Opinions
Tomorrow's Economy

Public investment and social policy in Spain

29 October 2018

A progressive agenda for sustainable growth and social cohesion

Authors
Manuel de la Rocha
Author
Shutterstock.com

Context

In 2017, after years of deep economic crisis, Spain’s GDP was brought back to its 2008 levels, which comes to show that the last ten years have been truly a ‘lost decade’ for Spain. The economic recovery has been achieved with 1,2 million fewer workers (that is to say, less employment is created per unit of output produced) which has resulted in higher levels of unemployment, less wealth, and more social inequality.

The emergence from the crisis and the recent consolidation of economic growth require a clear change of course towards future-oriented fiscal and budgetary policies, which have thus far been dominated by the themes of austerity and deficit reduction. The years of fiscal adjustment add up to a decade which saw Spain adopting trends of deregulation and tax exemptions that have resulted in weak public authority with little capacity to promote productive and socially sensible investment policies. The recovery in growth is largely attributed to improvements in external competitiveness, that was achieved through severe salary devaluation with significant effects on domestic demand and the purchasing power of wage earners, particularly Spain’s lowest-paid.

The average annual income of Spanish households has fallen more than 7% since the start of the crisis, while real wages of the lowest 2 deciles fell by 22.5% and 13.7% respectively. Spain has become one of the countries with highest the levels of inequality and poverty across the EU and the situation has worsened since the arrival of the PP (Partido Popular) to power in December 2011.

An entrepreneurial state for a new growth model                                 

Spain needs to steer towards a model of growth and competitiveness that is based on improved productivity, innovation, and an increase in ‘value added’. Renewed fiscal and investment policies should serve to promote a new structure of productivity, which increases the weight of the sectors with greater ‘value added’, while reducing that of others (i.e. construction) that generate low-wage employment. Developing a knowledge economy and technology requires the intelligent and determined involvement of the public sector through the launching of institutions and policies that are characteristic of an ‘Entrepreneurial State’, as defined by the work of Mariana Mazzucato.

As a top priority, it is crucial for there to be sustained increases in funding for R & D, which has fallen to 1.2% in Spain – one of the lowest rates among EU countries. This increase in funding must be supplemented by improvements in other fields, such as through the creation of human capital or a new system of interconnectivity between research centers, universities, and businesses.

The public sector can and must work together with the private sector to finance both innovation and the transfer of technology, by taking risks that the private sector cannot afford to in order to develop new branches, by promoting innovative public procurement, by leading the search for new niches of employment and wealth, by correcting market failures and by investing, along with the private sector, in areas where businesses alone do not.

At the same time, there is an urgent need to fuel the environmental and energy transition of the economy with effective policies that address climate change, tackles biodiversity loss, and reduces pollution. This implies the introduction of adequate public incentives through finance, public procurement, regulation, and mechanisms of public oversight in order to mitigate foreseeable corporate resistance, especially in the energy sector.

There are certain sectors which perform very well in this regard because of their capacity for potential growth and their contribution to a more just and sustainable society via education, health and retirement policies, sustainable transportation, energy efficiency, and smart cities among others. Such sectors deserve dedicated support from the government.

Furthermore, the policy of public housing must be restored, through fostering the creation of secure public spaces for rental housing. Those may come from new construction, existing empty housing, and, above all, from housing generated in the process of urban rehabilitation and regeneration.

In order to carry out these policies, Spain must gather together public resources with the help of new and innovative financing instruments. This should be done by a public investment bank, created from the current Official Credit Institute, which itself brings together both central and disconnected agencies and public funds, in a model similar to the German KfW.

A new approach to fiscal policy: social investment

In the last two decades public policies have lost an important part of their redistributive capacity, because of cuts in pre-crisis spending levels, although their generalized nature can also be explained by the growing loss of progressivity.In this context, it is important for Spain to redesign its welfare state in order to respond to the complex and pressing challenge of increasing inequality in the age of globalization.

The level of public spending in Spain has been significantly lower than the European average – 43.8% of GDP compared to 47.3% in the EU, and cuts in recent years have widened this gap. However, the response cannot focus solely on reversing the cuts without paying attention to the quality and impact of spending. According to Eurostat, public transfers in Spain (pensions excluded) reduce the risk of poverty by 26%, compared to the European average of 33.4%, and an even greater proportion of around 50% in the Nordic countries (see Eurostat 2018). This is mainly due to the fact that social spending in Spain is much lower in comparison with other developed countries, but also that a good chunk of public spending is intended for less progressive parties that benefit primarily the middle and higher classes through higher education, schools sponsored by a public voucher system, or tax breaks.

One interesting proposal is the idea of ​​social investment throughout the course of a citizen’s life, as has already been suggested by several authors (see Hemerjick, 2018). The idea is to generate virtuous circles which guarantee equal opportunity and investment in people throughout the course of their lives, starting from early childhood. This boosts their employment chances and productivity, which leads to greater potential growth and therefore higher public earnings. Thus, the main priority should be to advance family policies which can broadly be understood as making public pre-school education universal, extending assistance for dependent citizens, and passing gender equality and anti-discrimination policies that encourage the full integration of women and disabled citizens into the labor market.

Secondly, Spain needs to reform its system for returning the unemployed to the labor market, known as active labour market policies. Despite having one of the highest unemployment rates in the EU, Spain spends too little on such policies. Therefore, one of the major spending priorities of growing importance in the coming years is that of active employment policies. The spending should converge around some 80% of the average of the EU’s most advanced countries before reaching 2,700 Euros per jobseeker, which means increasing the current amount to 13 billion Euros over the next four years.

Third, the welfare state must be much more effective in combating poverty and exclusion as well as in providing cover for new social risks. Our welfare system is closely linked to the labor market, but the economic crisis left many within certain groups unprotected (including single-parent families, young people, immigrants, etc.). For this reason, it is crucial to put in place some type of basic income which guarantees a minimum living wage for all citizens.  The approach outlined here seeks to improve efficiency and promote equity – objectives which are not always compatible. The future success of these social democratic policies will depend largely on the necessary spirit of reform and innovation which is capable of advancing both values ​​together.

Fiscal reform to finance public investment

Spain maintains one of the lowest levels of tax revenue in Europe – 6.3 points below the Eurozone average. In addition, the income gap with Europe has widened over the past decade. This is why financing the new policies of social investment in favor of an ‘Entrepreneurial State’ cannot be carried out without addressing the problem of insufficient public revenues and without catching up to the average EU levels. In general, the Spanish tax system relies excessively on the taxation of labor income. Therefore, reforms are required to shift the weight of the tax burden toward the wealthy and the use of finite natural resources, by improving the system’s progressivity and equity, both vertically and horizontally.

On the one hand, there is a need for an in-depth review of the exemptions and deductions that undermine the tax base by some 37 billion euros annually and are often a breeding ground for tax evasion.

On the other hand, Spain’s green taxes , which are currently among the lowest in the EU, must assume a bigger role in ​​the state’s tax take. A good model would involve a carbon tax similar to the one introduced by Canada, as well as a revision of the diesel taxes, which again are currently among the Europe’s lowest.

In addition, as above, the Spanish tax model is biased toward taxing income, especially labor income, and is much more lenient toward the rich. A reform of how wealth is taxed in Spain that eliminates the current fiscal holes of the ‘Impuesto de Patrimonio’ (IP or the Spanish Wealth Tax) would be a step in the right direction. Along these lines, as requested by several international organizations, the taxation of real estate can and should play a more important role in our tax system.

Finally, the fight against fraud and tax evasion must be an absolute priority. It is estimated that in Spain, the public treasury fails to collect between 50 and 70 billion euros a year due to tax fraud (between 5 and 7% of GDP). This detracts enormous resources from public funds, and generates situations of social injustice and unfair competition. In such cases, fixing financial fraud means fixing inequality.

Conclusion

While Spain is emerging from the serious economic crisis it suffered in recent years, the consequences of the crisis are still present in Spanish society in the form of high unemployment, poverty, and inequality. The improvement in the external competitiveness of the country through a severe devaluation of prices and salaries has impoverished many of the less qualified workers while failing to ensure a change in the model of production.

Looking ahead, amendments are needed in the fiscal, budgetary and investment policy approaches, which have thus far focused exclusively on reducing the deficit and controlling public spending. The goal is to implement new social democratic and inclusive economic policies of an ‘Entrepreneurial State’ that will advance the knowledge economy and innovation in Spain with new regulatory, fiscal and monetary instruments similar to those found in most advanced countries.

It is also proposed that the welfare state undergoes a process of modernisation by adopting a new approach to social investment throughout the lifetime of citizens – meaning reinforcing educational, family, gender, anti-poverty and active employment policies which generate a virtuous circle of greater security, productivity and growth.

Crucially, in the current context of reducing the public deficit, these new policies demand tax reform in Spain that will tackle the deficiency and instability of public revenues.

This essay was originally a contribution to the Policy Network Progressive Governance Conference in Lisbon, June 2018.

 

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