This article was originally published on March 25, 2024 in Expansión. This is an analysis on the future of the Spanish economy based on the study "Freedom and Prosperity in the World 2024" prepared by the Atlantic Council and the Institute of Culture and Society of the University of Navarra in which our researcher Ignacio Campomanes participates. You can consult the original article here.

The future of the economy is very promising, but only in the short term. The Spanish economy will most likely grow by between 0.5% and 0.6% between January and March, which will pull activity through the rest of the year, by which time the government forecasts growth of 2% per year, which could go even higher, according to some analysts. However, beyond this progress, the long-term outlook is not so rosy, as growth in the coming decades is threatened by hyper-regulation, political and regulatory uncertainty and increasing fiscal pressure. According to the study Freedom and Prosperity in the World 2024, prepared by the Atlantic Council and the ICS of the University of Navarra, these are three elements that are key to ensuring the smooth running of an economy.

This index places Spain in 12th place in the ranking of economic freedom among the countries of the European Union, which places it below most of the most advanced countries and only ahead of Eastern Europe, as well as some of the most interventionist economies, such as Italy and Greece. And, if we zoom in, Spain is in 18th place worldwide, ahead of other European countries outside the EU, such as Switzerland, Norway and Iceland, and other economies outside this region, such as Australia and New Zealand. On the other hand, countries that were once more economically free than Spain, such as the United Kingdom and the United States, have now lost positions due to post-Brexit economic mismanagement and the rise of bureaucracy, in the first case, and the advance of policies against international trade and interventionism, in the second.

This creates a problem for Spanish growth in the long term, as the study points out that economic freedom is closely linked to prosperity, although this relationship is not evident at first. The main threats to the former have intensified in recent years, with an abuse of regulation, both by the state and certain autonomous regions, as well as by community authorities, considerable uncertainty about policy and regulations that slows down new investment, and a growing tax burden that hampers economic activity.

"Freedom and prosperity are closely related and this association is statistically significant," says the report, which states that for every ten points that a country climbs in the Freedom Index rises another six points on the Prosperity Index. However, it also points out that sometimes economic growth is due to the inertia of measures taken some time ago, which can produce the false sensation that current policies are the right ones when what happens is that "the time lag between the explanatory variable (freedom) and the dependent variable (prosperity) is very long", which "masks this relationship".

As a result, sometimes "the benefits of economic and legal reforms can be reversed," explains the text, giving as an example Vladimir Putin's Russia and Xi Jinping's China, where the economy initially maintained the pull of the previous economic opening but eventually slowed down. And, once the economy starts on this downward path, the trend is increasingly accelerated and difficult to change, because politicians tend to go for short-term stimulus rather than reforms that take longer to work, and this delay "results in good reforms not being implemented." As economist Rüdiger Dornbusch pointed out, "in economics, things take longer to happen than you thought, and then they happen faster than you thought."

And where might these threats to freedom come from that ultimately lead to a loss of prosperity? The Atlantic Council identifies three broad areas, economics, politics and regulation, and in all three there are areas that have experienced notable deterioration during Pedro Sanchez's terms in office. Specifically, hyper-regulation, political and regulatory uncertainty and taxes threaten to truncate in the long term growth that appears very solid but, if it cracks, will be very difficult to recover.

First, with respect to the economic sub-index, Spain scores highest on women's economic rights (bearing in mind that this is a global index) but suffers in other areas, such as property rights, which are weighed down by the growing tax burden. Although economic activity has now more than recovered to the figures prior to the outbreak of the coronavirus pandemic (and therefore the weight of the State in both expenditure and revenue should have normalized), public spending has risen by 4.8 points of GDP between 2019 and 2023 and the tax burden has increased by 3.9 percentage points, with rises in personal income tax (due to non-deflation), social contributions and numerous corporate taxes.

Secondly, the legal sub-index is perhaps the one that most detracts from Spain's position in the world ranking, as the country does not fare well in each of its components. On the one hand, corruption is a particularly bad statistic (which will probably reach an even worse record in subsequent editions); but to this must also be added the relative lack of legal certainty and legal clarity, both weighed down by overregulation by both the State and the Autonomous Communities, city councils and the EU. All in all, Spain shows good data in terms of judicial control of the Executive, thanks to the fact that the Government's harassment of the judges of the procés and the CGPJ has not affected their independence.

And, finally, within the political variable, the country scores very well in terms of the cleanliness of elections but falters in terms of legislative limits to the action of the Executive. During the last few years, the Government of Sánchez has abused the formula of the decree, which the Constitution reserves for cases of "extraordinary and urgent need" to reduce parliamentary control, even in cases of minor importance or in which a deferred entry into force was foreseen, something criticized by many sectors affected by regulatory changes without taking into account the opinion of the companies, such as real estate, finance, energy, agriculture or industry, since this lack of predictability dynamites the business plans of the companies.