Advice for Spain to cut wages by ten per cent from IMF

The IMF (International Monetary Fund) brought together Spain’s unions and employers so they could work to find a solution to the unemployment and stimulate more jobs even if that included cutting workers wages.

Latest Spanish reports have said that government reforms need to go further to increase companies “internal flexibility” and “enhance employment opportunities for the unemployed.”

IMF officials have said that even though the government’s reformed the labour sector, they should now consider reducing taxes on companies that focus on hiring certain groups. This may include the young and the low-skilled.

The report allegedly states that a social agreement should be explored to bring forward the employment gains from structural reforms. The accord could include a deal between employers, who would commit themselves to significant employment increases and the unions, who would agree to significant further wage moderation and some fiscal incentives.

“The risks, however, are significant and any agreement should not stall the reform process,” the IMF said.

Technicians of the IMF have studied the effects of a ten per cent cut of wages over two years which may be accompanied by a reduction in the social security contributions by one and two-thirds of a per cent. The IMF has also examined broadening the base of the value-added tax (VAT) in two years, which passing the now-reduced products have an 11 per cent rate into the general 21 per cent category.

“The results, while subject to inherent limitations of the model, suggest the wage reduction, and associated fall in prices, would have a significant positive impact on economic growth and support the fiscal adjustment,” according to the study.“The wage/price decline would result in a real depreciation of around five percent over three years, boosting exports and slowing imports. Importantly, a credible social agreement would also have a large positive impact on investment given the lower production costs and improved outlook.”

Spanish banks played their part when asked to by the IMF by “promptly recognizing” losses and selling distressed assets quickly “to avoid tying up resources.”

The report continues to state that the financial institutions should carry on reinforcing the quality and quantity of capital, remove supply constraints and implements “rigorous and regular forward-looking scenario exercises on bank resilience to guide supervisory action.”

“The government has a large majority, no general elections until late 2015, and has faced only limited social unrest. But the economic context has reduced the popularity of the two main parties, which could make public support for new difficult reforms more challenging,” the report stated. “There is a risk that regional-centre tensions could also increase and political fragmentation yield inconclusive elections in the future.”

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