The pension reform recently approved by the Council of Ministers does not convince the Bank of Spain either. The supervisor joined this Monday the criticism that the Independent Authority (Airef) expressed last Friday and questioned whether it is going to solve the sustainability problem that the system has been dragging on for more than a decade, despite the fact that the Minister of Social Security, José Luis Escrivá. And he does it precisely in his key week, since this second phase of measures must receive the final endorsement by Congress this Thursday and the PP is torn between no and abstention. And these judgments can influence his decision. “The opinion of Airef greatly conditions our vote,” popular sources admitted privately.
«The Airef details well some conclusions that we could share: it estimates that the measures put on the table would not be enough to compensate for the increase in public spending. In this context, an automatic mechanism would operate and, if it is shown that it is not enough, new measures would have to be taken in Parliament or, otherwise, a new automatic adjustment with prices would have to be carried out”, warned the governor of the Bank of Spain, Pablo Hernández de Cos, during a conference in Valladolid organized by ‘El Norte de Castilla’.
De Cos described this automatic adjustment – which was actually imposed by the European Commission – as “very important” “so as not to be constantly arguing about this very difficult issue”. The governor defended that “the 2013 reform [la que puso en marcha el Gobierno de Mariano Rajoy]with the sustainability factors and the revaluation index [que abocaba a las pensiones a un alza del 0,25%], guaranteed the system” and regretted that “it was not politically viable.” Although in reality he did not expressly criticize the return to inflation-linked revaluation –which has meant an 8.5% rise for this year and has triggered spending by nearly 15,000 million euros–, he did make it clear that he saw more viable the previous model.
VAT adjustments
For this reason, he bet that “a balanced adjustment of the variables should be carried out: on the spending side and on the income side. Not only in contributions, but in tax collection, which in Spain is lower than in the EU on the side of VAT and Excise and Environmental Taxes. In this sense, he pointed out that the retirement age should be “considered”, thus positioning himself in the same line as the president of Airef, who indicated that the sustainability of pensions after linking them to the CPI would only be achieved with two solutions: or a new delay in the retirement age or an extension of the years of contribution necessary to collect 100% of the pension.
Precisely the two measures that France has approved and that are causing strong citizen mobilizations. It should also be remembered that recently the leader of the PP, Alberto Núñez Feijóo, was in favor of a French-style reform, which has made him the center of government criticism.
Airef’s estimates question the economic calculations provided by Escrivá. In his recent report, he indicates that spending on pensions will increase by 2.6 points (about 30,000 million) from its current rate (13.6%), until 2050, when it will close with a level of 16.2% of GDP, thus that would exceed that maximum of 15% that the Government promised not to exceed. Revenues, for their part, will increase by 1.3% of GDP, mainly due to the reform of the contributions of the self-employed and the evolution of the maximum contribution bases.
To questions from the public, the governor gave his opinion on what should be “the tax burden on wealth and on those who create it.” According to De Cos, from the political sphere they have to “create conditions that allow business growth to develop in the best possible way.”
“We are concerned that the productivity of the Spanish economy is low for many reasons: the main one is the size of the business fabric, which is very small and prevents us from taking advantage of economies of scale in a world of globalized markets.” In addition, he recalled that “certain regulatory barriers do not favor entrepreneurship and the gain of business size.”
banking crisis
The governor also took advantage of his speech to rule out that the “financial turbulence” derived from the fall of several US regional banks – and the subsequent rescue ‘via merger’ of Credit Suisse – would end up damaging the sector in Europe. In his opinion, these are “idiosyncratically different” entities, stressing that on the other side of the Atlantic they suffer from lax supervision.
“In the stress tests we have verified that our banks, in a three-year horizon, would increase their solvency and, in terms of liquidity, they present high ratios in the short term and also in longer terms,” he highlighted.
He also recalled that in recent years all supervisors have paid special attention “to an environment of negative supply shock, with low growth and high inflation and rates”, requiring the banks most exposed to possible risks “to improve risk management and tended to be more conservative in their models.
At this point, Hernández de Cos asked the entities to be prudent in their provisions and in their capital levels. What’s more, he considers it appropriate that banks allocate part of the increase in profits – which reached records for many entities in 2022 – to further increase the resilience of the sector. “This would make it possible to better face the possible losses that would occur in the event that the different risk scenarios that we identify at this time materialize,” he said. Among them, a “some deterioration in the quality of credit risk” if interest rates continue to rise.