of Spain, keeping the dependence rate constant over the next 30 years would require a working‑age immigrant population three times larger than the latest INE projections suggest, which already foresee a rise of nearly 10 million foreign‑born residents by 2053. Specifically, the Bank estimates that by 2053, an additional 24.673 million immigrants of working age would be needed to maintain the current 26.6% dependence rate.
About 11 billion more due to “cold progressivity”
The Bank of Spain also urges a deep reform of the tax system to shift the weight toward indirect taxes (VAT and excise duties) and environmental taxes relative to direct taxes (income tax and corporate tax).
The Annual Report includes an analysis of greater revenue enabled by not correcting the inflation impact on the income tax. Tax Authority figures show income tax receipts rising from 86.821 billion in 2019 to 115.739 billion in 2023, a gain of nearly 29 billion. Bank of Spain calculations imply that correcting inflation in the income tax from 2019 to 2023 according to the prior year’s CPI would have produced about 11 billion less revenue.
The Bank’s research service also concludes that the middle of the income scale most affected by inflation in taxes sits between 16,385 and 19,873 euros. In this band, each additional euro of salary can lift the income tax bite by about 10 percent if inflation isn’t corrected.
Since 2019, the average effective rate of income tax has risen from 12.8% to 14.7% in 2023. The Bank estimates that about 70% of this increase stems from inflation. If no further tax changes are made, the average rate could reach 15.3% in 2025, which would be roughly 20% higher than in 2019.
A budget adjustment similar to 2010–2013
The governor also cautions that given the persistent structural deficit and a high debt level, complying with Europe’s new fiscal rules will require a consolidation plan that gradually corrects these imbalances. The Bank estimates that meeting the fiscal rules would require an annual adjustment of 0.5% of GDP in 2025 and in each of the following seven years, a pace somewhat lighter than the one faced during the debt crisis at the end of the Zapatero era and the early Rajoy years. The Bank notes that this would likely influence economic momentum.
Hernández de Cos warns that the impact of such an adjustment would likely slow growth, and he argues that accompanying reforms should bolster the economy’s potential growth and long‑term competitiveness.
Labor market reform
On employment policy, the Bank’s governor calls for a rethink of hiring rules that would advance the definition of objective dismissal reasons and reduce uncertainty in dismissal processes. He also argues that unemployment benefits should provide adequate protection without discouraging job search and mobility, suggesting that benefits could be made compatible with work and with a declining benefit profile over time.
Regarding possible increases to the minimum wage, the governor urges prudent steps since the minimum wage already exceeds 60% of the median gross wage. In addition, he notes Spain’s plan to shorten the legal workday and urges consideration of the heterogeneity in hours across sectors and firms, while focusing on productivity gains.
In sum, the report frames a set of reforms—fiscal consolidation, pension adjustment, tax reform, immigration dynamics, and labor market modernization—as essential to sustaining growth, fairness, and competitiveness in the coming years, while acknowledging the political and economic headwinds that lie ahead.