Good morning from New Economy Brief.
Crises have haunted Spain’s economy since 2008. The country was hit hard by the 2008 global financial crisis: a housing bubble burst spectacularly, Spanish banks were bailed out and unemployment reached a record high of 27.2% in 2013. In fact the resulting economic crisis lasted until 2014. And as a major tourist destination, the country’s economy was also significantly impacted by the pandemic.
But in December the Economist named Spain the best economy in the world for 2024. So what happened?
This week, we look into Spain’s economic recovery and how progressive policies helped bring it about.
–
Headline figures.
The Economist’s annual ranking scores countries on five measures: GDP, stock market performance, core inflation, unemployment and government deficits. Spain’s economy grew by 3.5% in 2024, compared to the UK’s 1.7%. It also managed to keep inflation lower than in the UK: in Spain core consumer prices rose just 2.4% compared to 4.1% here. The number of people out of work fell to its lowest level since 2007, and Spain also outperformed many other countries on government deficit and share prices. So while the UK grapples with low growth and the effects of high inflation, the picture looks quite different in Spain.
–
Responding to the cost of living
Back in summer 2023, we explored why inflation in Spain was dropping so fast from its peak, while it remained high in other countries – including our own. In short, it’s down to how Spain has used fiscal policy to tackle inflation, with Prime Minister Pedro Sanchez’s government tackling price rises head-on.
And the success of this method has been recognised. The IMF’s Chief Economist, Pierre-Olivier Gourinchas, has argued that ‘unconventional fiscal policies’ have played a significant role in tackling Eurozone inflation by reducing expectations of future price rises and preventing inflation ‘passing through’ from areas hit with supply shocks into core inflation in the rest of the economy.
–
Wealth taxes and redistribution.
On the tax side of things, Spain is doing things differently too. In December 2022 it introduced the Solidarity Tax for Great Fortunes (ISGF) – a temporary tax on wealth of individuals exceeding €3 million (around 0.5% of the Spanish population). Wealth between €3 million and €5 million is taxed 1.7%, between €5 million and €10 million is taxed 2.1% and net wealth of over €10 million is taxed at 3.5%. The Tax Justice Network estimates that if such a tax (often described as “featherlight”) were applied worldwide, it could raise $2.1 trillion.
–
Structural reforms and investment.
Beyond immediate relief measures, the Spanish government has also pursued structural reforms aimed at strengthening Spain’s long-term economic prospects. Labour market reforms, such as an historic agreement with trade unions to reintroduce sectoral collective bargaining, have been central. Reforms have also resulted in lower unemployment rates. By restricting temporary contracts while at the same time making permanent contracts more flexible, they helped keep seasonal workers in employment in sectors like tourism and agriculture, giving them more job security and improving overall employment figures.
Meanwhile, investments in renewable energy and infrastructure, supported by EU recovery funds, have positioned Spain as a leader in the green transition.
–
A template for progressive economic policy?
Today’s global economic turmoil warrants a far more interventionist approach from governments in relation to the economy - as Spain’s economic turnaround and the way its government has responded to the cost-of-living crisis in particular has proved.
Of course, Spain’s economy isn’t perfect: while unemployment has fallen significantly, it’s still the highest in the Eurozone. Yet while other countries have shied away from more active use of price controls and unconventional fiscal policies to tackle the cost of living, Spain’s success in containing inflation and securing strong growth suggests governments around the world should be looking to Madrid for ideas - as Isabella Weber has argued. Not least Keir Starmer, whose Labour government is pinning its hopes on turning round the UK’s stagnant economic growth and falling living standards by the end of this Parliament.
Will rising borrowing costs prompt a fiscal response? After gilt yields rose, speculation has been rife about whether the Bank of England may intervene by pausing quantitative tightening, or whether the government might need to change its tax and spending plans ahead of June’s Spending Review – perhaps when the OBR releases its Economic and Fiscal Outlook at the end of March. The government’s borrowing costs have risen as bond traders demand a higher premium on its debt, with many predicting that geopolitical instability and the effects of US President Trump’s trade tariffs will weaken the global economy and increase inflation, whilst low growth prospects in the UK economy means we are at particular risk of stagflation. (See our previous New Economy Brief explaining how bond market movements react to changes in inflation expectations.)
Labour’s plan to ‘unleash AI’. The government announced the AI Opportunities Action Plan on Monday to ‘unleash AI’ in a bid to increase economic growth. The IMF calculates that “if AI is fully embraced”, productivity could increase by 1.5% a year, amounting to £47 billion each year over the next decade. Three major tech companies have also committed to invest £14 billion in the UK’s data infrastructure.
Public investment doesn’t lead to higher mortgage costs, actually. Analysis from the Telegraph has argued that the Autumn Budget will add “over £1,000 to a middle-class family’s mortgage” as extra spending feeds into higher inflation and leaves interest rates higher than they otherwise would be. The Conservatives made a similar argument before the Autumn Budget; this briefing from the Invest in Britain campaign explains why it’s wrong (see pages 4-6).
#MakeRichPollutersPay. Last Friday (10th of January) was the day the richest 1% of the population burned through their entire carbon allowance for the whole year, marked as ‘pollutocrat day’ by Oxfam.
Private ownership of North Sea oil and gas. A new briefing from Common Wealth warns that the ownership of oil and gas assets in the North Sea is becoming increasingly concentrated, with private ownership of assets eight times higher in 2024 than in 2005. They argue for a publicly led reduction in output to provide a smoother transition that is both aligned to net zero and protects frontline communities and workers.
