IMF urges Spain to withdraw fuel subsidies and increase housing supply

All that glitters is not gold and the growth of the Spanish economy does not appear to be enough to convince the IMF (International Monetary Fund).

On Friday, the IMF urged the government to accelerate fiscal consolidation "before the imminent and sharp increase in spending pressures related to the aging population" of the country. In other words, the increase in pension spending.

The IMG also advised Spain to suspend the energy support measures it approved as a response to rising prices as a result of the war in Iran and only apply them if there is genuine need for such tax relief.

In that case, the price reductions should be "highly selective and not distort energy prices". The IMF believes that the aid consumes too many public resources in a context where it is necessary to reduce debt and the public deficit.

Although the discounts on electricity and gas bills end on 1 June, fuel discounts will remain in effect at least until 30 June. Furthermore, the government has not ruled out extending the reduced IVA rate of ten per cent for petrol and biofuels.

The IMF also expressed concerns about "the deterioration of housing affordability" in Spain, stressing that the crisis demands "more decisive" measures to boost supply, such as faster urban development, reducing legal uncertainty and simplifying building permit procedures.

The IMF deems it appropriate to introduce borrower-based, mortgage-related measures for next year, possibly in the form of supervisory guidelines. These should aim to prevent the accumulation of housing-related financial risks in a context of rapidly rising prices and early signs of a relaxation of lending standards.

The IMF also recommended that Spain study further reforms to the pension system and the harmonisation of IVA rates, while protecting vulnerable households, so that this fiscal consolidation promotes economic growth.

Despite the impact of the war, economic growth in Spain will remain solid at 2.1% in 2026 thanks to still-strong domestic demand.

"The Spanish economy has continued to outperform the euro area and solid growth is projected for this year despite the negative impact of the war in the Middle East. Subsequently, growth should gradually moderate over the medium term as immigration declines and the aging population grows," the IMF stated.

Therefore, GDP growth will moderate to 1.8% over the next two years, as demographic challenges intensify.

Another finding of the report is that the high share of renewable energy in the country's energy mix is mitigating the inflationary impact of rising gas prices. Even so, the energy shock will keep inflation at 3% through to the end of the year, before declining to 2.2% in 2027.

For the IMF, the risks to inflation are on the upside, while the risks to the Spanish economy's growth are on the downside. A prolonged conflict in the Middle East, other geopolitical and trade tensions and internal political fragmentation are the most significant factors.

Furthermore, the IMG highlighted the importance of undertaking new reforms to boost employment and improve productivity. This is one of Spain's major challenges, as it ranks far below other nations.

These measures should include strengthening active labour market policies and further facilitating business expansion and innovation through a redesign of the R&D tax credit.

The Spanish government welcomed the IMF's confirmation that Spain will lead economic growth in the eurozone, with a projected 2.1% GDP increase in 2026.

The Ministry of Economy highlighted that the European Commission's forecasts are in line with this projection. "Both institutions agree that Spain is facing the shock of the war in the Middle East from a position of strength, particularly in terms of job creation."

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