Spain has recently observed a significant increase in tax revenues and social security contributions from both companies and workers, diverging from a downward trend in the European Union.

According to the annual report presented by the Bank of Spain, by the end of 2024, the weight of social security contributions on Spain’s GDP is projected to surpass the EU average for the first time, following the implementation of pension reforms.

The report notes that the proportion of social contributions to GDP has risen from 12.8% in 2019 to 13.2% in 2024, contrasting with a minor decline of 0.1 percentage points in the EU aggregate during the same period.

Consequently, Spain's social contributions as a percentage of GDP are expected to exceed the EU monetary union average by 0.3 percentage points.

This increase can be attributed to measures such as the Intergenerational Equity Mechanism and the removal of caps on maximum bases under the pension reform designed by the former Minister of Social Security, José Luis Escrivá, who currently serves as the governor of the Bank of Spain.

Escrivá previously justified these reforms by stating that social contributions in Spain were below the European average.

Alongside this rise in social contributions, overall public revenues as a percentage of GDP have increased by 2.5 percentage points over the last five years, reaching 41.5% of GDP, while the EU average has remained static, as noted by Ángel Gavilán, director of the Bank of Spain's Economy and Statistics department.

The increase in personal income tax and wealth taxes has significantly contributed to public finances, attributed not only to employment growth, which accounts for only 23% of the revenue from these taxes, but predominantly to the impact of so-called 'bracket creep' due to inflation.

As wages have increased to match rising prices and without adjustment of the tax brackets, the tax authority has seen higher revenues.

It is estimated that approximately 23% of the increased revenue relates to job and wage growth outpacing GDP, while 77% results from rising average tax rates linked to stagnant tax parameters.

This effect has been notably pronounced in Spain compared to other Eurozone countries.

Despite the rise in public revenues, there has been a slight decrease in the contribution of indirect taxes such as VAT to GDP, from 11.4% in 2019 to 11.1% in 2024, even though these taxes are known for having the least distortion on economic activity since they do not directly impact employment decisions and have a lesser negative effect on saving decisions.

While Spain's public revenues have grown in recent years, they have not been sufficient to cover the substantial increase in public spending, which has risen by 2.6 percentage points of GDP from 2019 to 2024. Almost half of this increase, around 1.2 percentage points, is attributable to higher spending on social benefits, specifically direct payments such as pensions.

Public consumption has also notably increased since the onset of the pandemic, mainly due to heightened expenditures in healthcare and education, which rose by 0.5 and 0.2 percentage points respectively, standing at 6.6% and 4.2% of GDP, although still below the EU averages of 7.4% and 4.6%.

Gavilán has highlighted that the fiscal imbalance in the Spanish economy remains significant, both historically and in international comparisons.

Accordingly, he recommended a medium-term planning exercise involving a comprehensive review of public expenditures and revenues across all public administrations, founded on broad economic, political, and social consensus.

Looking ahead to 2025, the annual report outlines potential risks that could affect Spain’s economic dynamism, primarily driven by uncertainties in the trade landscape and ongoing tariff disputes with the United States.

It notes that despite Spain's direct commercial exposure to the U.S. being relatively limited, indirect links through global supply chains, as well as global financial and confidence channels, are significant and should be monitored carefully.