- The Spanish economy has continued to perform strongly, expanding significantly faster than euro area peers. Notwithstanding the adverse effect and heightened uncertainty from the conflict in the Middle East, growth is expected to stay solid this year, before slowing gradually as immigration inflows moderate and demographic aging intensifies. Risks are on the downside, including from a lengthy Middle East conflict, an escalation of other geopolitical tensions and trade measures, and domestic political fragmentation.
- Given the favorable cyclical position and still strong and resilient growth under staff’s baseline projection, the authorities should speed up the pace of discretionary consolidation to rebuild fiscal space more rapidly ahead of the looming sharp rise in aging-related spending pressures. Should any fiscal measures be taken to mitigate the adverse impacts of the energy price shock on households and firms, they should not distort energy prices, be well targeted, and remain temporary.
- To ensure that autonomous communities contribute to this effort, the contemplated reduction of their debt and increase in transfers from the central government should come hand in hand with credible consolidation plans and a reform of the subnational fiscal rule centered around strictly enforced expenditure growth limits, in line with the EU fiscal framework. It will also require offsetting tax increases and/or spending cuts from the central government.
- Deteriorating housing affordability calls for more forceful action to boost housing supply, building on ongoing government initiatives. Priorities include accelerating urban development plans, releasing more land for construction, and streamlining permitting procedures.
- To pre-empt the buildup of housing-related financial vulnerabilities amid fast-rising house prices and early signs of easing bank lending standards, mortgage-related borrower-based measures (BBMs) should be introduced in the coming year, at least in the form of supervisory guidance.
- To increase living standards at a faster pace, a renewed reform strategy would benefit from focusing on further raising the employment rate and solidifying the pickup in productivity growth. Stronger financial rewards for regional public employment services that improve job placement and for social benefit recipients who take up jobs would speed up return to employment. Intensifying product and capital market reforms at the Spanish and EU levels, together with simplifying cumbersome R&D tax incentives, could reduce Spain’s sizeable innovation gap vis-à -vis its peers.
Washington, DC:
Recent Economic Developments and Outlook
Spain’s economy has maintained solid growth as strong domestic demand offset subdued exports. Growth declined from 3.5 percent in 2024 to 2.8 percent during 2025, still significantly outpacing the rest of the euro area. Private consumption accelerated due to solid employment underpinned by continued net migration inflows, steady real wage gains, and some decline in the still high household saving rate. Investment also picked up, supported by more favorable financial conditions and Next Generation EU (NGEU) funds. A slowdown in tourism growth was largely offset by stronger growth in non-tourism service exports—such as business and ICT services—while goods exports remained subdued, and those to the United States fell following US tariff hikes. Headline inflation has hovered between 2.5 and 3.0 percent since mid-2025 as wage growth and core inflation remained sticky.
Notwithstanding a hit from the conflict in the Middle East, growth is projected to remain robust in the near term before slowing gradually. The conflict is projected to adversely affect the Spanish economy primarily through higher oil prices, while the impact of higher gas prices should be muted by several factors, including Spain’s large share of renewables in the electricity mix. Staff’s baseline assumes oil and gas prices that are broadly consistent with future prices by mid-March 2026. Under these assumptions, GDP growth would be about 2.1 percent in 2026 and 1.8 percent in 2027, while year-on-year headline inflation would reach about 3.0 percent by end-2026 before falling to 2.2 percent by end-2027. Domestic demand is expected to remain the main source of growth, partly offsetting the moderation of the supply-side (labor force gains) and demand-side (tourism) drivers of recent years. Private consumption should remain supported by continued wage gains amid a still dynamic labor market, and a continued decline in the saving rate that will enable households to smooth the impact of the energy shock. Investment will benefit from the final year of NGEU funding and a continued pickup in housing construction. Looking beyond 2027, annual GDP growth is projected to stabilize around its medium-term potential of about 1.7 percent.
While there are some domestic upside risks, overall risks to the outlook are predominantly on the downside. A lengthy conflict in the Middle East could result in higher-for-longer energy prices, tighter financial conditions, and deeper uncertainty, weighing on investment, consumption and growth. It could also induce larger second-round effects on wages and core inflation, keeping headline inflation above 3 percent for a while. An escalation of other geopolitical tensions and trade measures is another key external risk for Spain and the global economy. On the domestic front, political fragmentation raises questions regarding the government’s ability to deliver the sizeable fiscal consolidation measures that staff estimate will be needed to meet its medium-term fiscal structural plan (MTFSP) commitments, and to implement decisive action to reassure markets in the event of financial stress. On the upside, tourism growth could remain more resilient than projected due to increased diversification across regions, reduced seasonality, and diversion of tourists towards Spain following the Middle East conflict. Spain’s pro-immigration policy could keep net migration inflows above staff baseline projection—which is underpinned by the national statistical institute’s medium-term forecasts. Finally, consumption could grow more than projected if households reduced their saving rate towards its pre-COVID level faster than expected.
Fiscal Policies
Public finances continued to improve over the past year, with the general government deficit expected to fall to 2.5 percent of GDP in 2025 from 3.1 percent in 2024. Excluding the reconstruction costs related to the 2024 DANA floods, this improvement exceeds the authorities’ projection under the MTFSP. In the context of a further rollover of the 2023 budget, revenue growth was supported by strong economic growth, the non-indexation of personal income tax (PIT) brackets and higher social security contributions from the phasing in of the 2021-2023 pension reforms. Higher revenues more than offset a large increase in public expenditure that exceeded the authorities’ MTFSP target.
Looking ahead, staff project that annual net expenditure growth will keep exceeding the authorities’ targets and the deficit will fall only modestly, requiring additional consolidation efforts. Under staff’s current-policies baseline, which assumes no additional measures beyond those already implemented or approved, the deficit is projected to stabilize above 2 percent of GDP by 2031, compared to 0.8 percent envisaged in the MTFSP. This implies that measures of almost 1.5 percent of GDP have to be implemented to achieve the authorities’ MTSFP deficit path. Staff’s projection also implies that net spending growth would remain above the authorities’ MTFSP commitments running until 2028. While debt is projected to decline further over the next five years, its trajectory will remain vulnerable to shocks to growth and financing costs. Furthermore, it would rise sharply starting from the early 2030s as Spain faces one of the largest projected increases in public pension, health and long-term care spending among advanced EU economies—of about 4 percent of GDP between 2030 and 2050, according to AIReF, the fiscal watchdog.
Under staff’s baseline projection, the still strong growth momentum provides an opportunity for the authorities to rebuild fiscal space more swiftly. The cumulative improvement in the cyclically-adjusted primary balance (CAPB) of 2.5 percentage points of GDP during 2025-2031 envisaged in the MTFSP is appropriate. Staff see scope for delivering it already by 2030, implying a yearly adjustment of 0.5 percentage points in 2026-2030, to create fiscal space and more quickly reduce debt ahead of the looming aging-related spending pressures. This recommendation factors in the economy’s strong cyclical position and the continued investment impulse from NGEU funds, which reduce the growth costs of tighter fiscal policy. Moreover, to accomplish such adjustment, any future revenue surprises should be saved rather than spent. If downside risks materialize, automatic stabilizers should be allowed to play out. Temporary and targeted discretionary support should be considered, provided sovereign funding costs remain low, only in the event of a severe shock—for instance if an escalation of the conflict in the Middle East were to raise spot and future energy prices significantly further, exacerbate uncertainty and trigger an asset price correction, with knock-on effects on Spain’s external and internal demand. Any fiscal measures to mitigate the impact of the energy price shock should also avoid dampening price signals. Finally, the formulation of fiscal policy could be strengthened by bolstering the role of a fully independent and well-resourced AIReF in the preparation of future MTFSP and Annual Progress Reports (APRs). Â
A well-identified mix of revenue and expenditure measures should underpin a clear medium-term adjustment strategy. To constitute a fully-fledged medium-term framework, the MTFSP and the APR should include projections not just of the overall and primary balance but also of the main components of revenues and expenditures, along with the government’s tax increase and spending reduction priorities. Given Spain’s relatively low employment rate and high tax burden on labor, a growth-friendly consolidation strategy should primarily address the low efficiency of indirect taxation, which has been recurrently used for income distribution objectives that are best met with other tools. Staff estimate that harmonizing value added tax (VAT) rates by removing reduced rates on a wide range of products, combined with compensating transfers to lower-income households, could deliver much of the remaining consolidation envisaged by the MTFSP at a small GDP growth cost. With respect to pensions, although the outcome of AIReF’s upcoming review is not yet known, employment-friendly measures—including alternatives to raising social security contribution rates, such as lengthening the period over which benefits are computed—will eventually be needed to address the sharp future rise in pension expenditures.
READ MORE: https://www.imf.org/en/news/articles/2026/03/20/mcs032026-spain-2026-article-iv-mission
