Is Spain booming?

If the international press is to be believed, Spain is currently Europe’s growth miracle (just this week I read this, this, this and this).

The basic story is simple: last year GDP grew by 3.2%, compared to just 1.1% in France, 0.9% in the UK, and -0.2% in Germany. Unemployment is at its lowest point since 2008, and the deficit is on track to reach the Maastricht targets.

But despite the ‘boom’, Spanish households are not getting richer. By the end of 2024, real household income was just 1.4% above its pre-Covid level (and almost four percent below its level in 2008). The gap between the EU average and Spain is larger than it was five years ago. While total output is rising significantly, incomes are not. To understand why, it is worth looking at what the expansion consists of.

The first component of Spain’s boom is a significant rise in public expenditure. Spain received over €163bn from the European Covid recovery fund (€80bn in grants, €83bn in loans), to be spent between 2021 and August 2026. Public spending as a share of GDP is now four percentage points higher than pre-Covid. According to analysis by BBVA, a bank, higher public spending explains roughly 60% of GDP growth since 2019.

The second component is tourism (part of services exports on the chart above). Last year Spain received 94 million unique visitors – which contributed roughly 12% of GDP.

The third component is surging immigration. Spain took in 1,369,000 net immigrants between 2022 and 2023 — almost three percent of its population. Spain has the good fortune of receiving most of its immigrants from Latin America, who face minimal language or cultural barriers.

Unfortunately, all three parts of the boom have a thing in common: they are not raising productivity, which has grown less than 1.5% since Covid began.

Government spending is largely directed toward consumption rather than investment. Real government consumption has increased by roughly 12% in 4 years; capital formation per working-age person has dropped 18% since 2008 (in the same period, the EU27 saw a 13% rise).

The efficiency of Spanish public spending has actually declined over the last two decades, with Spain moving from an over-performer in the EU to below-average in terms of public sector productivity.

Unlike other labour-intensive sectors, tourism has built-in protection against AI and automation, and unlike other exports, it bypasses trade barriers and tariffs. But it suffers from what economists call Baumol's cost disease – labour-intensive services get more expensive over time without seeing productivity growth. It takes the same labour now as in 1800 to pour a glass of wine or make a bed.

The influx of foreign labour boosts output — which is after all income per worker multiplied by the size of the labour force. But a higher GDP matched by an equivalent growth in population means that per capita incomes have not improved (this is still a success, in the UK’s case rapid population growth with stagnant output implies that average incomes are currently falling).

So where are the gains from output growth going if they aren’t reflected in household income? Here is one basic interpretation of the boom. While working-age Spaniards' net incomes remain below 2008 levels, retirees have seen their real incomes grow by 17%

.

Household income have stagnated while the tax wedge grows. Employee and employer pay combined social security contributions of 37%. This means that even for a low-income worker who faces an average tax of 12%, the gap between total labour cost to the firm and take-home pay is close to 50%.¹

Driving up tax receipts through a rapidly growing labour force and a boom in tourism is a great strategy to fund surging pension expenditure. But the reality of being young in Spain is grim:

• One in four Spanish youth are unemployed — the highest rate in the European Union

• The average Spaniard today does not leave their parents' home until age 30, four years later than their European peers.

• Spain now has a total fertility rate of 1.12. (For reference, Japan’s is 1.26)

• 47% of young part-time workers want but cannot find full-time work, compared to just 19% across the EU.

• Housing costs have risen almost 50% faster than youth wages since 2014, with the average rental now equal to over 90% of a young worker's income.

Demographics are getting worse, not better. The country has the second lowest birth rate in Europe (after Malta) and one of the world’s highest life expectancies.

Spain’s most successful reform in the aftermath of the Eurozone crisis made its pension system more affordable. Under pressure from Brussels, the conservative People's Party implemented a sustainability factor in 2013 that would adjust pensions to demographic shifts.

Upon taking power in 2018, the Socialist Party (PSOE) promptly suspended these reforms, and formally repealed them in 2021 — reindexing pensions to inflation.

Spain's age-related fiscal outlook for 2070 has deteriorated by 6.6 percentage points of GDP in just three years. Spain will top European pension spending by 2050, with current promises to future retirees already totaling five times GDP — the highest implicit pension debt in Europe.

Fellow Europeans should not be surprised to read this. The electoral calculus is straightforward: over half of the voters of the governing PSOE are over the age of 55. A full 34% are already retired. Pensioners vote at 10%-15% higher rates than young voters, and the PSOE won this group by ten percentage points last election. The state you get is the one voters want. With a top-heavy population pyramid, political coalitions heavily favor current beneficiaries over future sustainability.

Historians and poets have long written about the two Spains — that of progress and reaction. Today, the split is between old and young. For the former, there is surging pension expenditure funded by a rapid rise in immigration and tourism. For the latter, there is stagnant productivity, high unemployment and low investment.

Spain’s future does not need to be bad. The country has enduring strengths: great weather, cheap labour, and some of the world's highest quality of life (reflected in its growing non-tourism services exports). It has the best location for solar in Europe, perhaps the most promising of the new energy technologies. And with Latin America, it has a pool of 570 million potential workers it can integrate without language or cultural friction — essential for staving off the demographic crunch.

But that is in the long term. In the short term, it is good to be accurate. In a country where youth unemployment is 25% and working-age incomes are lower than in 2008, it is perhaps premature to speak of a great boom.

1. Social security contribution rates are as follows: From 1 January 2024, the contribution rate for common contingencies is at 28.30 percent, with 23.60 percent being paid by the employer and 4.70 percent by the employee; the unemployment contribution rate for the employer is 5.50% and 1.55% for the worker; the vocational training contribution rate 0.60% for employer and 0.10% for worker; and the FOGASA at 0.20%. To this now is added the new intergenerational equality mechanism which adds 0.7% of which 0.58% is employer contribution- a total social security cost of 36.95%, of which 30.48% is paid by the employer and 6.47% is paid by the employee.