The Bank of Spain considers the pension reform insufficient and asks not to raise them this year with inflation | Economy

The Governor of the Bank of Spain, Pablo Hernández de Cos.
The Governor of the Bank of Spain, Pablo Hernández de Cos.David Zorrakino (Europa Press)

The reform that the Government has approved so far is insufficient to guarantee the sustainability of pensions and these should not rise with the CPI this year to face the rise in prices. This is stated by the Bank of Spain in its annual report, published today, which is its main document on the situation and the challenges of the Spanish economy. The report, of nearly 300 pages, launches other messages: inflation is affecting low incomes more because they have a more exposed shopping basket; the 20-cent help for fuel is not very selective and benefits higher incomes more, and the labor reform is achieving an increase in permanent contracts, but this should be valued when there is more data measuring job creation.

Inflation has originated in energy and should moderate, however, according to the agency, it is being more persistent than expected, it has spread to 60% of goods and services and there is a risk that it will spread even further because these energy costs are transferred to final prices or because wages rise more. Although an income pact would be desirable to avoid a price spiral, the Bank of Spain considers that such an agreement would already be taking place in a “tacit” way: companies are reducing margins and workers are losing purchasing power. Although public revenues are growing and the deficit is falling, the debt ratio remains practically the same and threatens to rise if nothing is done. Furthermore, the increase in income may not be structural in the same way as it was before 2008.

The report’s recommendations do not stop there. It would be necessary to review all government spending items to gain efficiency, especially since Spain allocates a lower proportion than its European peers in two fundamental headings for growth, education and investment. Instead, it spends more on social benefits and debt interest. It would also be necessary to reorient taxes from income to consumption, removing VAT reductions, raising environmental taxes and compensating low incomes with additional income. According to the academic literature, says the bank, these taxes penalize growth less because they do not make the labor factor more expensive. And all of this should be part of a gradual fiscal consolidation plan that should only be carried out once the recovery is consolidated and that is even more important since the ECB is already withdrawing stimuli. Although covid expenses are down, total spending has continued to rise, the supervisor recalls.

The pension challenge

Pensions are the main challenge for public accounts: “According to available estimates, which incorporate the measures recently adopted in this area, coping with the increases in spending on pensions that will result from population aging will require new actions in the future on the side of income, expenses or both”, affirms Governor Pablo Hernández de Cos in the presentation of the document. In other words, the reform approved so far is insufficient. In addition, the Bank of Spain insists on delinking from the CPI the revaluations of benefits and salaries of civil servants as part of the income pact that would seek to remove the possibility that inflation feeds back.

The supervisory body explains that it is necessary to analyze the redistributive consequences of the pension system and its effects on intergenerational equity. It would be necessary to avoid “that the possible adjustments fall on specific groups such as retirees or future workers”, he points out. And it underlines the need to initiate “a rigorous debate that addresses the level of benefits and the strategy for capturing income.” In this sense, it mentions “the convenience of reinforcing the link between the benefits and the contributions made, ensuring a sufficient level for the most vulnerable households”. Given that according to the bank’s calculations, a pensioner receives an average of 74% more than what he has contributed, in practice this would imply gradually moving towards a system with less generous benefits. The supervisor also talks about lengthening the working lives of workers and establishing “automatic adjustment mechanisms.” Although the bank does not mention them, an example of automatic instruments were the 0.25% revaluation in pensions and the sustainability factor that have been repealed. All this would serve to “provide the system with greater transparency and predictability,” he stresses.

He knows in depth all the sides of the coin.


Downward revision of growth

The Bank of Spain draws an incomplete recovery from the pandemic, surrounded by uncertainties and very different by sectors, companies and households. While the Spanish economy has yet to recover 3.4% of the GDP lost with the pandemic, the euro zone as a whole has already recovered. The disposable income of households presents a less favorable evolution than in Europe and weighs down a more robust take-off in consumption, which is still 8% below. In part because employment in hours worked has not yet recovered and because low income earners accumulated less savings. Furthermore, just as bottlenecks were beginning to ease and services such as tourism to recover with vaccinations, the war in Ukraine has triggered inflation, dented confidence, increased uncertainty and slowed international trade.

This inflation is having a greater impact in Spain because electricity and fuel have more weight in its consumption basket, and because it suffers a faster transfer of energy prices to the consumer due to the regulated tariff, whose prices are formed directly in the wholesale market. The savings accumulated with the pandemic and the European funds have not given the expected boost so far. And the behavior of the first quarter, which has been worse than expected, forces a downward revision of growth, announces the supervisory body. Having said this, the Spanish economy will continue to grow and will reach pre-pandemic levels at the end of 2023. In other words, with the war the recovery has again been delayed. France and Holland have already recovered. Italy and Germany should do so this year.

Prices are making greater progress in non-energy components, but show moderation in energy components. And the cap on the price of gas in the Iberian electricity market should temper the escalation of energy costs. Although inflation will remain high in the coming months, it should gradually come down, predicts the Bank of Spain, which nevertheless admits the “extraordinarily high” uncertainty about these projections. For this reason, and given the limited room for maneuver in public accounts, he calls for a selective and temporary fiscal policy to mitigate inflation in low incomes. The fuel discount benefits higher incomes more because they consume more. So it would be better to help only low incomes through personal income tax with negative taxes like that of working mothers.

The bank returns to the charge with the statement that an income pact would be “highly desirable” by which companies and workers would share “the inevitable decrease in national income” that has caused the rise in the price of imports of raw materials. This should be multiannual; take into account the different levels of productivity of companies; include business margins; exclude energy prices from references to negotiate salaries; avoid salary guarantee clauses and collect a commitment to maintain employment.

Inequality and labor reform

Although there is still no data, the evidence collected by the bank indicates that the pandemic increased income inequality, especially among young people. To correct it, the supervisor prescribes an improvement in education, an evaluation of income support policies such as the recently approved Minimum Vital Income, and making the indefinite contract more attractive. On the contrary, what the labor reform has done is limit by law the use of temporary. Regarding the significant drop in the temporary contract that has occurred with the reform, the Bank of Spain warns that more time is needed to assess it and that “the reduction in temporary employment could come both from the substitution of temporary employment for permanent employment and from the destruction of temporary employment. In fact, he cites the Italian case: “Some studies for other countries that have approved similar reforms in the past suggest that they would have had a certain cost in terms of lower net job creation.” The bank also recalls that young workers are experiencing a rising rate of unwanted bias since the financial crisis. And he adds that it will be necessary to follow how the rotation of jobs, the productivity of companies or the quality of jobs evolves.

Another necessary instrument is the reinsertion policies for the unemployed, the so-called active policies. According to the supervisor, in Spain these do not work as they should and that means that, after the loss of employment, the chances of getting a job are lower than in other European countries. Housing policy should also help after access has tightened in recent years. And the housing law pursues that objective, but sets price controls on rent that, in the bank’s opinion, could have undesirable or adverse effects in the medium and long term. Legal certainty should be guaranteed to ensure an increase in the rental offer, he concludes.

The size of the companies

The supervisor asks to analyze why Spain has more small companies with low productivity. And he points out some ideas in this regard: the high complexity of regulation, the lack of support for innovation and the need for financing under more favorable conditions. He considers the approval of the business creation law and the bankruptcy law to be positive, but says that their results will still have to be evaluated. The improvement of the size is important to face the increase in energy costs and the changes in the productive structure that will be necessary with digitalization and the green transition, highlights the annual report.

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