Spain must reform its pension system, including an increase in the legal retirement age and restrictions to subsidised early withdrawal from the labour market, an OECD report has said.

The OECD’s latest Economic Survey of Spain found that the country should also consider switching the tax burden from labour to consumption and property taxes.

According to the report, while GDP losses from the recession were similar to those seen in other major economies, government finances and employment were much harder hit than elsewhere.

Spain’s government deficit is projected at 9.2% this year, 6.3% in 2011 and 4.4% in 2012, according to forecasts from the November OECD Economic Outlook.

Unemployment, which is expected to hover near 20% this year, will drop slightly in 2011, to 19.1%, and then again to an expected 17.4% in 2012, according to the report.

The OECD also predicted economic growth to bounce back from this year’s projected 0.2% contraction, with GDP forecast to jump by 0.9% in 2011 and 1.8% in 2012.

It recognised that Spain has launched substantial fiscal consolidation plans and significant steps to address long-standing shortcomings in the labour market. The OECD calls for broadening and deepening of these measures, as well as further efforts to remove barriers to competition in products markets.

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