September 8, 2014 / 11:06 AM / 5 years ago

OECD urges Spain to further reform taxes, labour market

MADRID, Sept 8 (Reuters) - Spain should further reform its tax system and labour market to build on a year-long recovery from recession, the OECD said in a report on Monday.

Spain’s turnaround has been helped by measures such as banking and labour reforms, the report by the Organisation for Economic Co-operation and Development said. The key challenge now was to enhance growth and reduce unemployment.

Despite returning to economic growth in the second half of 2013 and growing at the fastest pace of any mainland western European country, Spanish unemployment remains among the highest in developed countries, at 24.5 percent.

“Tackling unemployment is crucial to reduce poverty and inequality,” the report said.

Prime Minister Mariano Rajoy adopted new rules in 2012 making it cheaper for companies to lay off workers and limiting the power of unions to negotiate collective-bargaining agreements across entire industries or regions.

The OECD urged Spain to improve vocational training, encourage greater scale and specialisation of universities and make it easier to start a business.

It also said Spain should shift the tax burden from labour to indirect taxes by cutting employer social security contributions for low-skilled workers and narrowing exemptions to value-added and corporation taxes.

Household and corporate debt levels are declining but still high, with companies more heavily indebted relative to earnings than in most European countries, the survey found. That high debt made the country vulnerable to any renewed turmoil in the sovereign debt markets, it said.

In addition, paying down this debt, alongside spending cuts and reluctance of banks to lend, will continue to restrain economic activity, the OECD said. It recommended a simplified personal insolvency procedure to recognise losses quickly.

Another threat is the risk of deflation, the report said. Low inflation helps competitiveness, but makes paying down debt harder if it is not accompanied by stronger economic growth

However, the recovery should gradually accelerate over the next two years, the OECD said, with domestic demand making an increasing contribution. (Reporting By Sonya Dowsett; Editing by Larry King)

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