I EKT; URNM TO vIlf ^ RESTRICTED REPORTU DETO rUlFll i Cur Report No. EA-165a WITHIN This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF SPAIN (in four volumes) VOLUME IV ANNEX III - PUBLIC FINANCE AND CAPITAL MARKET December 8, 1966 Europe and Middle East Department -CURRENCY EQUIVALENTS U.S. $1 60 pesetas 1 peseta = U.S. cents 1.67 1 million pesetas - U.S. $16,667 1 billion pesetas = U.S. $16, 666, 667 ANNEX III - PUBLIC FINANCE AND CAPITAL L\.RKET Table of Contents Page I. SCOPE AND TRANSACTIONS OF PUBLIC SECTOR 1 Treasury Transactions 1 Consolidated Account of Public Sector 3 II. PUBLIC REVENUES 5 Overall View of Public Sector Revenues 5 Trends in Central Government Revenues 5 Outline of the Tax System 6 Global Assessments 7 The 1964 Tax Reform 8 Business Income Tax 8 Tax on Individual Income 9 Schedular Taxes 9 a. Tax on Agricultural Property and Income 9 b. Urban Real Estate Tax 10 c. Tax on Income from Labor 10 d. Tax on Income from Capital 10 e. Industrial Tax 11 Inheritance Tax 11 Turnover Tax 11 Tax on Transfer of Property 11 Excise Taxes 12 Customs Taxes 12 Problems and Prospects 12 III. PUBLIC EXPENDITURES 14 Public Expenditures and the Plan 14 Remuneration of Civil Servants 16 IV. FISCAL MANAGEMENT 17 V. CAPITAL MARKET 19 Supply of Funds 19 Demand for Funds 21 Public Sector 21 Private Sector 22 Banking Reform 23 Saving Banks 23 Official Credit Institutions 24 Other Changes 25 Impact of Changes 25 Allocation of Bank Funds 25 Statutory Banking Coefficients 25 Interest Rates 26 Role of Official Credit Institutions 27 TABLES 1-12 This annex was prepared by Mr. Oktay Yenal (Parts I and III-V) and Mr. Marto Ballesteros (Part II). ANNEX III PUBLIC FINANCE AND CAPITAL MARKET I. SCOPE AND TRANSACTIONS OF PUBLIC SECTOR 1. In Spain, two complications arise in defining the public sec- tor and in identifying transactions between this sector and the rest of the economy, First, there exists a very large number of autonomous public or semi-public entities and enterprises outside the central or local administration. Secondly, there are no systematic data about actual transactions, not for this heterogenous category of autonomous agencies, and not for central and local administration activities either. Both points were emphasized in the 1962 Bank Report; the situation has not improved markedly since. Treasury Transactions 2. The most accurate piece of quantitative information that can be put together about public sector transactions is the statement of cash receipts and expenditures of the Treasury. (Table 1). This in- cludes the results of the budgetary and extrabudgetary transactions of the central administration. The extrabudgetary transactions are for- eign aid receipts and expenditures (annex budget), receipts and pay- ments on account of local governments, other revenues and expenditures wnich are mainly treasury advances (anticipos), and capital market transactions for financing the official credit institutions. 3. The Central Government budget, narrowly defined (excluding extra-budgetary treasury transactions), was in balance or yielded surpluses until 1965 when a deficit occurred of 3.6 billion pesetas. If extra-budgetary revenues and expenditures are taken into account, the deficit for 1965 rises to 8.6 billion while 1964 also shows a deficit, of 1.1 billion. This difference is mainly due to "other income" and "other expenditures" in the treasury accounts, represent- ing receipts and payments in advance of authorizations and not incor- porated in the budget. The implications of these operations for budget administration and control are left for later discussions. The operations should be considered as part of the Government budget, in which case the growth of the deficit during the last two years becomes more marked. 4. Other major items among extra-budgetary transactions are the issue of investment bonds (cedulas para inversicnes) and the transfer of funds to the official credit institutions. From 1960 to 1963 the Treasury transferred funds amounting to about 6-8 billion pesetas per year to these institutions, Of a total of 28.8 billion pesetas trans- ferred during these four years, only 9.5 billion were financed by the proceeds of investment bonds issued, the rest coming out of budget surpluses. In fact, during this period, the Government in addition to financing these transfers was even able to reduce its indebtedness to the Bank of Spain. 5. The years 1964 and 1965 present a completely different pic- ture. The Treasury transfers to the official credit institutions jumped to 17.6 billion in 1964 and 24.7 billion in 1965 despite the occurrence of budget deficits. The financing of these transfers and deficits was secured mostly by the increasing issue of investment bonds (15 billion in 1964 and 27.5 billion in 1965) and by borrowing from the Bank of Spain (including the issue of metallic money). 6. Although the direct net borrowing in 1964 and 1965 by the Treasury from the Bank of Spain was not large when compared to the increase in the monetary liabilities of the Bank, the indirect effect of public sector financing on the money supply was quite significant. The large amounts of investment bonds were bought mostly by commer- cial and saving banks9 Since these bonds are not automatically pledgeable or discountable at the Bank of Spain, the effect of this Government borrowing would be expected to be a redirection of bank credits to the public sector rather than an increase in money supply. However, statistics indicate that parallel with the sale of invest- ment bonds to the private banks there occurred a heavy Bank of Spain lending to these banks. (See Section V of this Annex). 7. Data for the first eight months of 1966 indicate an improve- ment in the Treasury position compared to the same period of 1965, although recourse to the central bank remained necessary on a substan- tial scale. (Table 1), The seasonal budget surplus for eight months was smaller than in 1965 and larger transfers to official credit in- stitutions were matched to a smaller amount by the issue of investment bonds. The big improvement was in "other income" and "other expendi- tures", 11 billion pesetas in total. In view of the important role of ad hoc decisions underlying the trend of various items (e.g., early in 1966 payments by the Treasury were temporarily delayed on a substan- tial scale) it is difficult to foresee trends in the near future. - 3- Consolidated Account of Public Sector 8. A meaningful consolidation of the Treasury accounts with accounts of the autonomous bodies, local governments and public enter- prises would necessitate not only data about their total revenues and expenditures, but also a classification of the accounts so that double counting could be avoided. This would require a clear indication of the transfers between the public entities as well as a distinction bet- ween intermediary and final income and expenditures. / In the case of public enterprises and the social security system even information on actual totals is lacking. Data about autonomous agencies and local governments are limited to budgets and those about the Central Gov- ernmeft topayment orders. Thus, at best, a consolidation was possible of the accounts of the Treasury with those of the local governments and the autonomous organizations. The result is given in Table 2. 9. The autonomous agencies incorporated in the consolidation include, in principle, all major public entities and enterprises with two important exceptions - The National Railways (Red Nacional de Ferrocarriles Espanoles: RENFE) and the social security scheme (Ins- tituto Nacional de Prevision). In 1964, the number of entities listed as autonomous agencies was about 300. 2/ They range from big entities like the holding company of public enterprises INI (Instituto Nacional de Industria), the Housing Organization (Instituto Nacional de la Vivienda), and the Resettlement Institute (Instituto Nacional de Colonizacion) on the one extreme, to numerous small charity organiza- tions on the other. The main components of revenues and expenditures of 25 larger organizations which account for about 80 percent of the total are shown in Table 3. 10. Both this table and the account of total autonomous agencies in the consolidated figures should be interpreted with caution. The coverage of the institutions is relatively complete, while that of the transactions reported is not. It was not possible for the Mission to define the exact scope of Government involvement in numerous public enterprises and to assess to what extent the INI budget reported by the Ministry of Finance reflects the total. More obvious cases of omission are the activities of the National Wheat Service (Servicio Nacional del Trigo: SNT) and the Supply and Transport Commission (Comisaria de Abastecimientos y Transportes: CAT) twTo institutions 1/ E.g., sale proceeds of a public enterprise should not be considered a public revenue and added to tax revenue; nor should wages paid to a laborer in a public factory be called public consumption and aggregated with salaries paid to Government officials. 2/ As reported in Informacion Estadistica, Ministry of Finance. - 4 - which are concerned with the regulation of trade in agricultural prod- ucts. Borrowing by these institutions from the banking system, which amounted to substantial sums in recent years, is not shown at all in their budget data. The Bank of Spain extended credits totalling 3 billion pesetas in 1963 and 10 bilion pesetas in 1964 to the Supply and Transport Commission, the latter contributing significantly to monetary expansion. In 1965, although CAT reduced its indebtedness to the Bank of Spain, NT continued borrowing from the cormercial banks. Since SNT paper was automatically rediscountable at the cen- tral bank, this agency was in the final analysis financed by the Bank of Spain (to an amount of 2,3 billion pesetas). 11. The two major types of local government in Spain are the municipalities (municipios), legally represented by town councils (ayuntanientos), and the provinces, legally represented by the pro- vincial deputations (Diputaciones Provinciales). A little less than half of the expenditures by these entities are financed by taxes and duties of various kinds with the remainder being financed by other revenues and grants of the Central Government. A recently enacted law aims at reorganizing local government finances by simplifying the complicated system of tax shares and Treasury grants. According to this law, local governments will receive Treasury grants on the following basis: (a) 2.5% of the total yield of indirect taxes; (b) 20% of the yield of the turnover tax; (c) 90% of the tax on capital gains on real estate; (d) 90% of the urban property tax. In addition, local governments are authorized to levy taxes on road transport and parking (on a uniform basis for the entire country), and special assessments to recover between 30 and 80% of the cost of public works and services. 12. In spite of the deficiencies in data, it can be concluded that the size of public sector financial activities in the total eco- nomy is relatively small. Current revenues of the total public sector (excluding social security and syndicates) amount to about 15-16% of GNP, and tax receipts to only 11%. Total public expenditures, even after including the substantial transfers financed by bond issues to the official credit institutions in 1964 and 1965, constitute no more than about 17-18% of GNP. On average, in terms of ratios to GNP, current expenditures equal about 11% and capital outlays about 5-6%. Transfers to official credit institutions rose in 1965 to 1.9%. (Table ). II. PUBLIC REVENUES Overall View of Public Sector Revenues 13. Table 2 summarizes the trend in public sector revenues during 1963-65. Of total current revenues, approximately 75% is accounted for by the Central Government, 15% by the autonomous agencies and 10% by local governments. The proportion of total public sector revenues to GNIP fell from 15.4% in 1963 to 15.1$ in 1965. (Table 4). 14. The sources of revenues differ markedly from one level of gov- ernment to another with taxes accounting for roughly 88% of central government income, 60% of local government income and 3% of the income of autonomous agencies. Income from fees, duties and property accounts for the bulk of the revenues of the autonomous agencies. Little is known, however, about the exact composition of these revenues. As for local governments, there is a definite tendency to eliminate the numer- ous fees and to assign to them shares of central government tax receipts. As a result of data limitations the description and comments that folloTw will be directed towards sources of revenue of the Central Government, particularly the internal tax system. Trends in Central Government Revenues 15. Table 5 indicates the movement of Central Government revenue between 1961 and 1965 and the 1966 budget estimates. Total revenue ex- hibits considerable stability in relation to GNP, being approximately 11.5,O. If tax revenue alone is considered, the proportion is similarly stable at around 10%. There is a slight but consistent decline in the share of direct taxes in total tax revenues from 34.9% in 1961 to 31.6% in 1965. In fact, writh the exception of the tax on commercial and in- dustrial enterprises, direct taxes have shoiwn little or no elasticity with respect to GNP. Revenues from real estate taxes show the least flexibility, increasing by no more than about one-quarter over the pe- riod which in real terms means a sharp drop in yields. GNP and Revenue from Selected Direct Taxes Income Income Individual from from Global Business Commercial GNP Labor Capital Income Income Enterprise 1961 100.0 100.0 1C0.0 100.0 100.0 100.0 1962 114.9 112.8 109.7 117,1 111.9 143.1 1963 135.2 128.9 119.1 137.2 115.6 161.8 1964 152.6 141.4 132.5 159.2 121.9 185.4 1965 183.2 146.0 162.3 180.3 146.1 220.2 Sources: Table 5, Revised National Accounts 1958-64 and INE. - 6 - 16. Indirect taxes exhibit substantial increases; identification of particular ones, however, is not always easy owing to the changes in- troduced by the 1964 tax reform. Two taxes, on luxury consumption and petroleum products, experienced pronounced increases during the period. In Table 5 they are included under internal excises. These figures un- doubtedly reflect the sharp increase in automobile and gasoline Consump- tion during the period. Revenue from Taxes on Luxury Consumption and Petroleum Products (billion pesetas) Luxury Petroleum 1961 7.34 3.85 1962 8.48 4.82 1963 10.25 5.38 1964 13.35 6.07 1965 16.23 7.18 Source: See Table 5 17. The turnover tax was introduced in July 1964, replacing a numiber of consumption taxes previously in existence, both at the cen- tral and local government levels; the sharp jump in revenue between 1964 and 1965 is, therefore, partly fictitious. 18. Another increasingly important source of revenue is the equalization or compensatory tax on imports. Introduced originally in 1960 its yield has been rising rapidly, reflecting increasing imports and, in 1965, rate changes as well. Outline of the Tax System 19. The Spanish tax system has been subject to two major reforms in the last ten years. The first, in 1957, had as its principal objec- tive to increase revenues through curbing evasion; the second, in June 1964, to simplify and rationalize the system and to make it a more pow- erful instrument of income redistribution and encouragement of private initiative. Global Assessments (Evaluaciones Globales) 20. The weapon that the 1957 reform introduced in its fights against evasion was the system of global assessments to determine net income of enterprises and professionals. Taxpayers are grouped by branch of activity, and assessment boards are formed with national, provincial or local scope. The boards consist of representatives of the Treasury (Presidente and Ponencia) and of the taxpayers (Comision- istas). Their function is to arrive at a figure of net income for the group of taxpayers as a whole, and to agree on indexes or yardsticks (indices basicos y de correccio) to allocate the arrived at figure among different taxpayers. Sales volume, raw material consumption, number of employees, etc., are used to this effect. 21. Individual accounting for tax purposes was not prohibited and the taxpayer was given the opportunity to choose it instead of the global assessment. It was assumed, however, that the taxpayer accepted the latter unless he explicitly renounced it within given time limits. In practice very few taxpayers have chosen to declare on an individual basis. 22. The global assessment system succeeded in bringing about a large increase in tax revenues, "gathering into the tax net a large number of new taxpayers". 1/ It was expected that this formula would be a transitory arrangement, and that once the administration was strengthened and its records completed, the individual accounting system would be fully and exclusively reinstated. Cn the contrary, hoWever, the 1964 reform not only continues the system but extends its use, wJith minor modifications, to the major new indirect tax, the turnover tax (impuesto sobre el trafico de empresas), The tax base is determined in this case by collective agreements (convenios colectivos), and no corrective measures are allowed for in cases of differences betwTeen agreed and actual figures. 2/ The global assess- ment system has been subjected to searching critiques by Spanish scholars and tax lawyers. 3/ 1/ IBRD, The Economic Development of Spai, 1962, p. I16. A short critique of the system is also provided. 2/ To some extent, agreements of this type were already in use for some consumption taxes. 3/ Since this was written, the Government has decided to reduce to some extent the application of the global assessment system. As a first step, the application to the turnover tax will be reduced by excluding a nuiber of activities and enterprises with a turnover ex- ceeding a certain minimum. The practical importance of this and pos- sible further steps will depend on their administration. -8- The 1964 Tax Reform 23, Prior to 1964, direct taxation consisted of a number of sched- ular taxes, with surtaxes applied to personal and business income. The 1964 law sanctions two taxes as the mainstays of the direct tax system: the individual income tax and the business income tax, Schedular taxes subsist with modifications but liabilities incurred under them are nowz credits against the two major ones. The inheritance tax completes the field of direct taxes which is as follows: 1. Business income tax. 2. Individual income tax. 3. Schedular taxes, credits against 1 and 2 (impuestos a cuenta): a) Tax on agricultural property and income b) Urban real estate tax c) Tax on income from labor d) Tax on income from capital e) Industrial tax 4, Inheritance tax. 24, Simplification has been largest in the field of indirect taxes. Two major ones, the turnover tax (impuesto general scbre el trafico de empresas) and the property transfer tax (impuesto general sobre transmis- iones patrimoniales) replace the vast number of consumption, stamp and transfer taxes previously in existence. Indirect taxes are as follows: 1. Turnover tax. 2. Tax on transfer of property. 3. Excise taxes: a) On luxury items b) Special taxes (alcohol, sugar, beer and soft drinks, petroleum, telephone, etc.) 4. Customs taxes: a) Customs duties b) Equalization taxes 25. Business Income Tax (ImnDuesto General sobre la Renta de las Sociedades y Demas Entidades Juridicas) A firm sometimes carries out activities in different agricultural, industrial or commercial fields. Profits in each field will then be taxed under the corresponding sched- ular tax (real estate, urban and rural, industrial and commercial tax, tax on income from capital). The business income tax is based on the sum of profits from all activities. The rate is 30% for corporations and 25%O for partnerships. Amounts paid under the schedular taxes are - 9 - credits against the liability under the business income tax, and consti- tute the lowier limit of this liability. There is a special surcharge of Vg on corporations, deductible from the corporation income tax base, which raises the effective corporate rate to 32,68%. 1/ 26. The usual method of tax base determination is by global assess- ment. The law makes provision for accelerated depreciation, investment reserves, and loss carryover. Favorable treatment is granted to enter- prises established in the polos de desarrollo, as well as for the merger of groups of companies into more economic units. Foreign subsidiaries pay tax on the profits realized in Spain. There are provisions for re- ducing or avoiding international double taxation for firms resident in Spain. The business income tax became effective as of the fiscal year ending December 31, 1964. 27. Tax on Individual Income (Impuesto General sobre la Renta de las Personas Fisicas). The new individual income tax, effective begin- ning January 1, 1966, is designed as a genuine global income tax instead of a surtax. Under the repealed system, income not exceeding 100,0C0 pesetas was exempt, and any excess over that was taxed at progressive rates ranging from 2.5 to 4%% on income exceeding 6,ooo0o00 pesetas. Under the new system, credit will be given for schedular taxes paid. This implies careful attention to the design of the new rate scale; neither this, nor detailed provisions regarding exemptions and deduc- tions have yet been enacted. 2/ 28. There are two methods of calculating taxable income, the "direct" method based on declared gross income from all sources, and the "external signs1' method, based on external indicators of wealth. If the latter yields an amount wihich exceeds declared income by more than 20%, tax is levied on presumed income. Schedular Taxes 29. a. Tax on Agricultural Property and Income (Contribucion Territorial Rustica). The rural land tax is partly a property tax and partly a schedular tax on income from agricultural sources. A "fixed quota" (cuota fija) is levied on all properties with cadastral values exceedin5,Q70W0Fpesetas, and a proportional tax at the rate of 17.5% is levied on the profits of agricultural enterprises in excess of 100,000 pesetas. This proportional feature of the tax is the innova- tion introduced by the 1964 reform, and became effective on January 1, 1966, 1/ 96 x (30 + 4) = 32.68. 2/ On September 28, 1966 the Government decided to postpone implementa- tion of this tax until 1967. - 10 - 30. Net profits are again usually arrived at by agreEnents or evaluations of committees consisting of tax officials and taxpayerso Payment of the fixed quota is credited against the proportional tax liability. Exemption of up to 50% of the tax is allowed for funds invested in improvements or research activities to be directly applied to the land. Furthermore, exemption of up to 95% of the tax for a period of 10 years will be granted when small holdings are consolida- ted, under specified conditions, into a larger one and when dry land is converted to irrigated land. Apparently no substantial increase in revenues from the rural land tax is expected in the immediate future. 31. b. Urban Real Estate Tax (Contribucion Territorial Urbana), The 1964 reform did not introduce major changes in this tax. Subject to it are urban land and buildings, and the tax base is arrived at by applying a 4% return to the value that appears in municipal registers. The rate is 20%. 32. c. Tax on Income from Labor (Impuesto sobre los Rendimientos del Trabajo Personal). All income received as remuneration for personal services in excess of 60,000 pesetas is subject to this tax. There is a personal exemption of 40,000 pesetas and dependent allowances for four or more children, ranging from 125,000 pesetas to complete exemption. Manual laborers are exempt. Tax must be withheld and paid quarterly to the tax authorities at the following rates: General rate 14% Corporation directors 20% Salesmen's commissions 7% Living allowances and similar fringe benefits 5% Persons engaged in independent professional practice are usually as- sessed under the global system, the overall amount being agreed upon between the tax authorities and the respective professional college or association. 33. d. Tax on Income from Capital (Ipuesto sobre las Rentas del Capital). Subject to this tax are interest on private and public in- debtedness, dividends and participation in profits of corporations and partnerships, and royalties. The main innovation introduced by the 1964 reform was to substitute a proportional rate of 15% applicable to divi- dends for the former progressive scale of 8 to 30%. Income from interest is taxed at 24%. The tax is withheld at the source, with the exception of interest on bank deposits, where bank secrecy might be considered violated. - II - 34. e. Industrial Tax (IMpuesto Industrial). Individuals, partner- ships and corporations that engage in commercial and industrial activit- ies are subject to this tax, which consists of two different levies. One is a licence fee (licencia fiscal), which varies according to the location, nature, and size of the activity in question. The other is a proportional tax on profits at the rate of 20%. Taxable profits are usually determined following the global assessment procedure. 35. Inheritance Tax (I=uesto General sobre las Sucesiones). The 1964 reform repealed the estate tax and readjusted somewihat the rates applicable to inheritances, which now range from 3 to 84% according to the amount and the relationship to the deceased. The new tax became effective July 1, 1964. 36. Turnover Tax (Impuesto General sobre el Trafico de las Em,resas) After considerable debate over whether a value added or a gross sales tax were better suited to Spanish conditions, the latter was adopted and be- came effective July 1, 1964. Operations of all industrial, commercial and service enterprises are subject to the tax at the following rates: Sales from manufacturers to wholesalers: 1.50% Sales from manufacturers to retailers : 1.80% Sales from wholesalers to retailers : 0.30% For services rendered : 2.00% Special rates apply to the operations and services of banks. As of January 1, 1965, the various rates were increased by a municipal surcharge of one-third. 37. No tax is levied on retail or export sales. The amount of tax to be paid may be determined by agreement with the authorities. Although a number of taxes previously levied as stamp, sales and transfer taxes have been abolished and replaced by the turnover tax, this tax appears to represent a widening of the indirect tax base, and substantial in- creases in revenue may be expected in the next few years. 38. Tax on Transfer of Property (Impuesto sobre las Transmisiones Patr-moniales y Actos Juridicos Documentados). Transactions and transfers of goods not subject to the turnover tax, are subject to this tax, the base being in general the real value of the transaction or property being transferred, and the rate ranging from 1.10% for loans to 7.40% for real property. Also collected under this tax are the old stamp taxes on pub- lic documents. - 12 - 39. The law also makes provision for the taxation of capital gains realized on the sale of real property purchased and held for more than three years. Adjustments are foreseen for changing price levels. The rates range from 17 to 25% depending on the length of the period the asset was held and the amount of the capital gain. This tax, how- ever, has not yet become effective. 40. Excise Taxes.Few modifications of these taxes were introduced by the 1964 reform. As mentioned earlier, included here as excises are a number of so-called rispecial" taxes (sugar, beer, etc.) and ItluxuryIt taxes. Some of the taxes are specific; in general, however, rates are ad valorem and applied to sale price. Gasoline is taxed at 6.25 pesetas per liter, bringing the retail price to 10 pesetas per liter or U.S. $0.64 per gallon. Automobiles of up to 7 fiscal HP are taxed at 17.6%; those exceeding 7 HP at 22%. Used automobiles over three years old and of less than 8 HP are, however, exempted of the tax by the 1964 reform. Other luxury items are taxed at rates ranging from 6 to 22%. Payment for same excise taxes is made by manufacturers under collective agree- ments iwith the tax authorities. There is an annual registration fee for automobiles of more than 7 fiscal HP, progressive with respect to the number of HP. 41. Customs Taxes. The structure of customs duties was established in 1959; no modifications were introduced by the 1964 reform. Adjust- ments were made, however, in the equalization tax on imports (originally called tarifa fiscal and, since the reform, impuesto de compensacion de gravamenes interiores), first enacted in 1959. 42. The purpose of the equalization tax is to impose on imported goods levies equivalent to what these goods bear in the form of internal indirect taxes. The new rates, calculated on the basis of the tax chan- ges introduced by the reform, particularly as regards the turnover tax, are higher than previous ones. They range from 1 to 16%, with a marked concentration in the 8-12% bracket. 43. Calculations of tax incidence of this type are always subject to a considerable margin of flexibility. In Spain, the peculiarities of the global assessment system make them more uncertain. Tax rebates at the same rates are granted to similar products exported. Problems and Prospects 44. The Spanish tax system emerged from the 1964 reform consid- erably simplified and rationalized. It offers potential to produce increased revenues, mainly in the field of indirect taxes such as the turnover tax. Since liabilities under the global assessment system are undoubtedly below what individual declarations under the provisi- ons of the law would produce, higher yields might be achieved from income taxes (business and professional income, agricultural income, - 13 - etc.) where the global assessment systen is now employed. Here, however, the fiscal authorities face the potential danger of collective refusal of global assessment and the consequent strain cn linited auditing re- sources. L5. Obvious improvements in practices could be introduced. For example, tax withheld from salaries and compensations is turned over to the Treasury every three months instead of currently. 46. From the point of view of equity and adequacy, the Spanish tax system falls short of what undoubtedly was the aim of the legis- lators, The progressive individual income tax is not applied in reality. Little, if any, effort is made to seek compliance and it appears that an excessive share of the burden falls cn salaried employees subject to vithholding. Compensations of high executives often escape even the proportional parts of the schedular tax through companies' under- reporting of true amounts. In fact, if a thorough look into the situation were possible, the personal income tax might well emerge as the most regressive feature of the wihole Spanish tax systen. 47. The 1964 reform not only sanctions the system of global assessments for the deterrination of taxable incomre of business enterprises and independent professionals, but expressly extends it to other areas, specifically the turnover tax and the tax on agricultural income. The use of global assessments is an ancient practice that does not adequately serve the demands of a modern economy. It deprives the tax system of its legal significance, distorts its impact on the process of economic decision making, and dampens the built-in flexibility features that it might possess. It makes crosschecking of tax returns among firms and among taxes impos- sible and in this way facilitates evasion, such as that of individual incone tax. 1/ 148. No effective tax on property is still levied in Spain. Real estate taxes, particularly those on rural property, are insig- nificant in practice and little improvement is foreseen as a con- sequence of the tax reform. 149. In the reform of indirect taxes, the 1964 law decided in favor of a turnover tax and against a value-added tax in spite of the definite trend in Europe to shift from the former to the latter :in the countries that are members of the European Econcmic Commiunity, of which Spain aspires to be a part. This is, however, a relatively .!rlnor matter since the turnover tax in Spain does not fall on actual -ales but on agreed-upon amounts between authcrities and the taxpayers. Very likely if the tax adopted had been on value-added, the only prac- tical consequence would have been that a higher rate would have had to we applied to a smaller base to collect the same amount of revenue. l/ See also footnote 3 on page 7. - 14 - 50. It seems dosirable that the Spanish authorities at this time reconsider their previous pronouncement regarding the desirability of increasing the tax effort. If such increase should be decided upon, better administration and enforcement of the existing system) with perhaps tightening of property and capital gains taxes, would suffice to provide ample additional revenues. 51. Given the bases on which the Spanish tax system operates, little can be said regarding future revenue projections. The 1966 budget estimates do not appear unreasonable. Further judgment will have to depend on the experience with the new turnover taxes, and with the new individual income tax, whose implementation has now been postponed until 1967. III. PUBLIC EXPENDITURES Public Expendituires and the Plan 52. The consolidated accounts of the public sector are at best rough approximations of general magnitudes; nevertheless, they serve to indicate the trends in the past few years. Both current and capi- tal expenditures of the public sector appear to have increased at approximately the same rate as public revenues which in turn have remained a stable proportion of GNP. This tendency of the public sector to remain a stable proportion of GNP was not planned in the past nor is it anticipated for the future. Planned levels of expend- iture implied a relative increase in the total size of the public sector. Plan targets have been upset by persistent increases in prices and, in 1965, by the reforms introduced in the civil service which necessitated substantial increases in salaries of civil servants. 53. The Plan lacks a systematic analysis of expected public revenues during the plan period 1964-1967 but it does set some targets for total public sector current and capital expenditures. Current expenditures are expected to grow at a maximum rate of 5 percent per annum and public investment at a rate of 10 percent per year after an initial increase of 15 percent from 1963 to 1964. Thle implication of these growth rates is, as shown in the table below, a relative increase in the size of public investment in relation to planned lev- els of GNP. 54. The targets imply an increase in the size of public expend- itures from 16.2 percent of GNP in 1963 to 17.5 percent of GNP in 1967 Aith investment expenditures increasing from 47 percent to 53 percent of total public expenditures. - 15 - Public Expenditure Targets of the Plan and their Relationship to Planned Levels of GIl? 7billion pesetas and percentages) Growth Rate 1963 1964 1965 1966 1967 GNP 6% 828.5 875.0 927.5 983.2 1,045.8 Current Expenditures 5% 71.3 7h.9 78,6 82.5 86.6 (% of GNP) (8.6) (8.6) (8.5) (8-4) (8.3) Public Investment 10% a/ 62.8 72.2 79.4 87.3 96.o (% of GNP) (7.6) (8,3) (8.6) (8.9) (9.2) a! For 1963 the projected growth rate was 15 percent. Source: Plan documents. 55. The meaning of these targets has been confused by the failure to distinguish clearly, in appraising actual performance under the Plan, between current and constant prices. The increase in actual current expenditures of about 14 percent per year is defended on the ground that if price changes are eliminated the rate of growth is much closer to the planned level of 5 percent - although still higher. On the other hand, not only are actual 196L4 and 1965 public investment expenditures in cur- rent prices lower than the Plan investment targets - as follows from the Progress Reports on the Plan for 1964 and 1965 I/ - but the budgets for 1966 and 1967 include the same investment sums as specified in the Plan prepared in 1962. 56. A further complication in interpreting and e-valuating perform- ance under the Plan is the lack of an explicit definition of the public sector. The multitude of public and semi-public institutions that ex- ist make possible a number of definitions of the public sector, and as the Plan does not specify what is included and what is excluded from the public sector, a wide variety of interpretations is possible. 57. In spite of these problems an effort has been made in the ac- companying table to compare plan targets and actual public expenditures. Actual developments in the public sector appear to have been opposite to those contemplated in the Plan: both the ratio of public expenditures to GM? and the share of public investment in total public expenditures appear to have declined. 1/ Memoria sobre la Ejecucion del Plan de Desarrollo Economico y Social for years 1964 and 1965; see Tables 5.3 - 5.5 in 3tatistical Appendix to Main Report. - 16 - Comparison of Plan Targets and Actual Public Expenditures (billion pesetasF 1963 1964 1965 Plan Plan Plan Base Actual Target Actual Target Actual GOTT 828.5 962,5 875.0 1,030.1 927.5 1,111.3 Current Expenditures 1/ 71.3 87.9 74.9 95.0 78.6 100.8 2/ (5 of G01) (8.6) (9.1) (8.6) (9.2) (8.5) (9.1) Investment Expenditures 62.8 58.4 71.0 59.3 78.1 62.0V (% of GNP) (7.6) (6.1) (8.1) (5.8) (8.4) (5.6) 1/ Excluding transfers. 2/ Unclassified expenditures of 7.5 billion pesetas in 1965 have been distributed equally between current and investment expenditures. Sources: Plan base and targets: GNP: Computed at 6% growth rate from figure given in Plan for 1963. Current Expenditures: Computed at 5% growth rate from figure given in Plan for 1963. Investment Expenditures: Fromn Plan for each year. Actuals: GI0P: Revised National Accounts 1958-64 and INE. Current Expenditures and Investment Ecpenditures: From Table 2, reduced to 1963 prices by GNP implicit deflator. Investment expenditures in- clude, in addition to capital expenditures in Table 2, transfers to RENFE in accordance with Plan definition. Remuneration of Civil Servants 58. One of the factors resulting in a marked increase over planned targets in the level of current expenditures was the reform in the civil service, introduced in 1965. The need for a reform in the public pay system was strongly emphasized in the IBRD Report of 1962, where it was re- marked that "the system for supplementing the basic salaries of civil ser- vants by payments from funds accumulated by individual ministries in the course of their operations (e.g. by surcharging investment expenditures) may become incompatible with the policies for economic development".l/ The reform legislation which came into effect in October 1965 brings a consoli- dation of salary payments in combination with general salary increases, aimed at placing civil service salaries at a level more competitive with that in the rest of the economy. Eighty percent of the contemplated in- crease became effective in October 1965 with the remaining 20 percent to be implemented over a period of four years. The increase in the total salary bill as a result of these changes is estimated at 91 percent. The net effect is, however, smaller as part of this increase will be offset by a reduction of expenditures in other accounts which formerly went for salary payments. The net impact is estimated to be an increase of about 43 percent. 1/ IBRD, The Economic Development of Spain, p.8. - 17 - IV. FISCAL MANAGEMENT 59. The formal Spanish budgeting procedures involve the preparation of an annual budget every two years with the same budget, with minor modi- fications, expected to serve a second year. In practice the rapidly changing pace of events has meant that these modifications have not always been minor in their impact. The table below shows the persistent tendency for estimateF to vary considerably from actual figures every other year. Budgeted and Actual Revenues and Expenditures (in billions of current pesetas) 1960 1961 1962 1963 1964 1965 Budgeted Revenues 65.7 65.7 86.9 86.9 120.8 136.8 Actual Revenues 72.7 81.1 94.9 109.1 125.8 149.5 Difference 7.0 15.T W0 22.2 5.0 12.7 Difference over budget (%) 10.6 23.4 9.2 25.5 L.1 9.3 Budgeted Expenditures 65.6 69.0 86.8 10h.7 121.0 136.8 Actual Expenditures 67.0 765 88.8 109.2 124.6 152.7 Difference 1.4 77 2.0 T3T Difference over budget (%) 2.1 8.0 2.3 h.3 3.0 11.6 Source: Ministry of Finance. 60. In addition to the long time lag between budget preparation and liquidation of the budget two years later, the use of partial and ad hoc expenditure authorizations diminishes the usefulness of the budget as an instrument of planning and control. Legislation involving increases in expenditures is incorporated automatically into the budget without suffi- cient consideration being given to the financing of these expenditures. An outstanding example of this practice was the recently legislated increa,o in wage and salary payments to the civil service. In general budgeting practices are loose and a good deal of use is made of supplementary appro.- priations combined with toc easy transfer of funds from one budget category to another (carry-overs). In recent years the practice of the Treasury ir releasing funds in advance of new authorizations (anticipos de tesoreria) has further weakened the budget as a control mechanism. 61. Poor budgeting practices are also found in the rest of the pub'i- sector. The budgets of the autonomous agencies which together account Cfr one-third of total public expenditures are subject to little centrialized - 18 - direction and are approved on a piecemeal basis without sufficient regard to their overall impact on the financial position of the public sector. Long time lags also exist between submission of these budgets and their final approval. In April 1966, one-half of theso budgets for fiscal 1966 still had not been approved. This state of affairs indicates the need for emphasizing again the recommendations for improvement in fiscal manage- ment contained in the 1962 ITRD Report. 62. The need for improved organization and accounting practices of the public sector was recognized in the formulation of the Plan. "In order to achieve greater efficiency in the coordinated action of the entire public sector, we will make a classification of the component organizations accord- ing to the nature of their activities, omitting those autonomous agencies whose functions can be absorbed by the central administration. We will also establish uniform systems of accounting within each category of organizaticr: (independent state agencies and local administration) which may permit proper formulation and publication of the aggregate accounts of the public sector.I1l/ Little progress has been made in this direction. 63. In order to achieve a more efficient management of public funds such steps are necessary and without them any attempts to engage in effective planning exercises will be largely ineffective. Good accounting and meaningful classification of public sector activities are essential for efficient management. 64. The Mission strongly supports the intentions contained in the Plea to reorganize the institutional structure of the public sector so that many of the autonomous agencies which have functions o1' a "general service" nature are incorporated into the general budget. The remaining agencies which have an "enterprise" character should be unified in a framework which would allow enough flexibility in the decision making process but at the same time provide a means of coordination and control for general financial planning. 65. In addition to these institutional reforms steps should be taken to include all financial transactions of the Government within the frame- work of the budget. This would result in a clearer picture of public sector transactions in the economy as well as serve as a control mechanism. It would mean including in the budget the financing of such organizations as the National Wheat Service and the Supply and Transport Commission. A method should also be devised to include expenditures made against antici- pated authorizations. 1/ Economic and Social Development Program for Spain, 1964-1967 (Ehglish version), page 41. - 19 - 66. In order to aid the government in its decision making, steps should also be taken to speed up the flow of information. The results of the financial operations of the Central Government, local governments and autonomous agencies should be available without excessive delay and in a format that lends itself to economic analysis. Apart from its significance for planning and fiscal management, the current presentation of such data would be an important contribution to improving present national income estimates. 67. Greater care also needs to be taken in the incorporation of Plan targets into the budget. At present the link between the Plan and the budget is very weak and has led to such things as the planned public in- vestment expenditures for 1964-1967 (which were made in 1962) being incorporated into the current budget without the necessary revisions for price changes. V. CAPITAL MARKET 63. The capital market in Spain, broadly defined, includes the banki-ng system, the official credit institutions and the security exchanges. These organizations, separately or jointly, provide a channel for the flow of investible funds from savers to investors, thus exercising substantial in- fluence over the allocation of resources. Supply of Funds 69. During each of the last five years, funds amounting to 1-15% of GNP were transferred via the banking system and the securities market. As illustrated in the table below and in Table 6, a large proportion of these resources (about three-fourths of the total) originated through liquidity creation (increase in currency and deposits). The consequent important implications for monetary management and stability are discussed in the MaIin Report. Iiquid assets are examined in the context of this Annex as sources of funds for the capital market and not as determinants of the general level of spending in the economy. - 20 - Flow of Funds (percentages of GNP) 1961 1962 1963 196b 1965 Sources of Funds 13.8 1h.5 13.8 16.O 15.1 Money 3.8 5.3 4.9 5.6 4.8 Time and Saving Deposits 5.6 6.3 5.6 7.3 6.2 Securities 3.9 3d, h.2 3.8 4.6 Others 0.5 -0.5 -0.8 -0.7 -0- Uses of Funds 13.8 1.5 13.8 16.0 15.1 Public Sector 0.8 0.9 1.5 2.1 1.6 Official Credit Institutions 1.2 0.8 0.7 1.6 1.9 Private Sector 9.0 11.3 11.1 10.L 12.3 External Sector 2.8 1. 0.5 1.8 -0.6 Sources: Table 6 Revised National Accounts 1958-6h and INE. 70. From 1960 to 1965 there was a rapid expansion of the money supplir. Currency in circulation increased by 109%, sight deposits by 122% and time and savings deposits by 2585.1/ Currency plus deposits increases together amounted to approximately 10% of GN.P Direct voluntary savings, increased demand for cash balances as a result of economic growth and monetization, and forced savings resulting from the rise in prices, all contributed in varying degrees to this total expansion of the money supply. 71. Compared to the volume of funds generated by the banking system in the form of currency issue or deposits, the size of total funds provided in the security markets (through the purchase of shares and bonds by in- dividuals and institutions outside the banking system) is small. Neverthe- less, in relation to GNP, these issues average approximately 3.5-L.5%, which is not insignificant. These ratios may, however, be overestimated as new private issues are quoted only in gross values. No data have yet been collected relating to the amortization of private bonds or to the conversien or consolidation of outstanding shares into new ones. 1/ A meaningful classification of demand and savings deposits is particularly difficult in $bain: (a) mcst savings deposits are payable on demand; (b) while checks cannot be drawn on these deposits,this is not a significant distinction, as payment by check is not widely practiced. - 21 - Demand for Funds 72. Public Sector. The public sector's share of funds generated in the capital market has been small. From 1961 to 1965, approximately 9-10% of funds passing through the capital market went to the public sector. Public bond issues to finance the private sector through the official credit institutions which showed a rapid rise in 1964 and 1965, are not included in this figure. If the definition of the public sector is broadened to include total funds administered by the State, the public sector's share rises to 23-24% for the last two years. 73. A major portion of government borrowing has been through the sale of bonds to banking institutions. Securities issued by the State prior to 1958 were automatically pledgeable with the Bank of Spain for 85 to 90% of their value. Because interest charged by the Bank of Spain on loans guaranteed by public bonds was equal to rates on the public debt (and at times even lower), these bonds were almost perfect substitutes for currency.. In fact, as far as bank reserves were concerned, they were better than cash. Banks could maintain their liquidity and at the same time earn a return of about h% on their reserves. Thus, bonds affected the money supply in the same way as an increase in base money (currency). The return on these bonds created a strong demand by banks. After 1957, pledgeable bonds were no longer issued, and the pledging rate was raised to about half a point above that of public bonds. Large amounts of the bonds nevertheless continued to be held by banks as part of their reserves. 7h. After 1957 issues by the Treasury have been confined to invest- ment bonds (cedulas para inversiones), which are not automatically pledge&ble at the Bank of Spain. They are used to raise funds for the official credit institutions. Since they offer no attraction other than a return of L-4.5% (see Table 9), their placement with banks has not been as automatic as that of pledgeable bonds. Regulation of asset portfolios was used by the Govern- ment to induce banks to hold investment bonds. Details of these regulations are discussed in paragraphs 86 and 87. 75. In addition to investment bonds, the Treasury has guaranteed bond issues by public enterprises through the Instituto Nacional de Industria (INI). Until 1963 there were also minor issues directly by some of the official credit institutions.) 1/ Banking statistics do not show separately the kinds of public bonds (fondos publicos) held by banks. The Mission has estimated that of about 159 billion worth of public bonds held by banks at the end of 1965, more than half (82 billion) is automatically pledgeable paper, 43 billion are investment bonds and 3L billion are INI bonds. Almost all INI bonds are held by the savings banks. - 22 - Issues of Public Bonds (million pesetas) 1961 1962 1963 1964 1965 Cedulas para Inversiones 1,000 474 5,000 15,000 27,506 INI Bonds 9,653 4,500 8,584 8,329 9,100 Official Credit Institutions 1,836 1,345 300 Total TEB79 6,319 U1783 F 23,329 36,606 Source: Bank of Spain, Boletin Estadistico 76. Data on the placement of public securities are given in Table 7. It indicates that more than 80% of public bonds issued in the last two years were absorbed by banks. Prior to 1965 saving banks took a larger share than commercial banks, but in 1965 the latter absorbed over one-half of total public bonds issued. 77. Private Sector. Private securities were mostly purchased by individuals and institutions outside the banking system (see Table 8). Recent years have witnessed a growing amount of private issues of both bonds and shares. More than half of these issues were made by public utilities (electricity, water, gas) and manufacturing industries. After 1963 bank issues also became important. 78. The increase in issues of private securities has taken place against the background of a sluggish market. The index of share price declined from a peak of 121.3 (1958=100) in 1957 to 87.1 in 1965. Within this general index, steel, chemicals and transport registered sharp declines, and banks a remarkable rise. Movements in yields indicate that price move- ments have been affected by factors other than profits, particularly in steel, transport and banks. The decline in quotations since 1957 can be attributed partially to the fact that 1957 was a peak year. In addition, the banking reform restricting the portfolio investments of banks, the tendency of non-residents to reduce total portfolio investments (since 1961), the attractiveness of investment in real estate and the taxation of divi- dends were factors influencing the market. The stockmarket has structural weaknesses, including poor information on the financial situation and results of many companies, lack of familiarity with the market on the part of the public at large and narrowness of the market. 79. Funds channeled from the capital market, broadly defined, to the private sector were largely in the form of bank credits. In 1965 credits to the private sector increased by 136 billion pesetas, more than twice the gross amount of issues of private securities. Commercial banks provided the largest portion of these credits, with the official credit institutions also playing an important role. - 23 - Banking Reform 80. In 1962 and 1963 a number of changes were made in the financial organization of the economy in an attermt to provide a firmer foundation for implementing the Plan. The Bank of Spain, formerly a private bank fulfilling many of the functions of a central bank, was placed directly under government control and given in a more explicit form the task of carrying out monetary policy together with general supervision of the commercial banks. Measures were also taken to rationalize the sphere of operations of the commercial banks which had evolved as institutions com- bining short and long-term financing. This was done by requiring the commercial banks to separate their normal commercial banking functions from the longer term investment functions. The banks were obligated to choose between confining their activities to typical commercial banking operations or to transfer themselves into investment banks. This change was facili- tated by removing some of the restrictions on entry into the banking field. As part of the reform of institutional arrangements, the various official credit institutions were placed under the control of the Institute for Medium and Long Term-Credit. This institution was also given certain regulatory powers with respect to the issue of new securities and the granting of long-term credits by the banking system. 81. As a result of these legislative changes all existing bariks (except one, the Banco Urquijo) chose to retain their commercial banking functions, but to avoid the forced sale of their industrial portfolios a number of banks increased their capital or created newi industrial banks to which they transferred part of their portfolio investment. Six of the largest banks formed their own industrial bank in spite of the limitation imposed by law that their ownership be restricted to 50%Z. Foreign financial institutions aided in the capitalization of some of the new investment banks. The initial result of the legislative changes has been a rapid growth of these institutions; nevertheless, their significance in the total financial system remains small with credits accounting for only 3% of total bank credits. 82. Saving Banks. The only change made in the institutional struc- ture of the numerous saving banks was to centralize their control under one institution known as the Institute for Saving Banks. These banks (66 in number, with approximately 3400 branches throughout the country) obtain their resources largely from passbook deposits most of which are drawable on demand. Slightly higher interest rates than those paid on commercial bank deposits have resulted in a growth rate of deposits with these insti- tutions twice that of checking deposits with the commercial bankcs. Sight deposits earn 2% interest (plus participation in a lottery) compared to - 24 - 0.5% earned on checking deposits. 1/ Fifty percent of the resources of these institutions are legally required to be in the form of public bonds with much of the remainder directed towards sectors, such as agriculture, Lhich are regarded as having high social priority. (Table 11). 83. Official Credit Institutions. Since 1958 the various indepen- dent official credit agencies operating in the medium and long-term mar- ket were loosely supervised by a committee known as the Committee for Medium and Long-Term Credit. The banking reform further centralized the control of these institutions by placing them directly under the Institute for Medium and Long-Term Credit. Since then, their major source of funds has been the proceeds of bonds issued by the Treasury. These resources are allocated at two levels; first, a part of the funds programmed for each year is earmarked by the Council of Ministers accord- ing to Plan priorities and second, the remainder is distributed among the institutions by the Institute for IMedium and Long-Term Credit. For 1966, the Council of Iinisters is expected to allocate 13.5 billion pesetas and the Institute 19.O billion pesetas. The following table and Table 10 summarize the activities of these institutions. 1/ In September 1966 some steps were taken to encourage personal savings and strengthen the capital market. Among these measures are the fol- lowing: (a) Rates of interest on bank deposits are raised progres- sively according to the term for deposits with a fixed term of at least 18 months; (b) Saving banks are entitled to set up and manage investment funds; (c) Saving banks are allowed to open security- investment accounts (cuentas de ahorro bursatil) and house-purchase accounts (cuentas de ahorro-vivienda); the latter can also be opened by commercial banks. Under these schemes regular savings are made by a participant to agreed amounts and at a bonus interest rate of 3% for security accounts and 4% for housing accounts. Once the agreed total of savings has been reached, it can be matched by a bank loan at an attractive rate to accelerate the purchase of the asset(s) de- sired. Loans to holders of security-investment accounts not subject to income tax have an additional favorable interest rate differential; (d) The income tax allowance previously given for stock purchases is extended to cover purchases of all recognized securities and raised from 20 to 25%; (e) Life insurance premiums become deductible as current expenses for income tax purposes; (f) A tax-free assets min- imum (patrimonio) is established, the transmission of which to wife (or husband and legitimate descendants upon death will also be tax exempt. - 25 - Resources and Credits of Official Credit Institutions (billion pesetas) Resources 1963 1964 1965 Capital and Reserves 1.2 1.h 0.7 Treasury Transfers 7.3 17.6 2h.7 Total 8.5 19.0 25.4 Credits (Disbursed) Agricultural Credit Bank 3.3 3.0 6.2 Construction Credit Bank 3.7 6.4 9.7 Mortgage Bank 1.7 1.9 1.8 Industrial Credit Bank 1.9 3.9 7.9 Local Credit Bank 0.7 2.7 1.lt Fisheries Credit 0.1 0.1 0.2 Total 11.5 17.9 27.3 Source: See Table 10 Btj.. Other Changes. As part of the general reform of financial in- stitutions several measures were also introduced to promote the development of stock exchanges. These measures allowed for the creation of new stock exchanges and at the same time provided for the creation of a regulatory body, the Stock Exchange Commission. Term operations were also permitted on the stock exchange. Other measures aimed at relaxing the restrictive nature of business legislation permitted the formation of open-end trusts. (The formation of closed-end trusts was made possible in 1958). 85. Impact of Changes. The impact of the various changes on the overall financial structure of the economy has been minor. A slight in- crease in loans and advances of a longer term nature has been achieved at the expense of the more general portfolio holdings of the commercial banks, some strengthening of the capital base of the banks has taken place and the degree of government control has been strengthened. Allocation of Dank Funds 86. Statutory Banking Coefficients. Bank operations are regulated mainly by statutory banking coefficients and restrictions on rates of interest charged and paid. The balance sheet ratios summarized in Table 11 are intended less as a tool of monetary control - as in the case of conventional reserve ratios - than as a means of rationing credit accord- ing to set minimum standards. In addition to the investment ratio (investments in industrial securities/capital and reserves), the main distinguishing factor between commercial banks (max.l:1) and industrial banks (max.3:l), the two most significant ratios are the minimum liquidity ratio and the minimum public bonds ratio. The first (cash plus deposits - 26 - at the Bank of Spain plus public bonds/deposits), now 13% for commercial banks, serves the double purpose of securing some minimum liquid asset ratio for the banks and making it attractive for them to hold public securities. The latter incentive prevented banks from borrowing from the central bank by pledging all public bonds in their possession. This also would have deprived them of a 4% return on these liquid assets. In fact, after 1959, they even would have had to bear a cost of one-half percent, the difference between the pledging rate and the interest on public bonds for holding cash rather than bonds. 37. In 1965 a new ratio - a minimum public bonds/deposits ratio of 15,0 - was imposed on banks to ensure their subscription to large issues of investment bonds (see paragraph 74). This measure compelled the banks to buy more public bonds but permitted them to finance part of these purchases by borrowing from the Bank of Spain. Additional public assets increased the liquidity of the banks - since cedulas are included in the liquidity calculation - enabling them to borrow from the Bank of Spain by pledging previously held automatically pledgeable paper. This was possible because, while pledged public assets are not included in the numerator of the liquidity ratio, they still are included in the numerator of the public assets coefficient. Thus, an increase in bank holdings of public bonds was achieved at the cost of reducing their liquid reserves (cash and cash substitutes: pledgeable paper). 38. Interest Hates. Interest rates do not serve as an effective rationing device in Spain. Given the rate of price increase, real inte- rest rates are low (see Table 12) or at times even negative. The highest lending rate is only 7.5% and the average rate is between 4.5 and 5.5%. The low lending rates are often defended on the ground that the interest paid on deposits is also kept low. Restrictions on deposit rates do not allow rates higher than 2.5% with the exception of industrial banks which are permitted to pay 4% on two-year deposits. These restrictions are in turn defended on the ground that savings should be discouraged from flowing to the money market (banks) and should flow instead to the capital market proper (the security exchanges). 89. Although there is some mnerit in this argument in view of the dangers of high dependence of industrial financing on bank credit, the Mission thinks that the line of argument can be reversed. The present policy of low interest rates makes the rational allocation of credit a difficult task and in order to introduce a greater degree of efficiency more reliance should be placed on market forces. Not only do low interest rates affect the allocation of savings but they also affect the amount of savings that will be forthcoming from the community. In an economy where 1/ The ratio was increased to 16% as of November 1, 1966. - 27 - saving opportunities are Linited, deposits may be useful intangible as- sets to offer to people who are neither rich nor sophisticated enough to enter the security market. It may also be true, given the institu- ticnal structure of the Spanish financial commnunity, that the banks will ccntinue to be the most efficient channel for routing savings into investment. 90. In addition to low levels, there is the problem of heteroge- neity of interest rates and conditicns applicable to various kinds of credit transactions. Over the years this phenomenon has reached extra- ordinary proportions. No economic rationale seems to exist for many of the differences and a consolidation of rates appears overdue. I/ 91. Role of Official Credit Institutions. One of the major means for rationing credit hasTbeen the compulsory channeling of the banking system's resources into the official credit agencies. These transfers to the official agencies were particularly large in 1964 and 1965. From an econcmic point of view, the evaluation of this transfer depends cn the efficiency of the official credit agencies relative to the private banks in allocating funds. In view of the experience in 1965, when a large portion of these transfers was ultimately financed by the central bank, extreme caution should be exercised to insure that the transfers do not become a continuing source of inflationary financing. 92. In 1965, funds allocated to official credit institutions con- stituted about 20% of the increase in the total resources of banks. At the time of this Mission's visit, only a tentative plan for public bor- rowing through investment bonds during 1966 was available. Investment bonds worth 28.5 billion pesetas are expected to be issued this year. This amount is expected to contribute to total financing by official credit institutions of 32.5 billion. Bonds in the amount of 8.5 billion pesetas were issued in March of this year and somewhat less than 0.4 billion during Pay-August; against this, 19.3 billicn were channeled to official credit institutions. j 93. In the near future, the availability of credit in the Spanish economy will depend, to a large extent, on the rate of monetary expan- sion. To aim at an ever expanding volume of business for official credit institutions while pursuing a somewhat less expansionary monetary policy may diminish the availability of credit to the private sector. For this reason, this year's target of 28.5 billion in investment bond issues should be considered a maximum. 1/ In September 1966, interest rates on loans by the official credit in- stitutions (excepting agricultural loans) below 4.5% were raised to that level. See also footnote to paragraph 82. 2/ In April 1966, a continuous issue of investment bonds was started in unspecified amounts (emision abierta) for commercial banks, saving banks, insurance companies and other financial institutions, to arrive at a more regular placement of bonds and to meet continuing investment requirements These cedulas have an amortization period of 10 years and the inteiest, rate is .53%. The effects on public debt policy reoai1a to be seer- Table 1 Central Government Cashl Receipts ard Expenditures 7EIIlion pesetas) Jan. - ug. 1959 1960 1961 1962 1963 1964 1965 1965 1966 Rer7enues nudget Cevenues 63.2 72.7 81.1 95.0 1D9.0 125.8 149.5 96.0 119.1 Aiznex Budget Revenues 3.8 2.5 4.8 3.3 3.8 1.6 1.2 0.9 1.3 Coilect.ions for L.G. account 3.4 3.7 3.6 b.0 4.3 4.6 4.& 2.5 2.6 Other Income (net) -- 0.3 -- 0.5 2.o -- -- -- 1.3 Total Revenue 70.4 79.2 89.5 102.8 119.1 132.0 155.5 101.4 124.3 Expenditures Budget Expenditures 59.8 67.1 78.0 8E8.8 109.2 124.6 153-1 91.7 115.6 Annex Budget Expenditures 3.2 3.0 4.1 8.2 4.0 2.3 1.9 1.3 1.1 Payments to L.G. account 3.3 3.5 3.7 3.7 1.5 4.0 4.2 8.1 8.7 Other Expenditures (net) 5.6 -- 0.8 -- -- 2.2 )j9 9.7 -- Total Expenditure 71.9 73.6 82.6 96.7 114.7 133.1 164.1 106.8 121.4 Surplus (t) or deficit (-) -1.5 5.6 6.9 6.1 8.8 -1.1 -8.6 -5.8 2.9 Transfers to Official Credit Institutions -3.4 -7.2 -8.6 -5.7 -7.3 -17.6 -24.7 -16.3 -19.3 Total to be financed -8.9 -1.6 -1.7 0.8 -2.9 -18.7 -33.3 -21.7 -16.8 Financing Issue of Bonds -- l.0 3.0 0.5 5.0 15.0 27.5 10.0 8.9 Borrowing from BOS 2.1 0.8 -1.7 -1.2 -3.2 2.5 8.6 11.1 6.9 Issue of Coins 2.7 0.3 0.4 0.4 1.2 1.2 1.2 0.6 o.6 Scurc:cc- onic of- Spain, Eo1ct!i. ZM rtt;stico, Sc teu½r Il66 TABLE 2 PURI-IC SECTC* PIVENOES AND RxIPrnTn;rrt.v 1963 -1966 (suillion pesetas) 1963 91 1965 Central Cati ?t.eI t!entral Local1 Tutal (-.ntn,r4l Local Total Govern- Auteneeeue Govern- Conseli- Governi- Autmonmnm Qal#4th- Conacli- Govcrn- Autonvmusj Govrern- C"naoll- me at _A_encie__ met dated ±143 A!enicnoa snmta dated it. Agencies ments da tedl I. Current Revenue 10.9 108 1L 0-21 11-238 21±8 367 3' 1.15 311 711 17_921 fl% ! 319533 3 103 1-780 198 1±21 ,.nee 95 825 632 B 880 105 337 310 210( 811. 10 708 121 731 129? 921 1 C0P± 10 587 11± 192 (Gleect) (31 837) ( 76) (7 91,6) (39 859) (L955) C 81 (9 651±) (1±1± Ag0) (41± aa7) ( 93) (9 128) (5o 2681 ( indilrect) (A3 988) ( 5996) (93L±) (6597) 7 255) 733) (1 U5) (77 01±2) (eS887i?) ( an ) (I 45R) (91 21±1) (tee an13tis)283 tl3 a38 5 3Ca 13 030 15 636. 29 89 7 fl3 6z 71±2 19 All7 29 099 8 193 56 909 (Ineest Recid e) C2 37) (121 8714) (3 783) (21 4±94) C6 538) (1 939) (5 027) (ni 2.4) (10 21?) (19 829?) (9 967) (36 013) (Interea Rerom roerty) 2317) (1I899) ( 6.6) (14282) (2C52) (1±016~ ( 66) 1 61.371 (2 9$R) (1±701) C103) (7 365) (Imo" from Property) ~323) (10 616) (1 196) (16 135) (6 991 ( ±31±0 (3 Ii2?) (12 368) 6 31±) ( 5± 66) (1 33 (12 1±1±8) (ethers) C 806 -- (313) C 1119) C 172) - ( 661) 1 1133) ( 193) -- 5 90) C I1D83) 12. Curnt Expndtmrs -663 34h1 -22 990 -31± 989 -10.5 282 -75 070 -V 31±1 -18 812 -13 ~ -87 71±0 -31 002 -2±) 480 Z-uS222 Wdages end Salaries -33 630 - 9±660 - 8380 - 91 670 ." sno -13 198 -10 56 - 61 94±2 -44 768 .12 719 -71 294± 73 781 GCocs and ServIce -13 073 -9760 -5191± -23 987 -12 72? - 7107 - 6369 .269 03 -13 965 -8a1271 -760. -29991I -ere-it paid - 5109 -1±307 - 929 -10 345 -1±z18 - h91C - 1012± -.1217 - 37)32 - 531±0 -1216 -10 338 Others -io035 5 72 281. -1888 -1±1 -823 - 25 -3960 - 31.3 - 1±11 - 210 - 937 Transf'ers .191±97 -2691 2144 -18 392 -.7 761 .1998 - ~' -23 101 -199~12 -1±1±02 - 299 -21±573 TII. PtAblic SAvings 1±0 761± 2 071 - 790 1±2 085 5 l± 1i360 Bg1 9) 291 61 798 - 8v9 1 700 59979. IT. T,,tra..SyStsq Tr"afsers -21 060 17 326 3561 - 93I 811 3 319 - 33 2 6 l- 19 V.Utlils-attnn af LeOOM 11 2 526 12 698 I 2 000 10 . 2 q58 20 gm± 12ii020~ 1 152 12 1±17 !orr±zvle8 - 11 860 ~~~~ ~~~~~~700 12 960 4-3118 ITo07 If 325 - 12 963 1383 1IL 3l±6 Ae,Ortiz±tion - - 728 - 174± 902 - 2000 -1037 - 122 -3159 -1711 - 94±3 - 231 -2929 V.Other Resources -2876 1o8 2981± I2Q9 103 1 308 "2 869 1212?2 VII. 1a1'q ndtu -19 838 -.30 935 -2 90 5-3678 -.21 838 -269 -50 -59' 738 -26 570 -5 3 -1±T -661±79 Direct Inoestuenta -11±161 -18 693 -2883 -39 697 -21 959 -a 588 .5196 -.8 773 -23903 -23 082 -P361 -53533j Financial Inyotsmnte -95677 -12 282 - 22 -179F81 -193 f1 - 95 -.0 969 - 18 -121±96 10 -1262±6 VIII. Discrepancy - 99 - 1900 -369 - .23 8 1257 - 29 -931 - 13730 1123 ~ 5 -8820 XX. En-ira Bu±ipetar1r Accounts 218 1ˇ18 -19± - ±)8 -2217 2 2217 Hevsi±±esa 10 oSo 10 080 61,6 6 196 191 99 591± Expendit±ren - 9 523 - 9 923 -a8515 - A 514!; -n2 012 -11 012 investreenta Sands lssued 5O 5OM900 16 000 15 O0m ˇ7 906 27 506 Tran3fers t o ficial Cre'd!jt list. - 7 339 - 7 339 -.l7 5vy - 17 599 -21. JUs - ii 705 1. SUrPIU3 ('-) or Deficit -)1989 n 270 -68 -- -11326 6 __1.20 171 -L706 - 3658 2 737 - 36 -iSA -91 13 67-±6 Scurce: C-entranl CGovereusnt revenues: MinistrY of Finance, &Jlnuene. Estadiatloos de Recnn6acion v NMOB, I.remomr 39('5. Central rovearment expenditures, other accounts n-d Autacmou±a Argencies: 196): 1B±1i ,,f 3yqq'n, Infome Abt~e h .nAa!rc± z 16,1965 1964 and 1965. frum± data pr-¶vlrid by 141nint±y of Finance. L~ocal Governments., frGrl daLta provided by 2Aiaistry of Finance, hatrnbudgctary tirnnsactiuii±e fran tonik of Spain, Holetin Eataddst6co, Mnarch 1966. (Lute: Th±e detailsa of CernLral G~overnm±nt expenditures in the table artF based not on actual caah peynents, but cii payqmint Otlgrs lorcuci durdn.n tiLe fis5cal year. Forthernoro, figures for 1963 and) 1964 incluzlo the) liquidation periodi unti) the enid of Harsh whbernno value3 for 1'467. MTV lip t'3 the end of Decembier onl1y. rherefore, these figLurv are Only approximatins okf the actuaLl expenditures. The m±L*L±±I eee)3 reteipts8 and pe±ymcntn for thec CehtA-a3 Canerrnment bidget are report-ed, i± sggre9atq value culy, in the Trea-sury accounts. The tWo sets Of Cign-es ha-Fe bean ±"utr:r.Illd in the table aeon-t by the rn6dl lion of a line for ndincrepaccies - The ligurca for the Autrcir:cumus Agencies anid the Local Governmlnts are lnacd on 'thedr rovir,.d b4nt±sA. ¸ ½flT ¸t'r'2 C-, I r'f9~I, `I( tc 6¾ c.?.',T 'Fi0o: - IT- JC mrf? A -nn - 11 0 o'~0t 10.. n½ 0% Ef P2 v gc a, oior ;1m2 ~~9I9 -- - - ~~~~~~~~~~ 113 O~~~1-~ ("161 6%19'q OOa~( - 06T? t~O P4G10tJJ-f, ~~90'~~~~ 2'! t0 21? ~~~~~~~~~ (' I'-LL'? ¸499 - r%i -no- -SltSfl op~j - - FP6 T'1t1 0''] 6%PI 21(9g T% - - 6'ft - 0q JL - 1.1u; Zos - - 21q L6'1 ¸61 3i19~ 92z ("1'? -p 5 -- - -g - 9fl( 5t '-6%69 2611 - 'Q, 0'0(4 *r1 *N,1WIJ?T090 Op*-WLWy6I T'A( 'Pu -- S' 9*(0Z 2o Z'169] 'P9St 01, - 90C o!¸,i - 33-IP.'iOJP)H'09*..j9q - 6"1g 'P~~~~90 "'lITf w'j? 'P'] 'PLgL 9"1 - 9"]A - GWAJ., -- &Qo 0'] 219qs - 191T 2¸16q -- S"JrI i'e6( - '11YOU U1 P9,5w 6'625 - - Leec I'LL C z'0 L PO ("1'] -- IT41.fl-rkv flO.1' 95u09l p *-'.: 'P 6L5i't 0-(16 -- - 261 PI'T Co9L V946 - - - 9(6 --fL -T. I CIAS 02t 6'!?,10'1 -- - 2(00 - 'I'6 R2(T0T ¸6' - 9%6( 'r'65 -61 SMbOWTz-'1S'-3 SFJ 14100? lqVz6f0T - - -- - 'PASt Cpoo'r ('191'! - - - --~~~~--1- ---T-- S --.L V Ml ('L¸('T 'Vtsc 6'o S'VTL 1"t 0169 9'o6Igt I1(61 - - 2009T -- lh4l 10P i~T--TM o'?A-bss 6'(to'e 96L -- 2~~~~~919! 9'9LG9'T I '? ('( T' U9e2' P9¸q, -- POL( 'I't'?'']TC-c ('i~~5's 2196 'PCCT l'~Z12(CH MWO6' T'(T 6'']!' Z'H']O'9 t'(iT d'(09'j CLoL -novGO 9t"04f ;11n t'LiVtt ('OuS 21(5''] ~6'de'l: ('(46" 6'O !-19i T'99']'Tt 1216 1'. ]5XC'6 29(6'?r -- -T09.A 'T OP E15- f f!V- l1 I(O('fl v7d1( -- !'6L 9'LOT c"o(e 0'990 6'qe5'nT VT4fl'r 6%o9'( - - 111P97 IP14Nt t'so" %SJLUU 9U5.AjTfl C4146 n;oo '"z')S I¶*A 'd 1961 ~ ~ ~ ~~~6 79i1t 1' PP l 1An4 s7 o: eQ :1 r I £v Table L Public Revenues ard Expenditures as Percentage of ONP 1963 1964 1965 Consol- Consol- Consol- C.G. A.0. L.G. idated C.C1, I O. L.G. idated C.G. h.O. L.G. idated Public R.evenues 11.3 2.6 1.5 15.4 11.5 2.5 1.7 15.9 11.4 2.3 1.4 15.1 Tax 10.0 0.1 0.9 11.0 10.2 0.1 1.0 11.2 10.0 0.1 0.8 10.9 !!on-Tax 1.3 2.5 o.6 4.4 1.3 2.7 0.7 h.7 1.4 2.2 o.6 4.2 Current Expenditures -7.1 -2.4 -1.6 -11.0 -6.9 -2.7 -1.7 -11.3 -6.7 -2.4 -1.6 -1i.6 Wag:es and Salaries -3.5 -1.0 -0.9 -5.4 -3.7 -1.0 -1.0 -5.7 -3.8 -1.0 -0.9 -5.7 Others -3.6 -1.3 -0.7 -5.6 -3.2 -1.7 -0.7 -5.6 -2.9 -144 -0.7 -5.0 Public Savings 4.2 0.2 -0.1 h.4 h.6 0.1 -0.1 - .6 4.6 -0.1 -0.1 .4 Transfers -2.2 1.8 0. -- -2.5 2.1 0.4 -- -2.3 1.8 0. -- Capital Expenditures -2.1 -3.2 -0.3 -5.6 -2.0 -3.0 -0.5 -5.6 -2.0 -2.7 -0.3 -5.1 NTet Extrabudgetary Rev. or Exp. 0.6 -- -- o.6 -0.2 -- -- -0.2 -C -- --o.4 To Official Credit Institutions -0.8 -- -- -0.8 -1.6 -- -- -1.6 -1.9 -- -- -1.9 Other Resources and Discrepancy -- -- -- -- 0.2 -0.2 0.2 0.2 -O.h -- -- -O.4 Surplus (4) or Deficit (-) -0.3 -1.2 -1.5 -1.5 -1. - -2.5 -2.4T -1.0 -- -34 Bonds Issued 0.5 1.2 -- 1.7 1.2 1.0 2.2 2.0 1.0 -- 3.0 Bo:roui ng from BOS & Is;ue of1 tutrAs -0.2 - -2 0.3 -- 0.3 09- --- 04 Sourc%is: Table 2 and R?vi.,ed National Accounts i153-6). Table 5 Central Government Budget Revenue (billion pesetas) 1961 1962 1963 1964 1965 1966 Direct Taxes 25.58 29.28 31.84 34.95 41.05 43.10 Rural and urban real estate 3.10 3.24 3.52 3.66 3.87 4e30 Income from labor 5.89 6.65 7.59 8.33 8.61 8.00 Income from capital 2.64 2.89 3.14 3.49 4.28 4.80 Business income 7.95 8.89 9.19 9.69 11.61 12.50 Commercial and indus- trial enterprises 2.49 3.56 4.03 4.62 5.48 6.20 Individual global income 1.02 1.20 1.40 1.63 1.84 1.60 Inheritance and estate 1.37 1.65 1.60 1.90 1.99 2.50 Other 1.12 1.20 1.37 1.63 3.37 3.20 Indirect Taxes 47.76 55.17 63.99 75,25 88.87 102.10 Transfer and stamp 9.53 10.53 13.05 14.21 9.88 11.30 Turnover 4.83 5.38 6.0o 7.13 14.93 18.10 Internal excises 22.12 24.49 27.31 33.05 38.69 45.80 Customs duties 8.20 10.38 12.25 14.15 14.46 15.00 Equalization taxes on imports 2.31 3.69 4.48 5.47 9.60 11±5o Other 0.77 0.70 0.90 1.24 1.31 0.40 Total Taxes 73.34 84.45 95.83 110.20 129,92 145.20 Non-tax revenues 7.73 10.50 13.28 15.64 19.62 23.50 Total Revenues 81.07 94.95 109.11 125.84 1i9.54 168.70 (Per cent of GN1P) 11.4 11.6 11.3 11.6 11.5 Table 5 (continued) lNotes: 1. Figures for 1961-65 are actual, for 1966 the budget's. 2. The 1964 tax reform consolidated and altered a number of previously existing indirect taxes. Also, there are a number of taxes (luxury, special, tobacco and gasoline) which can be conveniently classified as excises. The grouping in the table has been made as follows: a. Transfer and stamp taxes include: Transnisiones patrimoniales y actos juridicos documentados Derechos reales (inter vivos) Valores mobiliarios Efectos timbrados, a clasificar b. Turnover taxes include: Trafico de eEpresas Sobre el Gasto c. Internal excises include: Impuestos especiales Sobre el lujo Tabacos Petroleos d. "Other taxes" in each year represent predominantly collections of taxes due or accrued in prior years. Sources: IZnistry of Finance, Resumenes Estadisticos de Recaudacion y Pagos December 1965.- Budget 1966. Revised National Accounts 1958-64 and INE. Table 6 Sources and Uses of Funds 1961 1962 1963 1964 1965 billion billion billion billion billion pesetas % pesetas $ pesetas % pesetas $ pesetas % Sources of Funds (increases in financial assets of public) Money 27.4 28 43.4 37 46.8 35 60.4 35 62.1 31 Time and Saving Deposits 39.9 41 51.3 43 53.6 4o 79.5 46 80.9 41 Securities 27.5 28 27.8 23 40.3 30 41.7 24 59.7 30 Miscellaneous 3.3 3 -3.9 -3 -7.7 -5 -8.1 -4 -5.4 -3 Total 98.1 100 118.6 lOC 133.1 100 173.5 100 197.3 100 Uses of Funds (increases in financial liabilities of sectors) Public Sector 5.9 6 7.6 6 14.3 11 23.0 13 20.4 10 (Credits) (-) (7.8) (6.8) (17.6) (8.0) (Securities Issued) (14.4) (6.7) (13.9) (23.3) (36.7) (Transfer to Official Credit Institutions (-) ) (-8.6) (-6.9) (-6.4) (-17.9) (-24.3) Private Sector 72.6 74 99.9 84 113.4 65 130.7 75 185.0 94 (Credits) (53.6) (76.8) (77.0) (95.9) (135.8) (Securities) (18.9) (23.1) (36.4) (34.8) (49.1) External Sector 19.7 20 11.1 9 5.4 4 19.8 11 -8.0 -4 Total 98.1 100 118.6 100 133.1 100 173.5 100 197.3 100 Not,e Figures do not always add up to totals due to rounding. Source: Bank of Spain, Inf'orimwe s.bre la Fconomia Espano_L en 1964 and Ifgures provided by Eank of Spain Table 7 Issues by Public Sector and their Placement (billion pesetas) 1962 1963 1964 1965 A) Issues 6.7 13.9 23.3 36.6 B) Less Amortization 2.5 2,5 2.6 2e7 C) Net Issues 4.2 11.1 20.7 33.9 Placement: D) Credit System 2.3 7.8 17.0 28.0 (54 %) (69 %) (82 %) (83 %) a) Bank of Spain and Official Credit Instit. -- -- -- -- b) Banks -2.2 0.4 7.5 17.2 (-51 %) (3 %) (36 %) (51 %) c) Saving Banks 4.4 7.4 9.5 10.9 (105 %) (65 %) (46 %) (32 %) E) Insurance Sector o.6 3.2 3.2 3.2 1/ (15 %) (28 %) (15 %) (9 %) a) Social Security System 004 2.5 2.5 (9 %) (22 %) (12 %) b) Private Insurance Companies 0.3 0.7 0.7 (6 %) (6 %) (3 %) F) Rest of the Market and Amortization 2/ 1.3 0,3 0.5 2.6 (31 %) (3 %) (2 %) (8 %) Note: Figures do not always add up to totals due to rounding. 1/ Figure for 1964. 2/ Residual. Source: Bank of Spain. Table 8 Private Issues and their Placement (billion pesetas) 1962 1963 1964 1965 A) Issues 24.4 39.7 L0o0 60.7 a) Stocks 14.6 19.3 20.1 34.8 b) Bonds 9.7 20.4 19.9 25.9 Placement: B) Credit System 5.4 12.3 12.6 11.6 (227) T-T) (32 7) (1 %)) a) Bank of Spain and Official Credit Instit. -- 0.4 0.3 o.6 (--) (1 %) (1 %) (1 %) b) Banks 1.0 0.5 2.7 2.0 (4 %) (1 %) (7 %) (3 %) c) Saving Banks 4.4 11.4 9.6 9.0 (18 %) (29 %) (24 50 (15 %) C) Insurance Sector 1.5 1.7 3.3 4.7 1/ (6 7) (4 %) (8 %) (8 %) a) Social Security System 0.6 0.8 2.4 (3 %) (2 %) (6 %) b) Private Insurance Companies o.8 0.9 0.9 (3 %) (2 ") (2 %) D) Rest of the Market and Amortization 2/ 17.4 25.7 24.1 45.6 (72 0 3) ()60 %) (73) Note: Figures do not always add up to totals due to rounding. 1/ Estimate. 2/ Residual. Source: Bank of Spain. Table 9 Issues of Investment Bonds Amount (million pesetas) Interest Maturity Destination 1959 -- -- -- 1960 April 1,000 4% 30 months Type A Banks 1961 1,March 3,00 4.5% 10 years Type B General 1962 August 225 4% 10 years Type C j/ Septeniber 49 4% 10 years Type C 1/ October 200 4% 10 years Type C 1963 December 5,000 4.5% 15 years Type D General 1964 June 5,000 4.5% 15 years Type D General November 6,700 4% 30 months Type A Banks December 3,3C0 4% 30 months Type A Banks 1965 February 10,000 4.5% 15 years Type D General October 6,CCO 4.5% 10 years Type A Banks December 11,5o6 4.5% 20 years Type A Banks 1/ Available for subscription by previous shareholders of official credit Source: Bank of Spain. institutions. Table 10 Official Credit Institutions (billion pesetas) New Credits Approved Credits Actually Used 1961 1962 1963 1964 1965 1961 1962 1963 1964 1965 Agricultural Credit Bank 1.0 1.1 5.3 3.8 7.5 1.0 1.1 3.3 3.0 6.2 Construction Credit Bank 4.0 3.1 5.9 9.0 9.9 3.2 3.2 3.7 6.4 9.7 Housing (1.6) (1.9) (1.9) (4.1) (3.7) Urban Services (0.3) (---) (1.7) (2.2) (0.8) Shipbuilding (2.0) (1.5) (2.8) (2.0) (2.9) Other (0.1) (-0.3) (-0.5) (0.7) (2.5) Mortgage Bank 1.6 1.4 1.9 1.9 1.9 1.5 1.6 1.7 1.9 1.8 Industrial Credit Bank 1.0 0.4 1.9 6.8 10.6 1.0 0.4 1.9 3.9 7.9 of which: "Priority sectors" 1/ (0.7) (5.9) Export finance (0.7) (2.7) Local Credit Bank 1.0 1.3 0.6 3.2 2.6 0.8 0.4 0.7 2.7 1.4 Fisheries Credit 0.1 --- 0.1 0.1 0.2 0.1 --- 0.1 0.1 0.2 Total 8.6 7.3 15.6 25.0 32.8 7.6 6.7 11.5 17.9 27.3 Note: Some figures do not total due to rounding. 1/ Priority sectors, regional industrialization centers (tpolosIt) and "accion concertada". Sources: Instituto de Credito a Medio y Largo Plazo, Memorial del Credito Oficial, 1963, 1964 and 1965; Governm.lnt Commsdsion for Economic-Affairs, Mlemoria sobre la Ejecucion del Plan de Desarrollo EcoICo±ruQ y Social 1965; Ministry of Finance, Econo CihaE!ra ThThZa, No. 9. Table 11 Statutory Banking Coefficients Connercial Industrial Saving Kind of' Ratio Numerator Denominator Banks Banks Banks Cash ratio Cash on hand Total deposits Min. 5% + balance cn current account at B.O.S. + bonds issued + any credit available at B.O.S. Liquidity ratio Cash cn hand Total deposits Min. 13% Mlin. 10% + balance on current account at B.OS. + bonds issued • any credit available at B.O.S. • public securities (unpledged) + bills automatically rediscountable on basis of special line of credit with D.O.S. Capital backing Capital Total deposits Min. 15% ratio + reserves + bonds issued Investment ratio Investments in industrial securities Capital +.reserves Max. 100% Max. 300% Public bonds ratio Invcotznltls in public bonds Total deposits IMin.15% 1/ Min. O5 Social credit Credits for social purposes like Total deposits ilin. 20% ratio agriculture, housing, fishing B.O.S. Bank of Spain. I/ Au of Novemb;ar 1966, 16%. Source: H1r2k c0 Spain. Table 12 Rates of Interest I. Bank of Spain Discount 560% Rediscount by banks 4.0% Credits guaranteed by: Treasury bonds at 3% 5.0% Amortizable debt at 3 and 3.5% and perpetual debt 5.5% Other public Securities 6.0% Official credit To Treasury nil To SNT (National Wheat Service) 2.0% To INI (National Institute of Industry) 4,0% II. Interest on Deposits (i4aximun) Sight deposits 0 5% Saving deposits (1 month) 2.0% Time deposits: 3 months 2.0% 6 months 2.5% 1 year 3.0% 2 years 4.0% (Industrial banks only) III. Interest on Commercial Bank Loans W,ith personal guarantee (advances) 5.5 _7-. Conomercial discounts 5.4as With collateral of: goods 5.9% industrial securities 5.4% public securities 4.5 - 5.25%b Various 4.5 - 5.5% IV. Interest on Industrial Bank Loans 2.5% above the cost of funds; at present 7.5% V. Interest on Saving Bank Loans For agriculture 5,o% For processing industry investments 5.o% For other industry investments 5,25% For real estate 5.5% Table 12 (continued) VI. Interest on Loans by Official Credit Institutions Agricultural Credit Bank 2.75 - 3.75% Construction Credit Bank 4.0 - 6,5% Industrial Credit Bank 5,0 - 7425% Local Credit Bank 4.75 - 5.5% Mortgage Bank 5.25 - 7.0% Fisheries Credit 4.0 - 5.0% Notes: 1. This list intends to give an impression of representative levels and diversity of interest rates. In fact, many more rates exist. 2. In September 1966, the rates charged by official credit institutions below 4.5% were raised to that level and the way was opened for some increase in interest rates on de- posits with savings banks. Source: Bank of Spain.