Spain Faces Growing Public Debt and Welfare Inefficiencies Amid Economic Stagnation

Spain is confronting a grim economic outlook in 2025, characterized by unsustainable public debt driven primarily by pension obligations and a welfare state marked by inefficiency, despite high levels of public spending. A recent study by economists Luis Garicano, Bengt Holmström, and Nicolas Petit underscores that Spain's total debt—including pensions—could reach an astronomical 700% of GDP. This stems from Spain having the highest pension commitments in Europe, with a pension replacement rate exceeding 80%. Reforms by José Luis Escrivá, current governor of the Bank of Spain, may have exacerbated pension costs, adding approximately €32 billion annually, equivalent to 2% of GDP. This pension burden rises as the baby boomer generation retires, further straining public finances against a backdrop of stagnated European economic growth, averaging just 1.1% annually since 1995.

Alongside debt woes, Spain's welfare system ranks as the second most inefficient among OECD countries. A report from the Institute of Economic Affairs reveals that despite substantial tax pressure and high public expenditure, Spain occupies 22nd place out of 23 advanced economies in overall well-being—just above Greece. Key social metrics such as health, education, employment, and social inclusion score poorly. Particularly troubling are chronic unemployment issues for low-skilled and youth workers and declining educational outcomes, despite increased funding. Health services face worsening performance in areas such as hospital productivity and waiting times. Countries like Japan, South Korea, and Switzerland outperform Spain significantly while maintaining lower tax burdens and more efficient public services.

The dual challenges of skyrocketing pension liabilities and inefficient welfare spending raise critical questions regarding Spain's economic and social policy direction. Without substantial reforms to improve the efficacy of public services and manage pension obligations sustainably, Spain risks a vicious cycle of increasing taxes coupled with declining quality and accessibility of welfare benefits. Options appear limited to either intensifying tax burdens, persisting with the flawed status quo, or undertaking difficult but necessary structural reforms to secure long-term economic and social health.

These developments come at a time when Europe broadly struggles to reignite economic growth, highlighting Spain's acute vulnerabilities within a slowing continent-wide context. The report's authors and analysts suggest this is an inflection point requiring bold policy interventions to balance fiscal responsibility with social well-being.