Economic outlook and key challenges of the Spanish economy

The International Monetary Fund (IMF) released its conclusions from the annual review of the Spanish economy, highlighting its solid performance, with expected GDP growth to remain significantly above the euro area average in the short term, although fiscal and structural challenges could affect its long-term sustainability. The IMF suggests replacing the ad hoc banking tax with clearer and more strategic measures that would have a greater impact both in increasing fiscal revenues and reducing public spending.

• Robust economic growth, but with downside risks: Despite the IMF projecting GDP growth above the euro area average (+2.5% in 2025 and +1.8% in 2026), most risks to its forecasts are tilted to the downside, including renewed escalation in international trade measures and domestic political fragmentation and uncertainty. Population aging is a factor that will limit potential medium-term growth, estimated at around 1.7%. To support convergence of per capita income towards the level of other advanced economies, the IMF emphasizes the need to strengthen active labor market policies and adopt reforms to improve productivity (i.e., facilitating the growth of new and innovative companies and enhancing Spain’s innovation ecosystem), whose gap with the European average has not narrowed since the early 2000s.
  
  
• Fiscal and structural recommendations: The public debt level as a percentage of GDP (101.8% by end-2024) remains vulnerable to growth and financing cost shocks. The IMF urges Spain to bring forward the planned fiscal adjustment, despite meeting the 2024 deficit targets, considering the long-term increase in age-related spending (pensions, healthcare, and long-term care) and defense. The main fiscal recommendations involve harmonizing VAT rates and strengthening green taxation, starting with aligning excise duties on diesel and gasoline. Such measures could replace other less effective, ad hoc measures like the redesigned banking tax, which the IMF says should be phased out after its three-year term.
  
  
• Financial system and real estate market: According to the IMF, Spain's financial system is sound, with comfortable capital and liquidity buffers and strong profitability. The Fund views positively the gradual introduction of the countercyclical capital buffer to enhance the resilience of the banking system. In its view, the rapid rise in housing prices does not currently pose immediate risks to financial stability but warrants close monitoring and policies to boost housing supply. It also suggests reassessing rent control if it is found to reduce the quantity or quality of rental housing supply.