In recent decades, the debate on the role of the public sector has been intense, particularly in developed countries, which has resulted in changes in approach and policy adaptations. The privatization processes of public companies or the generalization of fiscal rules are two good examples. But that was not all. What we have experienced so far this century has reminded us of the importance of having rapid and effective response tools in the face of extreme shocks, whether of a financial nature such as the Great Recession; security and defense against international terrorism and unexpected war conflicts; or public health, such as the pandemic. Furthermore, there is a new consensus on the need to complement globalization with instruments that guarantee strategic autonomy and that allow us to respond to pressing planetary challenges such as climate change. All of this has reinforced the role of the public sector and has compensated for the vector of downward revision and cutting of tasks defended by liberal thinkers and politicians in the last half century.
Today the relevance of the public sector in most OECD countries is around its historical maximum, whether we are talking about financial or regulatory indicators. Finally, new challenges appear that demand new responses. Digitalization understood in a broad sense, globalization and population aging join the aforementioned climate change.
This general scenario is of particular application to the Spanish case, because we have been hardly reformist in the last twenty-five years and because some of the issues mentioned affect us more intensely than average. Consequently, our agenda of pending reforms in the public sector is today extensive. In particular, we must review the tax system in depth; significantly improve spending efficiency to make room for additional demands in defense, housing or R&D&I; redefine the Spanish institutional design to improve its decentralization and guarantee the fiscal sustainability that is required of us members of the European Union, and that is convenient for us to recover room for budgetary action and remove reputational risks.
We have addressed a good part of these issues at Funcas. In what follows, I summarize some of the main conclusions.
The first is that Spanish public spending has been converging with the European average in terms of proportion of GDP; although it is still below. However, the efficiency of our public administrations remains lower than the European average, which limits the impact of spending in key areas such as innovation, defense or housing; and social spending weighs more than productive spending, which conditions our capacity for long-term growth. Demographic and climatic challenges aggravate this situation. Population aging increases pressure on pensions and healthcare services, while the transition to a decarbonized economy requires massive investments. For all these reasons, Spain urgently needs an intelligent redistribution of its resources that promotes economic sustainability without sacrificing the welfare state. And, in this task, it is essential to advance in budget evaluation and planning, ensuring that each euro spent has the maximum impact.
The Spanish tax system also requires a profound review to correct problems, review tax expenditures and differentiated treatments, and adapt to changes in the context. While taxation on capital is similar to that in Europe, indirect and labor taxes are relatively low, and social contributions are high. This tax structure raises problems of competitiveness and sustainability.
Another crucial aspect is territorial governance. Spain is one of the most decentralized countries in the world, but its regional financing system has notable deficiencies. Reviewing this system to ensure financial adequacy, improve tax autonomy and foster effective co-governance is essential. At the local level, municipal atomization continues to be an obstacle to efficiency and equity in service delivery. Promoting municipal mergers and greater inter-municipal cooperation may be a viable, although politically challenging, path.
Ultimately, the success of these reforms depends on a broad and sustained political consensus. The challenges facing the Spanish public sector are not minor, but they are not insurmountable either. Addressing them with determination and strategic vision will not only reinforce citizen trust in institutions, but will also lay the foundations for sustainable and equitable growth in the coming decades.
Santiago Lago Peñas is professor of Applied Economics at USC and senior economist at FUNCAS
