The Spanish economy is slowly recovering, but broad reforms will still be required to create jobs and improve government finances, according to a report from the Organisation for Economic Co-operation and Development (OECD).

There has been widespread speculation that Spain – wracked with high debt and very high unemployment -- will be the next euro zone nation to ask for a substantial financial bailout from the European Union (EU), although top government officials have denied such a measure will ensue.

OECD indicated that while Spain’s GDP contracted at a similar magnitude with those seen in other major economies, the country’s finances and employment were much harder hit than elsewhere.
Spain’s government deficit is projected to reach 9.2 percent this year, 6.3 percent in 2011 and 4.4 percent in 2012, according to OECD forecasts.

Spanish unemployment, which is expected to remain near 20 percent this year, is expected to edge down in 2011, to 19.1 percent, and then decline again to 17.4 percent in 2012, according to the report.

The OECD sees economic growth bouncing back from this year’s projected 0.2 percent contraction, to a GDP expansion of 0.9 percent in 2011 and 1.8 percent in 2012.

OECD said it concedes that Spain has launched “substantial fiscal consolidation plans and significant steps to address long-standing shortcomings” in the labor market, however the nation still needs to enact a “broadening and deepening” of these measures, as well as further efforts to remove barriers to competition in products markets.

Specifically, the OECD recommends that Spain must reform its pension system, including an increase in the legal retirement age and restrictions to subsidized early withdrawal from the labor market.
Spain’s Labor Minister Valeriano Gomez has recently indicated that the government indeed intends to raise the retirement age.

The best way to extend the length of working life is to push back the age of retirement to 67, he said. Those who wish to retire at 65 can do so, but in this case they must accept a reduction in their pension.

In addition, Spain should consider switching the tax burden from labor to consumption and property taxes, OECD added.

With respect to jobs, OECD advises that Spain should ensure that “excessive severance pay for workers in permanent contracts is reduced substantially, at least for all new hiring.”

To bring the unemployed back to work Spain should also consider abolishing the legal extension of collective bargaining outcomes to all businesses.

The Spanish government should also improve job search incentives for unemployment benefit recipients. “Intermediate vocational education needs to made more accessible for youth,” the body noted.