Spain | Social Security contributions, wages of public sector employees and income pact

The national budget includes the planned revaluation of pensions in line with the CPI and the agreed increase in the wages of public sector employees. The implications of these two measures go beyond their impact on public sector expenditure, as they may also affect the income pact.

Key points

• Key points:
• The revenues and expenditures envisioned in the national budget reflect the government’s priorities, which are in turn based on its growth projections. However, some of the items contained in the national budget present hidden implications.
• Pensions will grow by 8.5% in 2023, to offset the loss of purchasing power due to average CPI growth during 2022. However, CPI inflation in 2022 will be much higher than the growth of the GDP deflator, with the difference being down to rising import prices.
• Companies unable to pass the higher costs on to prices, given the decline in their production margins, may have no other choice than to throttle their business output, stop recruiting, or proceed with smaller wage increases, thus negatively impacting aggregate labor income.
• As for the recently agreed wage increase for public sector employees, the 3.5% increase in 2022 (3.5% in 2023 and 2.5% in 2024) – in line with GDP deflator growth – is in principle a good yardstick for the private sector in order to avoid the dreaded second-round effects.
• The increase in Social Security contributions and the tax wedge, coupled with the reduction in working hours in the public sector, are creating inflationary pressures that threaten the balanced growth of the Spanish economy.

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