Government Reform Programme Second Half of 2012

1. Government Reform Programme Second Half of 2012 Council of Ministers of 13 July 2012

2. Overall Objectives, Specific Measures • Objectives: To tackle the difficult economic situation in Spain. To continue and intensify the process of deficit correction and structural reforms, tackling the imbalances that exist in Spain following the EU Recommendations. • Reform of Public Administrations • Strengthening Fiscal Consolidation • Structural reforms aimed at competitiveness PROGRAMME OF REFORMS SECOND HALF OF 2012

3. I. Public Administration Reform Fostering efficiency in Public Administration and contributing to budgetary adjustment.

4. Reform of the Public Administration Services • Objectives: • Promote austerity and efficiency • Guarantee sustainability and quality of public services • Avoid duplication and overlaps: “One administration, one power” • Ensure the engagement of all Public Administrations in the achievement of the deficit targets • Measures: • The Local Government Streamlining and Sustainability Act. • Measures to guarantee financial stability of regional governments. • Reforms in the field of public employees and officials.

5. Local Government Reform • Objectives: To strengthen local autonomy, guarantee adequate provision of services, and ensure financing and budgetary stability. • Measures: Local Government Streamlining and Sustainability Act. • Definition and limitation of powers, eliminating improper powers. • Underpin role of Provincial Councils in provision of common services • Guarantee budgetary stability of local authorities, improve transparency and efficiency in their management and independence of public auditors. • Reduction in number of state-owned companies at a local level • Limits on salaries received by mayors and a 30% reduction in the number of local councillors to a maximum of 35 in the largest municipalities.

6. Measures to Guarantee the FinancialStability of Regional Governments • Objective: Ensure liquidity and solvency of Regional Governments and strict compliance with the Budgetary Stability Act. • Measures: • Creation of a regional government liquidity mechanism: max. € 18 billion • Voluntary regional government participation. • Funding of authorised deficit, debt maturities and loans that cannot be refinanced. • Debt issued by Treasury but allocated to regional governments. • Strict conditions to access the mechanism: Compliance with deficit targets, adjustment plans, monthly report on budgetary performance, greater control by the Comptroller General’s Office, prior approval for the issue of debt…

7. Reform regarding public employees and officials. • Objective: To adapt civil service employees’ and public officials’ regime to economic reality, contributing to budgetary stability and competitiveness. • Measures: • Efficient and optimum allocation of human resources. • Adjustment in the number of full-time trade union representatives. • Reduction in the number of personal days off. • Equal temporary incapacity conditions to those of the rest of workers. • High officials: Incompatibility of Ministers’ and State Secretaries’ severance pay with other jobs. • Exceptional Measure: Elimination of the December extra salary, or equivalent reduction, for civil servants, high officials and MPs. Only civil servants will recover this amount after 2015 through contributions to their pension funds.

8. II. Fiscal Consolidation Deficit control as the basis for economic growth and a fundament of Spain’s commitment to Europe

9. Less Deficit: more confidence in Spain,more commitment to Europe 2011 2012 2013 2014 • Objective: Free Spain from the deficit and public debt burden, guarantee fiscal consolidation and comply with obligations arising from the Excessive Deficit Procedure • Measures: • Adjustment and streamlining of public spending • Reform of the tax structure Impact 2012-2014: € 65 billion

10. Spending Cuts by the Ministries • Objective: Reduce public spending in the budgetary headings of the ministerial departments in areas not associated with growth. • Measures: • Budget cuts in the field of subsidies, current goods and services, and transfers in the General State Budget 2012. • Saving: € 600 million • A further 20% cut in subsidies paid to political parties, trade unions and business organisations in the General State Budget 2013

11. Streamlining of Active and PassiveEmployment Policies • Objective: Guarantee the sustainability of the unemployment benefit system and correct shortcomings in the system. • Measures: • Withdrawal of the least efficient recruitment tax credits: those linked to entrepreneurs and the insertion into the labour market of groups with particular difficulties are maintained. • Unemployment benefit adjustment: • The amount received from the 7th month onwards is reduced from 60% to 50% of the calculation base. Neither current recipients nor minimum limits are affected. • Standardisation of the Social Security contribution regime regarding salaries and unemployment benefits. • Establishment of requirements to receive the Active Reinsertion Benefit, such as having worked in the past.

12. Sustainability Guarantee for theLong-Term Care System • Objective: Consolidate and guarantee the future of the long-term care system by resolving its finance and management problems and ensuring the treatment of long-term care recipients under quality and fair conditions • Measures: • Simplification of the scale and adaptation of the services and benefits to the long-term care needs. • Revision of the economic benefit for care within the family environment: adjustment of maximum amounts, revision of contribution to the Social Security system and establishment of criteria for the caretaker. • Adaptation of the contribution to the cost of the service depending on the user’s economic capacity, with common criteria throughout Spain. • Suspension of the level agreed with the regional governments and changes in the implementation schedule in order to guarantee care for those people with greater long-term care needs

13. Sustainability Guarantee for the Social Security System • Objective: Guarantee the sustainability of the public pension system and bringing the effective and the legal retirement age closer. • Measures: • Proposal on the sustainability of the public pension system to be assessed under the “Pacto de Toledo” social dialogue: • Regulation of the Sustainability Factor to maintain proportionality between contributions and benefits. • Tackle measures regarding partial and early retirement. • Efficiency improvements: • Assimilate for Social Security contribution purposes the treatment of incomes from employment to the income tax treatment. • Standardise 20% penalty rates for late payments of Social Security contributions.

14. Restructuring of the Spanish Tax System • Objective: Adjust the structure of the Spanish tax system to the European system, increasing stability, equality and efficiency. • Measures: • Larger proportion from indirect taxes • VAT: New rates (standard rate up from 18% to 21%, reduced rate up from 8% to 10% while the super-reduced rate is maintained at 4%) and reclassification of products. • Increased Tobacco Tax • Lower proportion from employment taxes, reducing Social Security contributions by 1% in 2013 and a further 1% in 2014 • Adjustment of the Corporate Income Tax, particularly the quarterly payment system. • Modernisation of the Personal Income Tax structure, eliminating the primary residence deduction in 2013.

15. III. Structural Reforms Measures aimed at enhancing competitiveness, boosting growth and creating jobs

16. Retail TradeLiberalisation and Increased Flexibility • Objective:Increased freedom and efficiency in retail trade distribution and new instruments for effective competition. • Measures: • Liberalisation of trading hours: the minimum number of trading hours per week is increased from 72 to 90 and the minimum number of public holidays from 8 to 10. • Liberalisation of promotional sales activities: introducing flexibility in the current regime, eliminating restrictions and incompatibilities.

17. Coastal Area Protection ActLegal Certainty • Objective: Guarantee legal certainty, the protection of coastal areas and the sustainable use of the coastline, and solve the problems generated by previous legislation • Measures: • Reaction mechanisms, suspending the concession of licences to projects that breach the Coastal Area Protection Act. • Creation of a legal security framework for the economic activities carried out in coastal areas. • Strengthened control by the State of coastal areas, with measures aimed at guaranteeing the end of urban development abuses in coastal areas • Strengthened environmental conservation in coastal areas, only permitting projects that increase the energy efficiency of already existing buildings and without relaxing construction limits.

18. Legislative Programme of ReformsSecond Half of 2012 (I) • Objective:Progress on structural reforms aimed at transforming the Spanish institutional and economic architecture, as a necessary condition for restoring confidence and returning to growth • Laws that will be submitted to Parliament: • Reform of the Public Administration: • Streamlining and Sustainability of Local Administration • Transparency, Access to Public Information and Good Governance • Foreign Service Act. • Fight against Fraud: • Tax Fraud • Social Security Fraud • Reform of Criminal Code • Employment and Social Security Reforms: • Mutual Insurance Companies Act. • Regulation of the Sustainability Factor

19. Legislative Programme of ReformsSecond Half of 2012 (II) • Market Unity and Legal Certainty: • Constitutional Law on the General Council of the Judiciary • Market Unity Act • Reform of Supervisory Bodies: Creation of the National Markets and Competition Commission • Act on the protection and sustainable use of coastal areas and amendments to the Coastal Act. • Act on measures to improve the way the food chain operates • Liberalisation, flexibility and competency measures: • Trading hours and Promotional Sales Activity • Professional Services • Land Transport Sector • Railway and Airport Transport Services • Property Rentals • Energy Reform: Solution for the Tariff Deficit • Reform for the Quality of Education and Professional Training