NCPA - National Center for Policy Analysis

Spain Privatizes And Reforms

August 12, 1997

While other European countries muddle along with high unemployment and restrictive labor practices, Spain is making real strides towards freeing up its economy. Observers credit the policies of Prime Minister Jose Maria Aznar -- a former tax inspector who has been in office only one year -- for producing some of the best economic numbers among European Union countries.

  • Aznar has accelerated privatization and deregulation, reformed stifling labor laws and begun to rationalize the nation's complex tax system.
  • The ambitious sell-off of state controlled companies is expected to raise up to $6.25 billion by year's end -- relieving pressures on public finances.
  • The independent Bank of Spain estimates the public-sector deficit will shrink to 2.9 percent of gross domestic product this year -- from 4.4 percent just a year ago.
  • Inflation is headed toward a record low of just 2 percent.

Spain's proposed 1998 budget is aimed at further progress in fiscal affairs. The 1997 budget included a pay freeze for public-sector employees and a 20 percent cut in public investment. Last year, the Aznar government cut inheritance taxes and simplified the capital gains tax.

However, analysts say there is still much that Spain needs to do to complete reforms.

  • The government needs to clean up its costly welfare and pension systems.
  • The country's economy is still hobbled by a top marginal income tax rate of 56 percent.
  • Subsidy-dependent industries such as shipbuilding, coal mining, defense and steel continue to consume state resources, and state-owned businesses such as the national airline Iberia, the national railway Renfe and the television monopoly RTVE remain unsold.
  • Some progress has been made on labor issues, but Spain's powerful trade unions still pursue benefits which have produced Europe's highest unemployment rate -- 21.5 percent.

Source: Editorial, "Spain Shows the Way," Wall Street Journal, August 12, 1997.


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