La sagrada familia in Spain

Spain Industrial production June 2023

Spain: Spain heads to snap elections in July; center-right leads the polls

A right-wing government is the most likely outcome.

Incumbent President Sánchez from the Socialist Party still has a chance of retaining power due to his ability to form a pact with several smaller political groupings.

A right-wing Cabinet would likely strengthen fiscal responsibility and lower taxes.

What is happening: On 23 July, Spain is heading to snap general elections that could significantly affect the economic policy framework, especially in the medium to long term. Prime Minister Pedro Sánchez from the social-democratic Spanish Socialist Workers’ Party (PSOE) called for elections shortly after suffering significant losses in 28 May’s regional and municipal polls. The move aimed to prevent the main opposition party, the center-right People’s Party (PP), from gaining further traction ahead of elections initially slated for Q4.

Who will win: Recent polls show that the PP has a commanding lead over the PSOE. However, the PP will still be short of an absolute majority in the 350-member lower house, meaning that it would need support from the far-right political party Vox in order to govern. In contrast, the Socialists can count on support from a wider net of regionalist and far-left parties, meaning they could conceivably form a parliamentary majority and retain control of the government despite winning fewer seats than the PP.

Economic implications: A right-wing government would likely shift towards more market-friendly policies. Namely, it could embark on the path of fiscal consolidation through spending restraint, while lowering taxes on companies, individuals and property and streamlining business rules, which is likely to spur domestic investment activity and attract inflows of foreign investment. On top of this, it may reform the social security system in order to reduce the pension system’s bulky deficit and strengthen financial sustainability.

In contrast, a continuation of a Socialist-led administration would see a greater focus on reducing income inequality and boosting social benefits for the less well-off, as well as fiscal handouts for regions such as Catalonia and the Basque Country, whose MPs would likely be crucial for Sanchez’ reelection. That said, economic policy would still be fairly orthodox due to the need to meet Brussels’ criteria in order to receive continued EU recovery fund money.

As for the likely policy consequences of a right-wing coalition government, EIU analysts said:

“Measures such as a temporary income-tax increase for high-net-worth individuals that is to be applied in 2023-24 would almost certainly be repealed. A PP-led government might also seek to relax some labour regulations again. However, we expect that in the next parliamentary term the main focus of labour market reforms will be on introducing more effective labour market activation policies to help to upskill workers and increase participation.”

Commenting on the same topic, Marco Protopapa, analyst at JPMorgan, stated:

“In our view, if our baseline of a PP-led administration transpired, this would be a net positive from an economic perspective, given the traditional pro-business stance of PP. This might affect especially corporate investment, which has languished since PSOE took power in mid-2018. On the EU Recovery fund front, a change of government may trigger some further revision in plans, but the most immediate consequence, in our view, will be a material delay of the recent request by the Sanchez administration to tap the loan envelope.”

Wouter Thierie, economist at ING, commented on the challenges facing the next government:

“Regardless of who wins the national elections, Spain’s new government faces important challenges, not least on the fiscal side so public finances remain stable. In addition, many people say that major reforms are needed in several sectors to increase productivity, as the country lags behind its European competitors in terms of productivity growth. On top of that, the energy transition is coming, and that is prompting calls for more labour market reforms.”

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