# EUR-Lex - 52013SC0359 - EN

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# 52013SC0359

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for SPAIN Accompanying the document Recommendation for a Council Recommendation on Spain's 2013 national reform programme and delivering a Council Opinion on Spain's 2013 stability programme for 2012-2016 /* SWD/2013/0359 final */**

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Contents

Executive summary. 3

1........... Introduction. 5

2........... Economic developments
and challenges. 8

2.1........ Recent economic
developments and outlook. 8

2.2........ Challenges. 9

3........... Assessment of the
policy agenda. 13

3.1........ Fiscal policy and
taxation. 13

3.2........ Financial sector 21

3.3........ Labour market, education
and social policies. 23

3.4........ Structural measures
promoting growth and competitiveness. 28

3.5........ Modernisation of public
administration. 35

4........... Overview table. 37

5........... Annex. 42

Executive
summary

Economic Outlook

The economic situation in Spain remains challenging, even though external financing pressures have eased since summer
2012. The economy is forecast to remain in
recession in 2013 (with real GDP falling by 1.5%) as the negative drag from
domestic demand continues to prevail over the positive contribution of net
exports. The unemployment rate is set to stabilise around an already very high
level of 27.2% at the beginning of 2013. Robust exports and falling imports
have driven a major improvement in the current account balance, from a deficit
of -10% of GDP in 2007 to a projected surplus of 1.6% of GDP in 2013.

The recession and the shift to a less
tax-rich growth pattern have complicated the reduction in the high government
deficit, while public debt has been rising fast. The
headline government deficit (net of capital transfers to banks) narrowed from
9% of GDP in 2011  to 7.0% in 2012 (higher than originally targeted) and the
Commission projects a deficit of 6.5% of GDP in 2013. Spain's planned adjustment path to reduce the deficit to below the 3% reference value by
2016 appears realistic, striking a balance between the need for ambitious
fiscal consolidation and the difficult economic situation. Government debt has
increased sharply from a low of about 36% of GDP in 2007 to 84% of GDP in 2012
and is forecast to approach 97% of GDP in 2014.

Key Issues

Overall, Spain continues to go through a
deep structural adjustment following the build-up of large external and
internal imbalances during the housing and credit boom. Adjustment needs remain large, while structural rigidities and
financing constraints have been hindering a faster adaptation of the real
economy and have aggravated the employment situation. The 2013 in-depth review[1] (IDR) pointed to the
persistence of substantial fragilities and risks as levels of domestic and
external debt remain high, and as corroborated by the funding stress in 2012.
In the Communication accompanying the IDRs, the Commission concluded that
excessive imbalances exist in Spain.

In response to the 2012 country specific
recommendations (CSRs), the government announced a comprehensive reform plan
covering fiscal, labour market, education and product market reforms, as well
as measures to improve the business environment.
However, progress in implementation has been uneven as key reforms, such as the
establishment of an independent fiscal council, a law on market unity and
further liberalisation of professional services, have been delayed. The 2013
national reform programme reinforces and provides further detail on content and
timetable of the reform agenda. Novel initiatives are foreseen to reduce the
negative economic impact of indexation and to strengthen corporate governance.
While the proposed reform agenda is comprehensive and goes in the right
direction, Spain should adopt and swiftly and effectively implement determined
reforms so that they can start deploying the expected positive effects on
growth and employment and support the correction of imbalances.

The main challenge for Spain is to boost economic growth and employment and correct the excessive macroeconomic
imbalances. Continued fiscal consolidation and
stronger fiscal institutions are needed to ensure sustainable public finances.
Completing financial sector repair and restructuring is paramount to support
the real economy. Competitiveness and export capacity need to be further
improved, while competition in domestic goods and services sectors is still insufficient.
Most crucially, the labour market situation remains critical. Early school
leaving and a vocational training system which is insufficiently tailored to
market needs remain a problem. Poverty and social exclusion are on the rise.

· 
Public finances:
The fiscal impact of the crisis and projected population ageing compound each
other and make fiscal sustainability a significant challenge. The 2012 deficit
target of 6.3% of GDP was missed in spite of large consolidation efforts, and
while the Spanish authorities' plans are broadly on track to correct the
excessive deficit by 2016, some measures are not sufficiently specified. The
2011 pension reform has not yielded sufficient savings. Reforms in public
administration and public procurement could generate further savings, in
particular given the decentralised system government (with the Autonomous
Communities accounting for about a third of total government expenditure). The
independent fiscal council is to be set up during 2013.

· 
Financial sector: The financial sector adjustment programme is on track, though credit
conditions for borrowers – especially SMEs – remain tight. Households and
corporations remain exposed to very high debt levels (total private debt
reached 211% of GDP as of 2012 Q4) and non-performing loans keep rising (10.5%
of total loans in March 2013 excluding   assets transferred to Sareb).
Meanwhile, despite the fall in house prices in 2012, there is still large stock
of unsold houses coupled with low demand, which means prices may not stabilise
before 2014.

· 
Labour market: The
strength of exports and improvements in competitiveness are not yet supporting
job creation. Unemployment is amongst the highest in the EU, while long-term
unemployment (44.5% of total unemployment) and youth unemployment (55.7%) are
on the rise. Despite the first notable effects of the 2012 labour market
reform, there are still very high levels of temporary employment. The
implementation of further reforms to help the unemployed back to work has
lagged behind. Social problems are growing, with 27% of the population at risk
of poverty or social exclusion. Early school leaving (24.9%) and insufficient
use of vocational training remain a problem, as 35.2% of unemployed people lack
formal qualifications.

· 
Product and service markets: It is taking longer than envisaged to address weaknesses in the
business environment, such as barriers to doing business, and increase
decisively competition in product and services markets, which, are holding back
growth and job creation and keeping prices higher for consumer. Reforms are
also needed in the electricity and transport sectors, while more needs to be
done to strengthen research and innovation activities and encourage spill-overs
to business.

1.           Introduction

In May 2012, the Commission proposed a set of
country-specific recommendations (CSRs)[2]
for economic and structural reforms in Spain. On the basis of these
recommendations, the Council of the European Union adopted eight CSRs[3] in the form of a Council
Recommendation. These CSRs concerned public finances, pension reform,
restructuring of the financial sector, tax policies, labour market, access to
finance for small and medium-sized enterprises (SMEs), research and innovation,
education and training, social inclusion and the functioning of product and
services markets. This staff working document assesses the state of
implementation of the 2012 country-specific recommendations, identifies current
policy challenges and, in this light, examines the policy plans adopted.

The SWD also assesses policy measures against
the background of the Commissionʼs Annual Growth Survey for 2013 (2013
AGS)[4] and the second annual Alert
Mechanism Report (2012 AMR), which were published in November 2012, as well as
the in-depth review (IDR) published in April 2013. The 2013 AGS sets out the
Commissionʼs proposals for building the necessary common understanding
about the priorities for action at national and EU level in 2013. It identifies
five priorities to guide Member States to renewed growth: pursuing
differentiated , growth-friendly fiscal consolidation; restoring normal lending
to the economy; promoting growth and competitiveness for today and tomorrow;
tackling unemployment and the social consequences of the crisis; and
modernising public administration. The 2012 AMR served as an initial screening
device to determine whether macroeconomic imbalances exist or risk emerging in
Member States, and found positive signs that macro-economic imbalances in Europe are being corrected. To ensure that a complete and durable rebalancing is achieved, Spain and 12 other Member States were selected for a review of developments in the accumulation and
unwinding of imbalances. The 2013 IDR and its accompanying communication 
pointed to the persistence of risks and negative
economic trends linked to macroeconomic imbalances. In
the communication, the Commission concluded that it would consider at the end
of May whether further steps are needed under the Excessive Imbalances
Procedure on the basis of the assessment of the National Reform Programme and
the stability programme.

Against this background, Spain transmitted its National
Reform Programme (NRP) and Stability Programme (SP) on 30 April 2013. The
programmes provide details of progress made since June 2012 and plans going
forward, addressing  most of the challenges identified in last yearʼs
Staff Working Document, and broad consistency between the two documents has
been ensured. The national reform programme confirms Spainʼs commitment to
addressing shortcomings in the areas identified by last yearʼs
country-specific recommendations, the 2013 AGS and the 2013 IDR.

The programmes submitted went through a consultation
process involving local and regional authorities in the areas of their
competence and the most important stakeholders.

Overall assessment

Spain has made some progress to
address the 2012 Council Recommendation. Swift and full implementation of the
reforms that have suffered delays and of the other measures in the NRP and SP
will be critical to support the correction of macroeconomic imbalances.

The national reform programme confirms
Spainʼs current strategies and provides details of new plans in the areas
of, among others, entrepreneurship and competition in product and service
markets, active labour market policies, education and cooperation between different
layers of public administration. The proposal for a law on de-indexation and the measures on
corporate governance are new elements in the NRP. Overall, the policy plans submitted by Spain are relevant to address
the policy challenges facing the country, but need to
be implemented without further delay, and, in some cases, need to be
complemented by further action. Moreover, effective implementation and regular
monitoring of the impact of the reforms against their objectives is important
to identify slippages and take corrective action in a timely manner. In
particular, Spainʼs dismal unemployment performance calls for openness to
review thoroughly and, possibly, strengthen past reforms in the light of the
forthcoming assessment of their effects.

Concerning public finances, the fiscal
position was further improved in 2012 thanks to a strengthened institutional
framework and better budgetary execution control. Nevertheless, the 2012
general government deficit target of 6.3 % of GDP was missed (outcome: 7 % of
GDP, net of bank recapitalisation measures) as a result mainly of major revenue
shortfalls and in spite of large consolidation efforts. The implementation of
the new Budgetary Stability Law implied major progress in 2012 in terms of
timely and more transparent reporting on budgetary outcomes at sub-central
government level, although there is scope to strengthen further the monitoring
instruments envisaged. Plans for setting up an independent fiscal council have
been delayed, but a first draft law was approved by the government in April
2013. The 2013 stability programme confirms the authorities' commitment to
advancing with fiscal consolidation over the medium-term. The programme
envisages an adjustment path which is broadly consistent with correcting the
excessive deficit by 2016. However, the budgetary adjustment path is not
sufficiently supported by measures, particularly towards the end of the
programme period.

The deficit in the social security system
is widening against the background of falling employment and rising
unemployment. The projected reduction in age-related public expenditure through
the 2011 pension reform is not sufficient. Activating the pension
sustainability factor only in 2027 would place the major burden of this reform
on future generations. Additional measures were adopted in March 2013 which
curbed access to early retirement schemes and to partial pensions and which
will contribute to enhancing sustainability in the medium and long term. Plans
to legislate the sustainability factor are being advanced and a decision is to
be taken by the end of 2013.

A number of tax measures were adopted
during 2012 to support fiscal consolidation. In line with the CSRs of 2012,
there was some rebalancing of the relative tax burden towards consumption and
environmental taxes, and a reduction in the tax-induced bias towards
indebtedness and home ownership. Limited fiscal space impeded the originally
planned reduction in employersʼ social security contributions, which was
intended to deepen the tax shift. The 2013 NRP does not provide for additional
major changes to the tax system, apart from some tax expenditure measures.

The financial sector adjustment programme
is on track. In particular, the necessary recapitalisation has been carried
out, and the asset management company Sareb has been set up. The restructuring
of banks, in accordance with decisions under state aid rules, will require
continued attention in the coming years. Still, credit conditions for
bank-dependent borrowers remain tight, notably for SMEs. State-guaranteed
credit lines have been strengthened and some initiatives to widen the financing
options for firms have also been launched. In parallel, Spain has implemented a major plan to pay the public administrationʼs commercial debts
(EUR 27.3 billion),  which has been extended to 2013 (EUR 2.6 billion).

Available data suggest that the 2012 labour
market reform has started to lead to greater internal flexibility, to some
reduction in dismissal costs and to increasing wage moderation. However.
progress appears more mixed as regards duality and the use of opt-out clauses.
An official assessment of the reform against its stated objectives, with a view
to stepping up its implementation where needed, was announced for July 2013 in
the NRP. The national Youth Employment and Entrepreneurship Strategy 2013-2016,
presented in March 2013, incorporates a range of short- and longer-term
measures intended to improve employment opportunities for young people.
Recently adopted measures should foster closer cooperation between national and
regional public employment services (with the creation of a Single Job Portal)
and between public employment services and private placement agencies, but
remain to be made fully operational.  The implementation of reform measures in
the field of active labour market policies (ALMPs) has lagged behind and
actions to modernise and reinforce the public employment service itself are
still needed.

A high proportion of unemployed people
without formal qualifications (35.2% in Q4-2012) and the insufficient relevance
of education and training to the labour market contribute to the high youth
unemployment rate. Early school leaving, although decreasing, continues to
represent a major challenge, and vocational training remains insufficiently
used. The NRP highlights the importance of a swift implementation of the reform
of the educational system and improvements in the quality of education and
training. Moreover, dual vocational training has been introduced and pilot
projects have started in 2012, but other measures to be included in the draft
organic law on quality of education have not advanced. Poverty and social
exclusion keep increasing, mainly as a result of the labour market situation,
high household debt levels and the limited effectiveness of the social
protection system to respond to growing needs.

In the area of competition in product and
service markets, progress is taking longer than envisaged in the September 2012
reform plan, in spite of the fact that weaknesses in the business environment
(e.g. the segmentation of Spainʼs domestic market and entry barriers in
services) also hold back job creation. The first draft law (anteproyecto de ley)
on market unity was adopted by the government in January 2013 and its final
approval by Parliament is foreseen by end-2013. The approval of the draft law
on professional services is scheduled for the end of the first half of 2013
only. The law to support entrepreneurs and their internationalisation is
expected to be approved by Parliament before the end of 2013. The electricity
tariff deficit, which represents a potentially sizeable contingent liability
for the budget and non-negligible macroeconomic risks, has not yet been tackled
conclusively. The 2013 NRP announces a draft law further reforming the
electricity sector by the end of June 2013. The 2013 NRP does not set out a
comprehensive response to the existing challenges in the transport sector.

The functioning of the public
administration could be streamlined. While progress has been made on
coordination between the various public administrations, with the presentation
by the government of draft legislation on market unity and on local
administration reform, efforts in the field of public procurement policy could
be stepped up, inter alia to contribute to fiscal savings. Reforms to improve
the efficiency of the judicial system are also ongoing.

2.           Economic
developments and challenges

2.1.    Recent economic developments and
outlook

Recent economic developments

The rebalancing of the Spanish economy
is causing a deep contraction of domestic demand, which is only partially
offset by external demand. Weak domestic demand
resulted in a recession in 2012, with real GDP falling by 1.4% after some
positive growth in 2011 (0.4%). The most important reasons for the weakness of
domestic demand were the continuing adjustment in the construction sector,
deleveraging by households and non-financial corporations, tight financing
conditions, fiscal consolidation, and the high level of unemployment.

The recession was accompanied by further
massive employment destruction. So far, since 2007,
around 3.6 million jobs have been lost. Employment contraction further gathered
pace in 2012, as employment fell by 4.6%. [5]
The job losses are the consequence partly of the depressed cyclical position,
but also of structural adjustment, notably the sustained downsizing of the
construction sector, skill mismatches and the sluggish adjustment of wages. In
2012, wage moderation markedly intensified, partly fostered by the 2012 labour
market reform and public sector wage cuts. The unemployment rate surged in 2012
and early 2013, reaching 27.2% in the first quarter of 2013, more than 6.2
million people, while the active population has been falling (by 1% in 2013
(Q1), year-on-year growth rate).

Although export growth decelerated, Spain continued to gain export market share in 2012. New
products and markets helped to sustain export performance. The loss of momentum
of exports was more than offset by a deep contraction of imports, as a
consequence of weak domestic demand. The result was a significant improvement
in the current account, leading to a small current account deficit of 0.8% of
GDP for 2012, despite the considerable drags from the energy trade balance and
income payments.

The 2013 Commission spring forecast
expects a further 1.5 % fall in real GDP in 2013.   The
drivers of the contraction in 2012 are expected to persist in 2013, although
with a diminishing intensity, and GDP is expected to bottom up towards the end of
the year.   While domestic demand will continue to be a drag on growth, exports
are projected to grow faster, in line with higher growth of export markets and
further market share gains. An additional fall in unit labour costs, due to
significant growth of labour productivity and moderated wage growth, will
support the recovery in cost competitiveness. As a result, the external
rebalancing of the economy is expected to advance in 2013.

Additional employment destruction is
expected in 2013, although to a lesser extent than in 2012. The labour market reform allowed firms to use alternative adjustment
mechanisms to job destruction, and wages have become more sensitive to the
cyclical position. These
effects will not, however, be sufficient to stem a further increase in the
unemployment rate this year given that activity levels are falling.

The macroeconomic scenario underlying
the NRP and the SP is similar to the Commission servicesʼ spring forecast.
For 2013, the positive contribution of net external
demand (2.4%) and the negative contribution of domestic demand (-3.7%) are
comparable to the outlook in the Commissionʼs 2013 spring forecast. The
stability programme forecasts economic growth of 0.5% in 2014, 0.9% in 2015 and
1.3% in 2016. The path of general government deficits after 2013 is more
favourable in the Spanish outlook, which, contrary to the Commissionʼs
spring forecast, includes the governmentʼs fiscal consolidation plans.

Despite the difficulties of pinpointing and
quantifying the shocks represented by the reforms, the NRP includes estimates
of their macroeconomic impact. According to these estimates, the reforms will
have a significant impact on growth and employment in the short- term, ane even
more so in the long- term. Among the estimates provided, the impact of the
labour market reform and of unifying the domestic market are of special
importance, with a significant effect on GDP in the long run, estimated at 4.5
% and 1.5 %, respectively.

2.2.    Challenges

The economic
situation in Spain remains challenging even though external financing pressures have
eased since summer 2012. The economy is still going
through a deep structural adjustment following the build-up of large external
and internal imbalances during the housing and credit boom. House prices are
still falling and the construction sector is shrinking. Households and
companies are rebuilding their balance sheets. The financial sector is
undergoing thorough restructuring. Faltering domestic demand is pushing firms
to boost productivity and expand their exports. Part of the past loss of cost
competitiveness has been reversed, although this is partly through the impact
of massive labour shedding on apparent labour
productivity. Robust exports and falling imports have driven a major improvement
in the current account balance, from a deficit of -10% of GDP in 2007 to -0.8%
of GDP in 2012 (and a projected surplus in 2013).
However, part of this adjustment seems to be cyclical in nature. In order to
ensure a steady decline in the still very large net external liabilities, and
taking into account the drags from the energy trade and income deficits,
further advances in competitiveness would be necessary. Structural rigidities
and financing constraints have been hindering a faster adaptation of the real
economy to post-bubble conditions. Acute funding stress during 2012 showed that
an adjustment process of this size brings with it significant risks for growth
and financial stability. Negative feedback loops between a protracted economic
recession, ongoing deleveraging and volatile market financing conditions remain
a tangible threat that requires a comprehensive policy response.

Households and
corporations remain exposed to very high debt levels and non-performing loans
keep rising, despite efforts to deleverage. The
correction in the housing market is still ongoing. Despite the acceleration of the fall in house prices witnessed in 2012, the still large stock of
unsold houses together with subdued demand conditions (via lower
disposable income, tighter financing conditions and high uncertainty) imply
that a stabilisation of house prices may not occur before 2014, notwithstanding
considerable variation in housing market conditions across regions.

In spite of improvements in wholesale
financial markets, financing conditions for bank-dependent borrowers remain
tight in the aftermath of the crisis. Sovereign
spreads have fallen and corporate issuance on international financial markets
has resumed. The financial sector adjustment programme for Spain[6] has reinforced the stability of the banking sector and hence is
setting the foundations for banks to provide adequate financing to the
households and companies. While the observed fall in lending is consistent with
the need for deleveraging, indicators of the availability and cost of financing
point to tight financing conditions for some categories of borrowers, notably
SMEs. The impact of credit constraints on SMEs is intensified by the scarcity
of alternative sources of financing, such as venture capital, business angels,
equity markets and other equity funding.  Facilitating access to finance
throughout the firmʼs life-cycle would help job creation and support the
growth and internationalisation of businesses.

The fiscal impact of the crisis and of
projected demographic developments compound each other and make fiscal
sustainability a significant challenge. The high
structural primary deficit and substantial increases in gross public debt
observed in the wake of the crisis are symptoms of fiscal stress. In the medium
and long term, Spain faces population ageing, which will  impact public
finances due to higher spending on pensions, healthcare and long-term care. The
reforms already introduced will moderate the increase in age-related
expenditure. Gradual improvements in the structural primary balance and further
reforms containing age-related expenditure growth are necessary to maintain the
sustainability of public finances in the long term and to ensure the adequacy
of pensions.

The taxation system can contribute to
the rebalancing of the economy. Even after the tax
measures taken to support fiscal consolidation, Spain has a relatively low
tax-to-GDP ratio. The ratio has been falling since the start of the crisis,
partly as a consequence of the shift in the composition of activity towards
exports. The tax system can continue to support both fiscal consolidation and
economic adjustment by keeping the course of shifting taxation away from
productive factors towards consumption and environmental taxes, scaling down tax
expenditures and other possible distortive measures, closing loopholes that and
fighting fraud, so as to provide a level-playing-field for companies.

Regaining competitiveness and boosting
employment remain key challenges. The strength of
exports and the improvement of relative cost competitiveness indicators are
positive developments but not yet sufficient to support the growth of activity
and employment. Improvements in structural competitiveness through more
efficient resource allocation and firm-level knowledge-based productivity
growth are needed to consolidate these gains. Swift completion and
implementation of the structural reform agenda will help regain
competitiveness, in particular through a more efficient public administration,
stronger competition in domestic services and product markets, further measures
in the labour market, improvement in the business environment (also by
significantly reducing and shortening licencing procedures, including for
industrial activities), support to research and innovation, the development of
market-relevant human capital and skills, and adequate access to finance.

The labour market situation remains
critical. Skills mismatches, lack of skills and
qualifications, the fall in domestic demand and insufficient job creation,
among other factors, have contributed to the rise in unemployment up to 27.2%
at the beginning of 2013 (the youth unemployment rate was 55.7 %; long-term unemployment has more than doubled since 2008 and
accounts for 44.5 %). The fall in employment has especially affected
labour-intensive sectors (such as construction and the public sector), thus
supporting apparent labour productivity growth and the
further fall in unit labour costs (-3.4% in 2012). In spite of a considerable increase in female labour market participation during
the last decade, women still show very low employment rates. The active
population has started to shrink and, despite the changes brought by the 2012 labour market reform, the labour market remains segmented, with
still very high levels of temporary employment. Wages, partly following the
reform, have started to respond to the slack in the labour market. Unemployment creates social hardship and constrains the capacity of
households to meet debt repayment obligations. A prolonged period of high
unemployment could dampen potential output growth via hysteresis effects.

Spain has
moved further away from its target of reducing the number of people at risk of
poverty and/or social exclusion. On the contrary,
the latter rose by 0.7 million in 2011 alone, on top of the 1.1 million
increase in 2010. Meanwhile, the social protection system has been intensely
challenged by the recession.

There is a need to reinforce the
contribution of the education and training system at all levels to human
capital formation. Major challenges in the education system are the transition from
education and training to the labour market, a persistently high rate of early
leavers from education and training (24.9 %[7] in
2012) and insufficient tailoring of skills and capabilities to market needs.
Some 29 % of 25-29 year-olds in Spain are not in employment, education or
training, and vocational training remains insufficiently used.

Lasting rebalancing of the economy
requires well-functioning and competitive product and service markets. The considerable inertia of consumer prices, despite major falls in
unit labour costs, may partly reflect ongoing corporate balance sheet repair
but may also indicate a lack of competition in certain product and service markets.
Barriers to competition prevent more productive firms from growing and gaining
market shares and hold back innovation. Weaknesses in the business environment
(e.g. segmentation of Spainʼs domestic market, entry barriers in
servicesʼ industries, a lack of efficiency in the judicial system) also
reduce market contestability and hold back job creation. As regards the energy
sector, the potentially sizeable contingent liability for the budget implied by
the electricity tariff deficit remains a non-negligible macroeconomic risk. The
extensive network of transport infrastructure entails high maintenance and
renewal costs, and low traffic flows often do not cover operating costs of
infrastructure.

These
interrelated and complex challenges require a comprehensive and ambitious
policy response. This response should centre on
pressing competitiveness- and growth-enhancing reforms of product and labour
markets and of the public administration.

Box 1. — Summary of the 2013 in-depth review (IDR) under the Macroeconomic Imbalance Procedure (MIP) The 2013 IDR takes a broad view of the Spanish economy in line with the scope of the surveillance under the Macroeconomic Imbalance Procedure (MIP). The main observations and findings from of the analysis are that the risks and negative economic trends associated linked to macroeconomic imbalances, as identified in the 2012 IDR, are still powerful and have partly materialised: · Negative feedback loops between a protracted economic recession, ongoing deleveraging and volatile market financing conditions remain a tangible threat. · The unemployment rate is at a record high and projected to rise further. The share proportion of long-term unemployment is increasing, and with it the probability of hysteresis effects that would lower the growth potential of the economy. Wages have only belatedly and gradually started to respond to the slack in the labour market, partly in reaction to the 2012 reform of the labour market. · The private sector faces strong pressures to deleverage. Despite a significant adjustment in terms of credit flows, private- sector debt remains particularly elevated high and non-performing loans are set to increase further. Falling house prices and rising unemployment are weakening household capacity to repay debt. · External debt level remains close to its historical peak and large net external liabilities increase the vulnerability of the Spanish economy to external financial shocks. Notwithstanding the sizeable improvements in the current account balance, further competitiveness gains will be needed to underpin the dynamism of exports and import substitution, and thereby bring about a significant reduction of net external debt over time. · High and fast- rising general government debt has been the flip side of the ongoing adjustments in the private sector. The full unwinding of macroeconomic imbalances also requires that the negative impact on public finances is to be corrected as well. The IDR also discusses the policy challenges stemming from these imbalances. The interrelated nature of the imbalances requires a comprehensive and ambitious policy response. Notwithstanding the measures already adopted or proposed, a number of areas can be considered for further reform, including inter alia deepening the structural reform agenda to open up product and factor markets, grounding fiscal consolidation on structural measures and reinforcing the institutional framework, further reviewing the tax system to enhance its growth-friendliness and to ensure that it supports the internal and external rebalancing of the economy, strengthening the business environment as well as deepening and complementing the labour market reform.

3.           Assessment
of the policy agenda

3.1.      Fiscal policy and taxation

Budgetary developments and debt dynamics

The main goal of the medium-term
budgetary strategy outlined in the stability programme is to bring the budget
deficit below the 3% reference value by 2016. The
stability programme provides for meeting the medium-term objective (MTO), which
remains a balanced budgetary position in structural terms, by 2018, which is
beyond the programme horizon. The MTO more than adequately reflects the
requirements of the Stability and Growth Pact.

Additional consolidation measures in
combination with a strengthened institutional framework and budgetary execution
control led to a further improvement of the underlying fiscal position in 2012.
The general government deficit net of capital
transfers to banks, which are considered as one-off operations, narrowed from
8.9 % of GDP in 2011 to 7.0 % in 2012. This exceeds the revised government and
EDP target of 6.3% of GDP. By level of government, the main consolidation
effort was achieved at the regional and local level, with the regions as a
whole missing the deficit target of 1.5% of GDP by slightly more than 0.2 pps.[8] In contrast, the social
security sector balance deteriorated by around 1 pp, resulting in a deficit of
almost 1 % of GDP. The deviation from the general government target was linked
to a combination of weaker-than-expected revenues (taking into account the
impact of discretionary measures and the base effect) and some expenditure
overruns, including higher intermediate consumption and social transfers. The
less tax-rich growth composition and a stronger-than-expected deterioration in
the labour market implied major revenue shortfalls as well as higher social
expenditure.

For 2013, the stability programme aims
at achieving a general government deficit of 6.3 % of GDP, compared with a
target of 4.5 % originally set in the July 2012 EDP recommendation (Box 2). This revision reflects the worse starting position in 2012 and a
downward adjustment of the macroeconomic scenario. The planned narrowing of the
deficit in 2013 will be mainly revenue-driven, as a result of higher tax
revenue due to the expected full-year effect of the increase in VAT in
September 2012 and hikes in excise duties. On the expenditure side, savings in
compensation of employees, intermediate consumption, and gross fixed capital
formation will be largely offset by higher interest expenditure and social
spending. In total, the consolidation in the programme relies on adopted
discretionary measures with a budgetary impact estimated by the government at
3.6 % of GDP. In its 2013 spring forecast, the Commission projects a deficit of
6.5 % of GDP. The small difference is largely explained by a slightly lower
growth forecast and the fact that the programme assumes an additional impact of
measures of about 0.2-0.3 pp, which are not clearly specified in the programme.

The stability programme confirms the
authorities' commitment to advance with fiscal consolidation over the medium
term. The headline deficit is expected to fall to
5.5 % of GDP in 2014 and to be reduced to 2.7 % of GDP in 2016. The fiscal
consolidation plan (net of bank recapitalisations in 2012) is back-loaded, with
most of the fiscal adjustment to be delivered in 2015 and 2016 in terms of the
headline, primary, and structural balances, which is appropriate given the
current macroeconomic environment. The current programme targets differ
significantly from those in the previous update, reflecting a substantial
downward revision of the underlying macroeconomic and budgetary projections.
According to the programme, the consolidation would be mainly expenditure-based
from 2014 onwards. The expenditure-to-GDP ratio is projected to fall by 3.7 %
of GDP between 2012 and 2016 while the revenue ratio is expected to increase by
0.7 % of GDP. The planned expenditure restraint mainly falls in the areas of
compensation of employees and intermediate consumption and less in social
payments and gross fixed capital formation. The central government plans to
reduce its deficit by 2.1 pps of GDP between 2012 and 2016: the regional
governments will have to deliver a deficit reduction of 1.6 pps of GDP, and
social security a reduction of 0.5 pp of GDP.

The envisaged budgetary adjustment is
not sufficiently supported by measures in the programme, particularly towards
the end of the programme period (Box 2). For 2014, the stability programme indicates an additional consolidation of 1 pp of
GDP on the expenditure side partly offset by a drop in the revenue ratio (0.2
pp) due to lower social security contributions. According to the programme, the
consolidation will be underpinned by the extension of certain temporary revenue
measures taken in previous years, such as changes to the corporate and personal
income taxation, which were supposed to expire in 2014, and by (still to be
specified) revenue measures at regional level. On the expenditure side, the
main discretionary measures with an incremental impact in 2014 are the
continued freeze in public sector hiring, various measures restricting early or
partial retirement and unspecified savings at regional level and under the
local administration reform, which remain to be adopted. For 2015, the
programme states that the planned budgetary adjustment requires measures of
1.5-1.7 % of GDP, whereas measures of only 1.3 % of GDP are presented.
Moreover, the programme refers to future measures in the field of social
security that are expected to add 0.2-0.3 pp in 2014-15, which, however, are
not specified. The main measures for 2015 presented in the programme concern planned
savings at regional level and further savings from the local administration
reform. For 2016 the programme does not specify any measures necessary to
underpin the achievement of the target.

There are some downside risks to the
deficit adjustment path presented in the stability programme. The source of additional regional revenues from 2014 onwards is not
sufficiently specified and previously introduced temporary measures are
extended only to 2014. In addition, the programme announces a number of deficit-increasing
tax expenditure measures in the area of corporate taxation effective as from
2014 that risk eroding the tax base. For 2016, the programme does not present
any measures, and this could jeopardise the achievement of the proposed deficit
target. The planned savings from the 2014 local government reform are subject
to significant implementation risks since the draft law has not yet been
submitted to Parliament. Moreover, maintaining the public sector pay and hiring
freeze may prove increasingly difficult the longer it has been in place. Other
risks to budgetary strategy are larger deficits in the social security system
(if employment growth falls short of expectations and pensions expenditure
proves more difficult to contain) and the greater sensitivity of revenues to
the on-going structural adjustment. Fully implementing the reforms already
adopted with regard to the pension system and reaching an agreement on the
sustainability factor, including de-indexation of pensions, would mitigate the
risk of shortfalls in the social security system. Moreover, there is
uncertainty regarding macroeconomic developments, given the uncertainties
surrounding the economic and financial situation and the need to correct
excessive macroeconomic imbalances. A further risk stems from contingent
liabilities linked with asset protection schemes/guarantees.

The adjustment path presented in the
programme is realistic, striking a balance between ambitious fiscal
consolidation and the difficult economic situation.
In terms of the structural balance,[9]
the programme foresees an improvement in the (recalculated) structural deficit
from 5.5 % of GDP in 2012 to 4.2 % of GDP in 2013 and, thereafter, a fall to
2.1 % of GDP in 2016. In 2014, the effort is slightly below 0.5 pp. The overall
consolidation implies a cumulative structural fiscal effort of 3.4 pps. of GDP
over the entire programme period. The programme does not foresee the
achievement of the MTO within the programme period. The Commissionʼs 2013
spring forecast projects the structural deficit to be only slightly higher in
2013 and 13⁄4% of GDP higher than the programme target in 2014 (based on a
no-policy-change assumption). For the period after the correction of the
excessive deficit, the programme foresees adequate progress towards achieving
the MTO. According to the programme, the structural deficit decreases by 1.2
pps in 2017 and turns into a structural surplus in 2018 with further
improvement in 2019.

The general government debt-to-GDP ratio
has been on an upward path since reaching a low of about 36% of GDP in 2007. In
2012, it rose further to exceed 84 % of GDP. The debt ratio is projected to
continue to increase over the programme period, peaking at close to 100 % in
2016, well above the Treaty reference value in all years. This increase in debt
is mainly driven by high interest payments and to a lesser extent by the
dynamics in the primary deficit, which is expected to turn into a surplus in
2016. Stock-flow adjustments contribute around 1 pps of GDP on average over
2013-16. The trend in the debt ratio may be more unfavourable than projected in
the programme if risks related to the budgetary targets materialise. The
Commissionʼs 2013 spring forecast projects a similar trend in the public
debt, based on a no-policy-change scenario.

Box 2. Main measures

After raising a number of taxes in 2012-13, such as personal and corporate income taxes and VAT, the focus of the measures presented in the programme is more clearly tilted towards the expenditure side in the latter years of the programme. Notably, the programme relies heavily on the hiring freeze and continued expenditure restraint at regional and local government level. The reform of local government and other savings at local level are expected to yield increasing savings, reaching about 1⁄2 pp. of GDP in 2015. This item is subject to substantial implementation risk, as the local government reform has not yet been submitted to Parliament. Moreover, neither revenue nor expenditure measures at regional level as from 2014 are well specified and could thus be subject to significant risk. With the previously implemented hikes in personal income tax being extended only to 2014, there is a risk of a negative budgetary effect in 2015. The programme does not present any measures for 2016.

Main budgetary measures

Revenue || Expenditure

2012

· Income tax and taxes on non-residents (0.3 % of GDP) · Corporate income tax (0.4 % of GDP) · Tax amnesty and measures combatting fraud (0.1 % of GDP) · VAT (0.1 % of GDP) · Property tax (0.1 % of GDP) · Revenue measures at regional level (0.4 % of GDP) · Fight against social security fraud (0.2 % of GDP) || · Public employment (0.5 % of GDP) · Employment policies (0.1 % of GDP) · Regional measures, excl. public employment measures (0.9 % of GDP) · Local government reform and adjustment plans (0.1 % of GDP) · Other, incl. reforms of regional government (0.8 % of GDP)

2013

· Income tax and taxes on non-residents (0.3 % of GDP) · Environmental taxes (0.2 % of GDP) · VAT (0.8 % of GDP) · Excise duties (0.2 % of GDP) · Revenue measures at regional level (0.3 % of GDP) · Social contributions (0.2 % of GDP) || · Public employment (-0.2 % of GDP) · Employment policies (0.4 % of GDP) · Long-term care (0.1 % of GDP) · Regional measures, excl. public employment measures (0.6 % of GDP) · Local government reform and adjustment plans (0.2 % of GDP) · Other, incl. reforms of regional government (0.4 % of GDP)

2014

· Corporate income tax (0.3 % of GDP) · Measures combatting fraud (0.1 % of GDP) · Revenue measures at regional level (0.2 % of GDP) || · Public employment (0.2 % of GDP) · Long-term care (0.1 % of GDP) · Regional measures, excl. public employment measures (0.2 % of GDP) · Local government reform and adjustment plans (0.3 % of GDP) · Other, incl. reforms of regional government (0.1 % of GDP) · Social security (0.1 % of GDP)

2015

· Corporate income tax (-0.1 % of GDP) · VAT (0.1 % of GDP) · Revenue measures at regional level (0.2 % of GDP) || · Public employment (0.1 % of GDP) · Regional measures, excl. public employment measures (0.2 % of GDP) · Local government reform and adjustment plans (0.5 % of GDP) · Other, incl. reforms of regional government (0.1 % of GDP) · Social security (0.1 % of GDP)

Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A plus sign implies that revenue / expenditure increases / decreases as a consequence of this measure.

Among macro-structural measures affecting potential growth, the main measures are the successive labour market reforms. A series of labour market reforms in 2010 and 2011 and again in February 2012 aimed to reduce labour market segmentation and to make the collective bargaining system more flexible (see Section 3.3).

Box 3. Excessive deficit procedure for Spain

On 27 April 2009, the Council decided that
an excessive deficit existed in Spain. The most recent Council Recommendation
under Article 126(7) TFEU was adopted on 10 July 2012. The Council recommended
that Spain puts an end to the present excessive deficit situation by 2014.
Specifically, in order to bring the headline government deficit below the 3 %
of GDP reference value by 2014 the Spanish authorities were recommended to
deliver an improvement of the structural balance of 2.7 % of GDP in 2012, 2.5 %
of GDP in 2013, and 1.9 % of GDP in 2014, based on the Commissionʼs update
of the 2012 spring forecast. The headline deficit targets were 6.3 % of GDP for
2012, 4.5 % of GDP for 2013, and 2.8 % of GDP in 2014. Spain was also
recommended to (a) implement the measures adopted in the 2012 budget and in the
Autonomous Communitiesʼ rebalancing plans; (b) adopt the announced
multi-annual budget plan for 2013-14 by end of July 2012; (c) adopt without
delay additional measures in 2012 to ensure the fulfilment of the budgetary
plans for 2012; (d) stand ready to adopt further measures should risks to the
budgetary plans materialise and accelerate the reduction of the deficit in 2013
and 2014 if economic or budgetary conditions turn out better than currently
expected; (e) strictly apply the new provisions of the Budgetary Stability Law
regarding transparency and control of budget execution; (f) to establish an
independent fiscal institution to provide analysis, advice and monitor fiscal
policy, (g) maintain the enforceability of its medium-term budgetary framework;
(h) closely monitor adherence to the budgetary targets throughout the year for
all the levels of the general government sector. On 14 November 2012, the
Commission concluded that, based on its 2012 autumn forecast, Spain had taken effective action in compliance with the revised Council recommendation of
10 July 2012 and that no further steps in the excessive deficit procedure were
required.

An overview of the current state of
excessive deficit procedures is available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm
(please refer to country sections at the bottom of the page).

Long-term sustainability

Spain is
facing a risk of fiscal stress, primarily the fiscal front, but in part also on
the macro-financial and competitiveness fronts.
Full implementation of the planned adjustment would go a long way towards
reducing the risk of fiscal stress. Spain also faces high risks to
sustainability in a medium-term perspective and medium risks in the long run.
Returning to a higher structural primary balance, around -0.5% of GDD as it was
on average in the period 1998-2012, would help containing these risks. The 2013
reform of early retirement schemes is expected to contribute to the long-term
sustainability of the social security system. However, further measures to
contain age-related expenditure growth appear necessary, e.g. via the
appropriate regulation of the sustainability factor foreseen by the 2011 reform
of the pension system. In addition, government debt (84.2% of GDP in 2012 and
expected to continue to rise) needs to be reduced.

The government has complemented the 2011
pension reform with additional measures to improve the sustainability of the pension
system. The 2011 pension reform was an
important step towards strengthening long-term sustainability.[10] In addition, in
early 2013, the government curbed access to early and partial retirement, which
contributes to improving sustainability in the medium and long term.[11] The prohibition of forced
retirement in collective agreements, and tightened access to special
unemployment benefit for older workers were other measures introduced in 2012
and 2013. The pension sustainability factor, which the 2011 reform foresaw to
be triggered only in 2027, has not yet been regulated. An independent experts
group established in April 2013 to propose the details of the sustainability
factor has been tasked to report to the Toledo Pact parliamentary committee by
the end of May 2013. The specification of the sustainability factor will need
to include a clear link between the retirement age and gains in life
expectancy, to ensure the long-term financial stability of the system, and
could take into account other relevant factors. A prolonged period of high
unemployment and a falling active population pose challenges to the
sustainability of the pension system in the short and the long term. The social
security system has been in deficit since 2011, reflecting labour market weakness.
High unemployment, the transition to inactivity, and the prevalence of
involuntary part-time work prevent many workers, particularly women, from
building adequate future pension rights, adding pressure on non- contributory
pensions or social assistance.

According to the latest long-term
projections, public healthcare spending will increase by 1.3 percentage points
(pps) of GDP by 2060. Crisis-related expenditure
cuts have helped contain the growth in spending. Public healthcare expenditure
decreased from 7.1 % of GDP in 2010 to 6.7 % in 2011. In 2010 and 2011 savings
originated from cuts in the wage bill and pharmaceutical expenditure. In 2012,
measures specifying the common basket of healthcare benefits and an extension
of co-payments on pharmaceutical products were adopted. However, sustainability
challenges remain. Reducing long-term expenditure pressures further would be
difficult without better control of pharmaceutical expenditure, particularly in
hospitals, strengthening the relative role of primary care provision, better
coordination across types of care, incentive-improving changes in remuneration
systems, and greater interregional mobility for professionals. The 2013 NRP
announces that more measures improving efficiency in healthcare and pharmaceutical
expenditure will be adopted later in the year, e.g. revising reference prices
and centralising purchasing of pharmaceutical products, and extending
co-payments.

Fiscal framework

The Budgetary Stability Organic Law, which entered into force on 1 May
2012, strengthens fiscal discipline across all levels of government, by introducing
tighter fiscal rules, including expenditure ceilings for regions and local
governments, as well as providing for corrective mechanisms and sanctions in
the event of non-compliance with fiscal targets. As part of the law,
transparency of budget execution, especially by regional and local governments,
has improved considerably with the publication of more timely, systematic and
higher-frequency data. Starting from May 2013, the Ministry of Finance is
publishing budgetary execution data for regions and social security on a
monthly and national accounts basis. More systematic information on the
regionsʼ budgetary laws has also become available.[12]

In addition, the Budgetary Stability
Organic Law provides for the creation of financing mechanisms for sub-central
government levels, such as the suppliers' payment
scheme (plan de pago a proveedores) and the regional liquidity fund (fondo de
liquidez autonómica). The former aims at enabling regions and local entities to
pay commercial arrears (see section 3.2). The latter is a credit line to allow
regions with no or limited market access to service their public debt. Access
to both facilities is subject to financial and fiscal conditionality, which
combined with the provisions of the Budgetary Stability Organic Law,
contributed in 2012 to enhanced fiscal discipline at sub-central government
level.

However, implementation of the
preventive and corrective mechanisms of the law was not fully effective and
could have been more timely and transparent. For
example, corrective measures provided for in the law were only applied with a
delay. The regions ʼ economic and financial plans were approved in May,
but the first quarterly report on their implementation in line with Article 24
was issued only at the end of December. An earlier assessment and issuance of
warning letters (requerimientos) would have given more time for the correction
of budgetary slippages in 2012 in a number of regions, where there were early
indications that the 2012 deficit target was unlikely to be met. Moreover, the
first assessments of the regionsʼ economic and financial plans could have
been more informative and the publication of other reports provided for in the
law could have been more timely.

Plans to set up an independent fiscal
institution to provide analysis, advice and monitor fiscal policy have been
delayed. A first draft organic law was approved by
the government in April 2012. The draft organic law providing for its
constitution is expected to be submitted to Parliament in June and to be
adopted in the second half of 2013. This means that, contrary to initial plans,
the new authority will have only a limited role in the preparatory stage of the
2014 budgetary process. The new authority is expected to enhance fiscal
monitoring and transparency at all levels of government, provided that it is
given sufficient powers, legal standing and resources to carry out its duties.

Tax system

Spain has a low tax-to-GDP ratio (32.3 % in 2012), compared to the EU-27
average and the national average over the last decade. The tax-to-GDP ratio has decreased considerably since the start of
the crisis, partly as a consequence of the rebalancing of the economy towards a
less tax-rich growth pattern. Both direct and indirect taxes (including social
security contributions) have are lower shares inas percentage of GDP than the
EU average (2012 indirect taxes in ES: 10.2 % of GDP, EU27 average: 13.3 %;
direct taxes in ES: 10.1 %, EU27 average: 13 %).

Some
rebalancing of the relative tax burden towards consumption and environmental
taxes took place in 2012. In line with the 2012
country-specific recommendations, the very narrow VAT base was broadened by
reducing the scope of application of the super-reduced and reduced tax rates.
The standard (from 18 to 21 %) and the reduced rate (from 8 to 10 %)
were increased, while the 4 % super-reduced rate has remained unchanged.
However, a number of goods and services remain subject to the reduced and
super-reduced rates (e.g. food and health products, and some tourist services).
Some excise duties have also been increased (e.g. on tobacco and kerosene).
Limited fiscal space impeded the originally planned reduction in
employersʼ social security contributions. Going forward, there appears to
be  scope for further limiting the application of the reduced rates of VAT or
increasing those rates.

Revenues from
environmental taxes as a percentage of GDP were the lowest in the EU in 2011, with low revenues from energy, transport fuel, and pollution and
resource-use taxes. The package of taxes on electricity generation introduced
in December 2012 to cover the electricity tariff deficit (see section 3.4)
could yield around 0.2 % of GDP annually. Excise duties on petrol and
diesel are currently below the EU average and those in neighbouring countries.
Also in view of the reforms that Spain launched in the field of fuel
distribution, there would seem to be scope for a tax increase to further
improve the functioning of the market and promote energy savings. Moreover, as
in other Member States, there is scope to address the preferential tax
treatment of diesel compared with petrol. The municipal vehicle circulation
taxes in practice do not always reflect the environmental performance of the
vehicles. Revising landfill and other waste taxes as well as a better water
pricing policy could help achieve environmental objectives and fiscal
consolidation.

High tax
expenditure in direct taxation reduces fiscal revenues and causes distortions.[13] In consequence, the effective tax rates are much lower than the
statutory rates. In personal income tax, the tax allowance for contributions to
pension plans[14]
has a regressive effect and distorts the composition of savings. In corporate
income tax, there are important reductions in calculating the tax base, which
lower the effective rate to around 60 % of the statutory rate.[15] Despite the reduced corporate
income tax rate of 25 % for companies under a certain turnover threshold,
SMEs pay on average a higher effective rate than bigger companies.[16] The broadening of the tax base
could improve the overall efficiency of the tax system. The 2013 NRP envisages
some discretionary measures with a deficit-increasing impact, e.g. deductions
against income tax for reinvestment of retained profits and R&D activities,
and fiscal incentives for informal investors (ʼbusiness angelsʼ).

There has
been progress in addressing the debt bias in corporate income tax and in the
treatment of housing in personal income tax, in line with the 2012 CSR. Corporate income tax deductions for interest payments implied an
incentive for high indebteness and leverage ratios. These incentives were
partly reduced by introducing a ceiling on the deduction of net financial costs
for corporate groups and associated companies. Moreover, in 2012 Spain also withdrew tax compensation in personal income tax for house purchases made before
2006 and removed home mortgage deductions against
personal income tax[17]
for purchases from 2013 onwards.

The current
design of recurrent property taxation does not provide means to secure
additional revenue. The wealth tax has a temporary
nature -currently applicable until 2014- and substantial exemptions reduce the
tax base. Heterogeneous regional allowances applied in property, inheritance
and donation taxes lead to significant differences in tax liabilities and reduce
the efficiency of the system.

Spain has introduced measures to combat tax evasion and improve revenue
collection. In October 2012, an act strengthening
the fight against tax fraud and evasion entered into force. Its provisions
include stronger penalties, limits on cash payments, new reporting obligations
for assets held abroad, and application of the VAT reverse charge mechanism for
some high-risk sectors. Moreover, in March 2013 Spain established a new
international tax office to deal with international tax audits. These measures
go in the right direction. Nevertheless, there remains scope for further action
so as to ensure that taxes are collected in line with the tax law.

3.2.      Financial sector

The banking sector was seen in last
year’s SWD as a source of vulnerability with respect to financial stability and
credit provision to the real economy. The growing market tensions in the run-up to Spain’s request for financial assistance confirmed this assessment. The banking sector
programme, lasting 18 months,[18]
started on 23 July with the signature of a Memorandum of Understanding (MoU).
The core of the programme is the sufficient recapitalisation and restructuring
of Spanish banks, where needed, for which up to EUR 100 billion was made
available by the European Financial Stability Facility / European Stability
Mechanism.

Fulfilment of the conditions set out in
the MoU is on track.[19] The specific capital needs of each participating bank were
established and the banks requiring state aid submitted their restructuring
plans to the European Commission. The restructuring plans of banks needing
injections of capital from the state were approved by the end of December. The
asset management company has been set up under the name of Sareb as a
majority-private-owned company. Regarding horizontal conditionality, the bank
resolution framework has been upgraded, bank supervision and the regulatory
powers of the banking regulator strengthened, and the governance structure of
savings banks enhanced.

Disbursements made so far, totalling EUR
41.4 billion, were sufficient to recapitalise the weaker banks and for the
Spanish Fund for Orderly Bank Restructuring to inject capital into Sareb. The other Spanish banks either did not have a capital shortfall
according to the bank-by-bank stress test or were able to cover the shortfall
without recourse to state aid.

In spite of the easing of financial
market tensions, tight financing conditions remain a major factor constraining
the operations and growth of businesses in Spain, particularly of SMEs. Fragmented business structures and large numbers of micro-firms have
resulted in Spanish firms being highly dependent on bank financing. Meanwhile,
the general tightening of credit standards has made access to bank loans more
difficult. In this context, several initiatives have been taken or are underway
to alleviate credit and liquidity constraints for companies, in particular
SMEs. Measures promoting non-bank intermediation, announced in November
2012 in the context of the banking sector programme, are being implemented and
are further detailed and developed in the NRP. They address the financing needs
of businesses at various stages of development, although in the short term they
cannot be expected to fully address the structural lack of equity financing
from private sources. Funds under the European Regional Development Fund (ERDF)
have been recently reprogrammed (approximately EUR 320 million) to improve
access of SMEs to credit. There is room for further ERDF reprogramming into new
national or regional financial instruments that may cover loans, guarantees,
seed and working capital for SMEs.

Measures are being taken to alleviate businessesʼ
liquidity problems stemming from long delays in payments. Spain was one of the Member States with the
longest payment times by public authorities in 2011 (160 days, well
above the EU average[20]), and in business-to-business transactions (97 days[21]). Long delays create liquidity problems for companies and imply
higher costs for the state, as providers factor in payment delays in their
prices. In 2012 the government provided EUR 27.4 billion to settle
the arrears of local and regional governments for commitments made before
January 2012.[22] The scheme has been extended to 2013 (for EUR 2.6 billion) under
Royal Decree Law 4/2013, which also transposes EU Directive 2011/7/EU in this
field. The amount of arrears outstanding following the application of the
scheme remains unclear, however. According to the 2013 NRP, a third round of
the scheme to settle arrears of public administrations will be launched later
in 2013.

3.3       Labour market, education and social policies

Labour market

The implementation of the 2012 labour
market reform[23]
continues, against the background of a
deteriorating labour market situation. The extent
of the unemployment challenge means the impact of the 2012 labour market reform
must be closely monitored and the need for the reform to be complemented by
accompanying measures carefully analysed. Although it
is still early to draw definitive conclusions on all aspects of the 2012
reform, and the assessment is complicated by the ongoing contraction of the
economy, available data indicate that the reform has started to have
some positive effects on internal flexibility, the reduction of dismissal
costs, the use of collective dismissals and wage moderation. On the other hand,
the new permanent contract for SMEs is apparently not yet being used extensively,
and, overall, labour market segmentation remains high. The governmentʼs
evaluation of the labour market reform,  planned in the NRP to be completed in
the first half of 2013, could identify areas where follow-up measures may be
necessary to achieve the initial objectives of the reform, such as the role of
indefinite validity of collective agreements (ultraactivity), the use of
op-out clauses and the gap between dismissal costs across different contracts.

The employment rate stands at 59.3 % (2012),
far from the national employment target of 74 % by 2020. Older workers (44.5 %) and women (55.5 %) have lower employment
rates. In the case of women this is affected by the affordability of childcare
and long-term care services, and tax considerations for second earners.[24] The 2012 reform is expected to
contribute to increasing the employment rate over the medium term.

The government has adopted measures to
increase the efficiency of active labour market policies, but the pace of
reform could have been faster. Passive labour
market policies and their link with active labour market policies were revised
in July 2012.[25]
Unemployment benefit and assistance conditions were reformed and, overall,
job-search requirements were tightened: active and proven job search is
required from unemployment benefit recipients, and participation in actions to
improve employability is voluntary for the first 30 days and becomes compulsory
after that. Furthermore, the gross unemployment benefit after six months
has been reduced from 60 % to 50 % of the reference wage and the unemployment
assistance has been raised from 75 % to 80 % of the IPREM (Indicador
público de renta de efectos múltiples). Eligibility conditions for the
active income for jobseekers scheme (Renta activa de inserción) have
also been amended and the links with active job seeking reinforced. These
measures go in the direction indicated in the 2012 country-specific
recommendation, but their effectiveness needs to be closely monitored.
Moreover, it is expected that the new integrated system for management of the
unemployment benefits will be finalised in 2013. This new tool will make easier
the control on the participation in ALMP, training and will have links to other
national databases with fiscal, financial or social security information. Also,
the PREPARA programme[26]
has been amended and extended, with an automatic rollover until the
unemployment rate falls below 20 %. Although so far, its results are not
showing the expected impact on labour market reintegration, [27] PREPARA has played a role in
some cases as a non-negligible last-resort safety net for the beneficiaries.

Reform of public employment services is
lagging behind. Initial steps have been taken to
develop the regulatory framework for cooperation between public employment
eervices (PESs) and private placement agencies. A positive element in this
cooperation framework will be the performance-based evaluation of the
contribution of the private agents depending on the profile of the unemployed
person offered a job and the contract duration. Nevertheless, the work of these
private employment agencies might start only in late 2013 after the adoption of
the legal framework and the respective agreements between the national PES and
the employment services of the regions. Moreover, new measures concerning
cooperation and sharing of information among PESs concerning job vacancies have
been adopted in February 2013,[28]
including the creation of a Single Job Portal. These measures are still not
fully operational and a swift implementation and monitoring remain important.
No specific measures were taken to modernise and reinforce the public
employment service itself to provide effective, individualised counselling and
job search assistance to those looking for jobs.

ALMPs need to be further reinforced to
provide an effective individualised approach to the activation and skills
upgrading of the unemployed. This is needed to
reorient skills towards current and foreseeable demand by companies. In this
context, specific attention may have to be paid to the groups most affected by
unemployment, like the young, women, the long-term unemployed and the low
skilled. The employability and working conditions of
older workers, partially addressed with the measures on early and part-retirement
introduced in March 2013, also deserve attention to support the planned
increase in the statutory and the effective retirement age.[29]

The Government is preparing a more
comprehensive reform of active labour market policies in cooperation with the Autonomous
Communities. This reform relies on the objectives
set by the 2012 Annual Plan on Employment Policies, passed on 6 July 2012:  to
reduce youth unemployment, improve the employability of the unemployed,
support  entrepreneurship, step up public-private cooperation on placement
services, reinforce employment opportunities for specific groups (such as
people with disabilities), and fight fraud. In relation to these objectives,
some measures have been adopted with the reforms introduced in July 2012 and
the National Youth Entrepreneurship and Employment Strategy. Most importantly,
the 2012 National Employment Plan provides the basis for an assessment of the
implementation of ALMPs by the regional governments, which will serve as a
basis for identifying good practices and reallocating budget resources towards
effective and well-targeted training, and career guidance measures - 15 % of
the financial allocation for ALMPs that is transferred from the central
government to the regions will be linked to a performance evaluation- .
However, the performance indicators for 2012 have yet to be evaluated. The
forthcoming Annual Plan 2013, with new objectives and indicators, as set in the
NRP, is to be adopted before the end of the first half of 2013.

Responding to the 2012 CSR, the national
Youth Employment and Entrepreneurship Strategy 2013-2016 provides measures to
fight the high youth unemployment.  The Strategy,
adopted in March 2013,  incorporates a range of new measures - 15 for the
short-term[30]
and 85 for the medium to long-term intended to fight youth unemployment,[31] including new fiscal rebates
and hiring subsidies for young people, new contractual arrangements for young
people and new measures to foster entrepreneurship, increase youth
employability and improve the intermediation in the labour market.
Complementing the reallocation of structural funds to youth employment-related
actions that took place in 2012, the Strategy is to be funded with EUR 3.5
billion, EUR 2.4 billion from the national budget and EUR 1.1 billion from
European Social Fund (ESF). The strategy may contribute to generating
employment and job opportunities and is an important step towards delivering a
Youth Guarantee Scheme.[32]
Close monitoring of its implementation and effectiveness will be needed,
especially since hiring incentives have not always proved successful in the
past and the new contractual forms introduced could result in an increase of
duality.

The Spanish authorities adopted in 2012
the National Plan against irregular work and social security fraud.[33] Apart from some measures for improving coordination among relevant
bodies, the plan aims to intensify checks and toughen legal action. These
measures seem to have produced initial results, as at the end of 2012 more than
90000 irregular jobs were detected in checks (12 % more than in 2011) and
social security contributions increased by EUR 95 million.

Education and training

Structural
weaknesses in the education and training system have contributed to the high
youth unemployment rate and are still largely unresolved. These weaknesses include: high early school leaving rates, skills
mismatches and insufficient labour market relevance and attractiveness of
vocational education and training. To be effective in the long run,
improvements in education need to enable access to quality education, to
prevent and remedy early school leaving, and to obtain the skills and knowledge
needed for effective social and labour market inclusion. Coordination of all
levels of government remains key in education and training policies.

Reinforcing
the quality and relevance of education and training remains a challenge.  Despite a continued reduction from 31.2 % in 2009 to 24.9 %[34] in 2012, early school leaving (ESL) represents a major problem,
shows  important disparities among regions (ranging from 32.5 % in Andalucía to
12 % in Navarra) and stands far from the target of 15 % by 2020. Measures put
in place in recent years have, to some extent, contributed to a reduction in
early-school leavers, but a comprehensive, adequately funded strategy is still
to be implemented. There have been national and regional measures in recent
years, including the ʼPlan to fight ESLʼ (preventive and intervention
measures such as analysis, awareness raising, follow up of early school
leavers  to support their reintegration into the education and training
system), a guidance and support programme (the PROA) and  an initial
professional qualification programme (the PCPI). While funding for the 
ʼPlan to fight ESLʼ (EUR 40 million) and PROA (EUR 60 million) was
maintained in the 2012 national budget, this was not supplemented by
co-financing by the Autonomous Communities as in previous years. In addition,
the 2013 national budget does not provide funding for measures. Reducing early
school leaving is also the main objective of the draft Organic Law for the
Improvement of Quality of Education (LOMCE), which aims to increase the
percentage of students completing upper secondary education and obtaining
initial and intermediate vocational training diplomas by making educational
pathways more flexible and making vocational education more attractive (e.g. by
introducing a two-year basic vocational training module).

Spain has initiated a reform of the vocational education and training
(VET) system to better adapt the skills and competences of young people to
labour market needs and to make VET more attractive. Apart from the basic vocational training to be introduced under the
LOMCE, measures[35] have been introduced to develop the training and apprenticeship
contract and establish the basis for dual vocational training. In 2012, 4000
students and 500 enterprises participated  in pilot projects. The measures
concerning VET seem adequate but in the present economic and labour market
situation their full implementation remains a challenge. Further continued
efforts jointly involving public authorities, education providers and employers
will be required to extend and consolidate the dual VET system in Spain and,
above all, to increase participation rates in vocational training.
Participation rates in lifelong learning, especially for low-skilled and older
people, also remain low.

Additional
steps are required to reduce the number of young people not in employment,
education or training (NEETs) and the high number of young unemployed without
formal qualifications, partly by developing a
system of early career counselling (cooperation between schools and PES),
job-search assistance for the young unemployed and early school leavers and
improved systems for the validation of competences acquired at work to
facilitate re-entry to education and training and targeted re-skilling. The
national Youth Entrepreneurship and Employment Strategy contains some measures
and plans to address the challenge of the high number of young unemployed
without formal qualifications, but its swift implementation remains key. Poor
language skills constitute an important obstacle to studying and working mobility,
with negative implications for youth employment.

While tertiary educational attainment is
comparatively high (40.1 %[36] in 2012), Spain is still lacking a comprehensive strategy to
effectively match tertiary education skills to  market needs. In the framework of the Bologna Process, the Spanish authorities
have announced their intention to reform the Spanish university system to make
it more innovative and competitive in the longer term.

Social
policies

Largely due to
the strong deterioration of the labour market and limited effectiveness of
social protection in reducing poverty, Spain is below the EU average in the
main key indicators measuring poverty and social exclusion. No progress has been made towards meeting the target of reducing
the number of people at risk of poverty and social exclusion by 1.4-1.5 million
by 2020. Severe material deprivation affected 3.9 % of the total population in
2011, while the at-risk-of-poverty rate rose to 21.8 % and the at risk of
poverty and social exclusion to 27 %.[37] The
share of people living in households with very low work intensity rose to 12.2
% in 2011. In-work poverty rates remained at 12.3 % in 2011, above the EU
average, reflecting the deterioration of the situation for some clusters of the
employed population (notably young people, the low skilled and temporary
workers). Children are at particular risk of poverty, showing the highest rate
among all age groups, especially in low work intensity households.[38]

Overall, no major improvements were made
in the development of new policy measures for
active inclusion and poverty reduction. The NRP does not include
information on the content or the timeframe for approval of the National Action
Plan on Social Inclusion 2013-2016, which could be the basis for further modernising the Spanish social protection system, in line with the
priorities of the 2013 AGS [39] by improving its sustainability, as well as its effectiveness in
preventing poverty and ensuring essential safety nets. The key challenges are
to rationalise targets and resources under an adequate
policy framework, improve governance and inter-institutional coordination at
national, regional and local level, simplify procedures for social assistance
claimants, review mobility barriers, strengthen the link
between social assistance and activation measures through more personalised support, and improve the articulation of in- and out-of-work
benefits to better address in-work poverty while reducing disincentives to
work. Particular attention should be paid to the weakest in the labour
market and to those exposed to the risk of suffering discrimination, such as
foreign nationals, persons with disabilities or Roma population.[40]

Limited progress was made on measures to
tackle child poverty and improve the efficiency of family support services in
2012. The Second National Strategic Plan for Children
and Adolescents 2013-2016 (PENIA II)[41] was
adopted in April 2013, although it needs to be complemented by the
Comprehensive Plan for Family Support (PIAF), approval of which is still
delayed. Households were increasingly exposed to financial stress, with growing
numbers of persons unable to face housing costs. Temporary measures were
adopted in 2012 to protect the weakest households from evictions,[42] including the creation of a social housing fund. As a follow up, on
18 April 2013, Parliament's economy and competitiveness committee approved a
draft law on measures to strengthen the protection of mortgage debtors, debt
restructuring and social rent, which is now before the Senate. In parallel, the
potential impact on eviction processes of the recent European Court of Justice
ruling[43] needs to be considered.

3.4.    Structural
measures promoting growth and competitiveness

Product and services market reforms

Progress in addressing structural
obstacles to growth and competitiveness in product and services markets, as
addressed by the 2012 CSR, has been mixed. Reforms
are crucial to create the right framework conditions and incentives so that the
reallocation of resources towards tradable sectors continues and spurs growth
and employment creation.

The draft law on market unity aims at
addressing the fragmentation of the domestic market, which hinders competition
and prevents businesses from taking advantage of economies of scale and scope. The law was announced as part of the September 2012 reform plan for
Q4-2012. A first draft was adopted by the Council of Ministers on 25 January
2013. The parliamentary adoption of the law is foreseen in the NRP by the end
of 2013 under urgency procedure. The draft is inspired by the EU's Services
Directive, but it is broader in scope. It provides for principles favouring
free establishment and movement of goods and services in Spain[44] and for their application in
practice. Once in force, all legal texts enacted at local, regional and central
government level that may be considered inconsistent with the market unity law
will have to be amended in the following six months. This process will be
supported by enhancing administrative cooperation, and setting up a procedure
for responding quickly to complaints about obstacles to the single market. An
ambitious law on market unity would be a key step towards improving the
business environment and competition by facilitating establishment, circulation
of goods and services throughout Spain and by simplifying business licensing
requirements.

Further liberalisation of professional
services has been delayed. Available data[45] show that professional
services are less productive than in the EU average. In addition to the job
creation potential, reforming professional services would lift the competitiveness
of the overall economy, given that they are an input for other sectors of the
economy. The 2013 NRP commits again to this reform, which builds on the
transposition of the Services Directive of 2009. According to the 2013 NRP, the
forthcoming reform will provide for a common framework for professional
services based on the general principle of freedom of access to and exercise of
those activities. It can potentially increase the mobility and competition
among providers of professional services throughout Spain, provided that
limitations to the general principle are minimised and justified by overriding
reasons of public interest. Once the law is approved, the consistency of sector
specific legislation, including regional legislation and professional organisationsʼ
internal rules, with the new regulatory framework will need to be swiftly
ensured so that the liberalisation starts deploying its effects.

The measures adopted to support
entrepreneurship need to be complemented with the announced law on entrepreneurship
and company internationalisation, the adoption
of which is now planned by the NRP by the end of 2013.[46] The law is supposed to inter
alia provide for the creation of a regime of limited liability for
entrepreneurs, the establishment of out-of-court settlement mechanisms to allow
formerly bankrupt entrepreneurs a fresh start, and fiscal, financial and other
measures to support company growth. The law could have a positive impact on
company and job creation as well as on resource reallocation. The 2012
simplification of licensing for small retail outlets ("express
licence"), which will be extended in 2013, the planned revision of
licensing regimes at local level and the creation of an online mechanism for
submitting the required declarations to start an economic activity could also
contribute to fostering entrepreneurship. Broader use of the declaration and
notice systems (with ex-post controls) simplifies licensing procedures
and may promote new business creation while reducing barriers to firm growth,
entry and exit.

There appears to be scope for a greater
role of industrial activity in the economy. Spain has a relatively small share of
manufacturing activities (13.3% of gross value added compared to 15.3% for the
EU-27 in 2012), and a need to rebalance the economy towards the tradable sector
in a lasting way. Ongoing and planned initiatives to simplify licencing
requirements and more generally the business environment, may benefit the
industrial sector to some extent. However, specific initiatives to simplify
industrial licensing should be considered.

Structural rebalancing of the economy
requires greater price responsiveness to economic conditions. Gains in cost competitiveness have so far not been accompanied by
similar gains in domestic price competitiveness, which would be important to
boost also intra competitiveness. In the 2013 NRP, to address the issue of
price inertia, the authorities plan to implement a new indexation rule, which
would be applied to all public revenues, expenditures, charges and prices
currently indexed by the consumer price index (CPI). The rule would be based on
core inflation at constant tax rates with an upper limit of 2 % and is expected
to be adopted by the end of 2013. It is hoped that the new rule will become a benchmark
for the private sector as well. Further steps would have to be considered to
reduce the prevalence of indexation clauses in the Spanish economy more
generally. It is, for example, questionable whether indexation should be
applied to that part of public expenditure related to long-term public
contracts.

A review of the insolvency framework
could contribute to easing entry and exit conditions for business and to
orderly deleveraging in the private sector. The
ability of many SMEs and households to service their debts has been damaged by
the crisis. The current insolvency regime appears to be unduly complex and
costly, especially for households.[47]
Inefficient bankruptcy procedures, which are compounded by long judicial
resolution periods, may have encouraged creditors to use the mortgage system to
secure their loans and hence biased firms towards investing in assets which can
serve as collateral, notably tangible fixed assets. In general, difficulties in
recovering loans from insolvent firms have resulted in higher collateral
requirements from borrowers, while low opportunities for discharge may have
dented entrepreneurship.[48]
Overall, streamlining the insolvency framework for the Spanish private sector,
beyond the measures that were announced in the context of the above mentioned
Law on entrepreneurship and company's internationalisation, while preserving
lending discipline, might contribute to smoother entry and exit of firms and
bring significant economic benefits in the medium term. These measures could be
flanked by possible actions to restructure the debt of viable firms and give
entrepreneurs a second chance, thereby promoting entrepreneurial activity and
helping to reallocate resources within the economy.

Barriers to entry for large retail
outlets limit competition in the retail sector.  Recent
reforms, in particular the more flexible shop opening hours, liberalisation of
sales periods, and simplification of licensing procedures for small retail
outlets approved in 2012, could enhance competition in the retail sector.
However, regional authorisation schemes for large retail outlets limit the
entry of new operators with the ability to increase competitive pressure on
incumbent retailers. Increased concentration in food distribution has resulted
in retailers gaining bargaining power over suppliers. Extending the simplified
licensing regime to larger outlets (e.g. over 500 m2) could
enhance competition. Given the role of the distribution chain in final price
formation, effective competition along the chain would facilitate the
pass-through of cost moderation (including raw materials) on final prices, and
as a consequence on inflation.

Market regulation and competition
oversight

More competition is needed to raise
productivity at firm level and further increase competitiveness. In 2011 and 2012, labour cost adjustments were partially absorbed by
widening profit margins, thus partly offsetting the positive effect of cost
moderation on price competitiveness. Profit margins
grew faster particularly in market services (e.g. in professional activities,
trade, transport and the hospitality sector), which could point to the need for
firms to rebuild their finances in the context of tight credit conditions, but
also weaknesses in effective competition in an environment of sluggish domestic
demand. Restrictions on competition are often linked to
the highly devolved institutional structure of the country. The National
Competition Authority refers to numerous competition problems at regional level
(especially restrictive regulation) and local level (protection of incumbents
in the area of public services). Regional restrictions often counteract the
effect of pro-competitive regulation adopted at national level, an issue that
will be addressed by the upcoming law on market unity.

Arrangements for the planned merger of
regulatory and competition oversight authorities in the initial government
proposal have raised some objections from the European Commission. In September 2012 the government adopted a draft law to merge the national
competition authority with supervisory and regulatory authorities in six
sectors (energy, telecommunications, postal services, audio-visual industries,
railway and air transport) thus creating a single body — the National
Commission for Markets and Competition (CNMC). The aim of this reform is to
provide for consistent application of competition principles across the various
economic sectors. The Parliament approved the law on 22 May 2013, the challenge
ahead lies on its swift implementation. The reform has raised some concerns
regarding the financing of the new body, the transfer of competences and
functions currently exercised by independent sectoral regulators to line
ministries, and the early termination of the mandate of some board members. In
addition, while the draft preserves the enforcement powers of the competition
authority, it seems to blur the existing range of advocacy tools. Some of these
concerns may be addressed, however, through implementing regulations and
internal rules for the new Competition and Regulatory Authority.

Rental market

Efforts to create a larger and more
efficient rental market, which would support labour mobility, are still at an
early stage. Only 17 % of the population in Spain lives in rented accommodation. High home ownership rates limit incentives to
geographical mobility and thus reduce the potential for swift adjustment of
economic imbalances. However, numerous restrictions on rental contracts (e.g.
minimum compulsory duration and long resolution procedures) hamper the
development of the rental market. To ease the rebalancing process within the
Spanish housing market, a developed and well-functioning rental segment is
essential, as it would provide an alternative to ownership, diminish the
pressure on house prices and reduce their volatility. Social housing has also
been traditionally geared to ownership rather than renting. Removing the tax
deductibility of mortgage interest payments and repayments in 2012 was
essential to shifting incentives away from home ownership. In August 2012 the
government presented a proposal for rental market reform, finally adopted by
Parliament in May 2013. The reform gives parties more flexibility in designing
rental contracts, strengthens legal certainty in real estate transactions, and
changes eviction procedures. The housing plan adopted in April 2013 aims to
achieve various social and economic goals, including financial support for
tenants in rented accommodation.

Energy, transport, infrastructure and
environment

Energy represents a major input cost for
the economy that could be reduced by greater efforts to enhance energy
efficiency. The energy trade deficit has been
increasing since 2009, to reach more than 4 % of GDP in 2012, partly due
to higher world energy prices, which limit the scope for achieving a
sustainable trade surplus. Significant improvements in energy efficiency could
be achieved in the buildings, transport and industrial sectors. Meanwhile,
measures to improve energy efficiency have not always followed the Second National
Energy Efficiency Plan 2011-2020,[49]
and are not always being achieved at the lowest possible cost, for example, the
car fleet renewal scheme has limited benefits for the environment but a high
budget allocation. In other cases, they only address part of the potential
energy saving, e.g. the focus on lighting appliances instead of a broader range
of actions for SMEs. Intelligent transport systems, parking policies and
congestion pricing are not always fully exploited to reduce congestion in big
metropolitan areas.

The recent trend in gross margins in the
fuel distribution sector is characteristic of uncompetitive markets.[50] Consumers have to bear the burden of high pre-tax fuel prices
(compared with international fuel prices); they are among the highest in the EU
due to sizeable distribution margins. This might be due to high concentration
in the automotive fuel sector, the high level of vertical integration between
supply, refining and retail activities, the low market share of low-cost fuel
retailers, burdensome administrative processes required for opening new service
stations, and low competition between service stations located on major roads.
In February 2013, the government simplified procedures for opening service
stations and introduced some measures which reduce the power of established
distributors against independent retailers.

There is scope for improving competition
in the retail electricity market.[51]
The market is to a large extent vertically
integrated. The energy regulator (CNE) does not have sufficient powers to carry
out investigations into the functioning of the wholesale market. Most domestic
consumers are supplied under the ‘last resort tariff’,[52] which has a negative impact on
switching rates between suppliers and upholds concentration in the retail
market. Consumers are often not provided with sufficiently clear information on
electricity consumption and related prices.[53]

The ‘electricity tariff deficit’
involves a considerable contingent liability for the budget and non-negligible
macroeconomic risks. The deficit, i.e. the gap
between the regulated ‘access tariffs’ paid by consumers and various regulated
costs (including distribution costs and subsidies for renewable energy
production) stood at over EUR 5 billion in 2012, exceeding the approved
level of EUR 1.5 billion by a wide margin. In recent years the
deficit has been driven also by failure of regulated tariffs to follow
increases in costs, primarily the unexpectedly high growth in support to
renewable energy sources, repayment of the tariff debt from the previous years,
and electricity transmission costs. High investment in renewable technologies
was due to their falling costs and generous support for renewable energy
sources, fostered by the indexation of regulated costs. The cumulative tariff
debt is EUR 29 billion (equivalent to almost 3% of GDP), which to a
large extent has been securitised by the Electricity Debt Amortisation Fund,
backed by a government guarantee.

Measures to contain the electricity
tariff deficit have been insufficient so far. New
taxes on energy production to cover the deficit were adopted in December 2012.[54] In February 2013 the
government proposed simplifying the system of support for renewable energy and
revising the annual adjustment of regulated costs.[55] In addition, an extraordinary
credit from the state budget of EUR 2.2 billion was made available.
Eliminating the deficit will require a comprehensive approach, based on a
combination of gradual adjustment of electricity tariffs, a downward review of
costs and a reassessment of revenues (e.g. possibly sharing costs with other
energy sectors) and of subsidies discouraging energy efficiency. In the 2013
NRP, the government announced that a draft law further reforming the energy
sector and allowing for periodic reviews of regulated costs will be presented
by the end of June 2013. The government has announced that the existing support
for electricity generated using domestic coal will expire after 2014.[56]

The low cross-border transmission
capacity with France has contributed to inefficiencies and higher costs. It prevents Spain from engaging in cross-border trade in electricity
and gas, and from profiting from its overcapacity in electricity generation
(only 44 GW is used at peak demand compared with 100 GW installed). A
new 2 000 MW electricity interconnection with France is being built and could be operational in 2014. A sixth, 4 000 MW,
interconnection is planned to be built by 2020. Building cross-border gas
interconnections with Portugal and France (as part of the Africa-Spain-France
gas corridor) would foster competition between gas companies, increase the
liquidity of the market, allow diversity of supply, and help use the potential
of the Spanish liquefied natural gas terminals. Better coordination between the
central and regional governments on authorisation procedures would facilitate
installation of power plants, both conventional and renewable.

The extensive network of motorways,
high-speed railway lines, airports and ports entails high ongoing maintenance
and renewal costs. The transport infrastructure
deficit of the past has, to a large degree, been addressed. Reducing public
investment and focusing on maintenance of the networks as has recently been the
case seems appropriate. More stringent cost-benefit analysis of proposed
projects is needed to avoid further over-investment and to optimise existing
infrastructure. The 2013 NRP presents some conflicting
goals for transport policy, e.g. reduction of the operation costs of the
network and continued construction of high-speed railway lines. Setting up an independent observatory, as planned by the authorities
would help to assess projects in a more transparent way based on objective
criteria.

Low traffic flows in many cases do not
cover the operational costs of transport infrastructure. Road transport users do not bear a proportionate share of the
overall maintenance costs of the infrastructure. Operators of several toll
motorways face financial difficulties, which imply a significant contingent
liability for public finances. The network of airports is vast and unprofitable
regional airports continue to put an unnecessary burden on public finances. The
regulatory framework for airports is not entirely complete and offers room for
improvement, notably in relation to airport charges and airport slot
coordination. As announced in the 2013 NRP, the authority attributing time
slots should be given more independence.

In recent years, railway freight
transport has been losing market share, partly due to  weak connections to
seaports and weak cross-border connections. The low
competitiveness of railway freight stems from underinvestment in freight lines
and weak development of intermodal nodes. Due to underdevelopment of the Mediterranean and Atlantic axis, very little cargo is transported from and to seaports by
rail, and standard gauge lines generally do not reach the major ports. The
establishment in Spain of rail freight corridors[57] should contribute to the
development of domestic and cross-border rail freight. This calls for ambitious
targets for the development of the rail freight corridors, and in particular
their technical standards. Spain has several ports which are large by European
standards (e.g. Barcelona, Valencia, Algeciras), but also a considerable number
of smaller ports, as investment in port infrastructure has very often been
guided by regional priorities. A coherent national strategy concentrating
resources and focusing on the improvement of railway connections to the major
ports is lacking in the NRP 2013. While the management model for ports has seen
some liberalisation, there are still restrictions on competition that have a
detrimental effect on the efficiency of the sector.

To bring effective competition in
railway transport, liberalisation would need to be accompanied by additional
measures. The national rail passenger market is
supposed to be liberalised from 31 July 2013, but initially only tourist
lines will be opened to competition. This does not create effective competition
in the sector. Opening up the freight market should by now be fully achieved,
but technical and legal obstacles prevent effective competition. Low
interoperability with the rest of the European railway network (e.g. different
gauge, rolling stock, and technical requirements) could prevent potential new
entries into the market.

Spain
faces considerable challenges in the area of water and waste management and air
quality. As one of the most arid countries in the
EU, Spain needs relatively high investment in infrastructure and sophisticated
institutional arrangements to harness the productive potential of water. While
sectors like agriculture, tourism and energy are heavily dependent on water
supply, water tariffs are among the lowest in the EU, despite serious water
stress. A discrepancy between fees and operating costs and inappropriate supply
and demand management mean that available resources may not be put to their
most efficient, priority use. Major water-saving potential in agriculture has
not been yet fully exploited, e.g. by means of adequate pricing or improvements
in the water supply network. Apart from economic incentives, changes to
governance (e.g. identification of priorities, improved institutional
coordination, raising awareness) could also be envisaged. More than 50 % of
municipal waste goes to landfill, while waste prevention and recycling are not
fully developed. Individual transport exacerbates seasonal problems with air
quality in the major cities. The 2013 NRP does not propose explicitly how to
improve waste or water management.

Research and innovation

Public and private
funding for research and innovation (R&I) has markedly decreased over the
last four years. The
considerable increase in public and private research and development (R&D)
expenditure over the decade 2000-09 has had a
positive impact on science performance but did not boost innovation
significantly.[58]
Public funding has fallen since 2009 and it does not
currently provide sufficient incentives for universities and public research
organisations to cooperate with industry and societal stakeholders. The
result is a low rate of transformation of R&I into commercial products and
services. Spanish firms are reluctant to integrate R&D into their business
models, and private expenditure on R&D remains insufficient. Innovation
policy is increasingly taking on a regional dimension, requiring reinforced
coordination between national and regional policies. There is scope for
improving the efficiency of public expenditure in R&D with more elements of
performance-based funding, including for universities and research-performing
organisations. An evaluation of the impact of R&D tax credits could also be
carried out to understand why business expenditure on R&D does not appear
responsive towards those incentives.

In response to these challenges, in
February 2013 the Spanish authorities adopted a new national strategy for
science, technology and innovation, together with a
state plan for scientific and technical research and innovation. In response to the 2011 law on science, technology and
innovation, a new national research agency is being set up. The agency would
represent progress in terms of flexibility in handling multi-annual budgets and
facilitating the management and evaluation of publicly funded research and innovation
activities. For the first time Spain has drafted a comprehensive
strategy which covers the whole spectrum of R&D and innovation measures,
from human capital and skills, through strengthening
Spainʼs excellence base, to fostering the development of industrial
leadership in R&I. The strategy is aligned with the Framework Programme for Research and Innovation
(ʼHorizon 2020ʼ) and reflects the Europe 2020 strategy. It
covers supply-side and demand-side policies, aims to incorporate key enabling
technologies into traditional industries, and creates stronger incentives for
public-private cooperation and private funding of R&I. Implementation of
the strategy and the plan and evaluation in line with international peer review
standards will be crucial for their success.

Spanish enterprises do not use the
potential of e-commerce to boost their sales in the domestic market and abroad. Only a small proportion of Spanish SMEs sell online. The slow
uptake of e-commerce may also be linked to a poor performance of the market for
internet services provision.[59]

3.5.    Modernisation of public
administration

The highly decentralised setting calls
for enhanced coordination between the various public administrations, both to
reduce costs and to limit the administrative burden on companies and households. The Autonomous Communities account for around 35% of total general
government expenditure and have legislative powers in the policy areas provided
for in their statute laws, such as health and social policies. Local governments
are responsible for some 13% of expenditure. Several legislative initiatives
have been undertaken or will be completed in the course of  2013 to enhance
control and improve coordination among the national, regional and local
administrations.

Several reform initiatives to modernise
the public administration are under way. First, the
2012 Budgetary Stability Organic Law reinforced fiscal discipline at all levels
of government (see section 3.1). Second, in February 2013, the government
presented a draft law on local administration reform (to be adopted by
Parliament by the end of 2013), which aims at clarifying the powers of
municipalities, streamlining their structure, rationalising their staffing and
enhancing financial and budgetary supervision of local entities. Third, the
creation on an Office for Fiscal Responsibility is expected to enhance fiscal
monitoring and transparency at all levels of government (see also section 3.1).
Fourth, several committees reporting to the Minister of Finance[60] are, among others, screening
administrative structures for duplications between the central government and
the regions and are identifying burdens in administrative procedures, with a
deadline of mid-2013 for the submission of conclusions and quantification of
potential savings. However, the NRP lacks detail on the potential follow-up to
the work of the committee, whose final report is expected to be issued by the
end of June 2013. Finally, the draft laws on market unity and on local
administration reform may ease business licensing requirements, by inter
alia, reducing the number of cases in which the Spanish public sector
requires permits. While all these initiatives go in the right direction, they
will eventually be tested against the expected improvement in the efficiency of
public spending, the quality of public services, and enhanced fiscal discipline
and transparency.

An efficient public procurement policy
could contribute to transparency  and fiscal savings. While Spain boasts a relatively developed system of electronic
publication of contract notices,[61]
available statistics show that the size of pooled volumes procured by central
purchasing bodies is below the EU average (around 3 % of the total value of
public procurement in Spain from 2006 to 2010, compared with an EU average of
12 %). Given the well-known advantages of procurement centralisation (in terms
of lower prices), these figures suggest that savings could be reaped from
additional pooled purchases. In this respect, the 2013 NRP points to
strengthening centralised procurement for health supplies. The use of
electronic means in public procurement is another way of economising on
resources. Spain has set an ambitious target of conducting 50 % of public
procurement above EU thresholds by electronic means. However, the (few)
available data show that e-procurement take-up[62]
is currently below the target. Moreover, the current dispersion of the
e-procurement platforms used by contracting authorities at regional level
increases companiesʼ compliance costs.

Reforms to improve the working of the
judicial system are being prepared, although some measures have been delayed. An effective justice system enhances trust and stability and thus
is an important component of an attractive business environment. The EU Justice
Scoreboard shows areas of concern in the efficiency of the Spanish judiciary,
in terms of lower clearance rates, a higher case backlog and relatively lengthy
proceedings.[63]
In 2012, the Authorities already acknowleged the need to enhance the efficiency
of the judicial system with a view to facilitating investment and economic
activity. To this end, the 2012 NRP included measures such as reorganising the
judiciary and the courts, implementing the electronic judicial file, promoting
out-of-court solutions to conflicts and amending specific procedural and
substantial legal provisions relevant to businesses. While certain measures
have been adopted recently, others are still in preparation. For example, the
draft legislation on court and judiciary reorganisation is now scheduled for
the end of 2013. This important reform will be accompanied by amendments to the
codes of criminal and civil procedure. Significant investment has been made in
information and communication technologies (ICT), with Law 18/2011 providing
for the use of ICT tools in courts so as to increase the efficiency of the
judicial system. However, these are not yet readily available throughout Spain. Lastly, there are no data as of yet to assess the new legal framework on mediation
and on court fees adopted in 2012.[64]

4.           Overview
table

2012 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Deliver an annual average structural fiscal effort of above 1.5 % of GDP over the period 2010-13 as required by the Council recommendation under the EDP by implementing the measures adopted in the 2012 budget and adopting the announced multiannual budget plan for 2013-14 by end July 2012. Adopt and implement measures at regional level in line with the approved rebalancing plans and strictly apply the new provisions of the Budgetary Stability Law regarding transparency and control of budget execution and continue improving the timeliness and accuracy of budgetary reporting at all levels of government. Establish an independent fiscal institution to provide analysis, advice and monitor fiscal policy. Implement reforms in the public sector to improve the efficiency and quality of public expenditure at all government levels. || Spain has implemented the CSR only partially. Spain has implemented a structural effort in 2012 and 2013 which, account taken of the unexpected adverse economic developments compared to when the Council recommendation was issued, is in line with the EDP recommendation. However, Spain will not meet the nominal budgetary targets established in the Council Recommendation of 10 July 2012. The provisions of the Budgetary Stability Laws regarding the envisaged early warning and corrective mechanisms to limit deviations from the budgetary targets of the Autonomous Communities have not been implemented in a fully transparent, timely, and effective way. Specifically, the first assessments of the regions' economic and financial plans published in late December 2012 should have been done one quarter earlier, thereby giving regions more time for the correction of emerging budgetary deviations. Progress has been made with respect to budgetary reporting at central, regional, and social security levels by publishing monthly budgetary execution data on national accounts basis. However, achieving a higher degree of fiscal transparency would require more comprehensive, consistent, and timely reporting on a consolidated general government basis in line with ESA 95. The submission of the draft law providing for the setting up of an independent fiscal authority was submitted to the Council of Ministers in April 2013; contrary to initial expectations the authority is unlikely to be fully operational in the 2014 budgetary procedure.

CSR 2: Ensure that the retirement age is rising in line with life expectancy when regulating the sustainability factor foreseen in the recent pension reform and underpin the Global Employment Strategy for Older Workers with concrete measures to develop lifelong learning further, improve working conditions and foster the reincorporation of this group in the job market. || There is some progress in relation to this CSR. In early 2013, access to early and partial retirement was curbed. An experts group has been set up to assess the sustainability factor, but a proposal on the technical details is still pending. The 2012-2014 Global Employment Strategy for Older Workers has not yet been underpinned by concrete measures, except for some progress in the recognition and accreditation of professional competencies based on work experience and formal and non-formal learning and revision of the rules on combining work and pension entitlements.

CSR 3: Introduce a taxation system consistent with the fiscal consolidation efforts and more supportive of growth, including a shift away from labour towards consumption and environmental taxation. In particular, address the low VAT revenue ratio by broadening the tax base for VAT. Ensure less tax-induced bias towards indebtedness and homeownership (as opposed to renting). || Spain has implemented the CSR partially. With effect from September 2012, VAT rates were increased (the standard rate from 18 % to 21 %, and the reduced rate from 8 % to 10 %). The scope of application of the standard VAT rate was also extended (second set of measures in November 2012). New environmental taxes (on electricity generation) were introduced in 2013. A 1 % reduction in employers’ social security contributions in 2013 and 2014 previously announced was postponed until further notice due to the challenge of fiscal consolidation. The abolition of mortgage payment deductibility was adopted in December 2012.

CSR 4: Implement the reform of the financial sector, in particular complement the on-going restructuring of the banking sector by addressing the situation of remaining weak institutions, put forward a comprehensive strategy to deal effectively with the legacy assets on the banksʼ balance sheets, and define a clear stance on the funding and use of backstop facilities. || Implementation is ongoing in the framework of the bank recapitalisation programme.

CSR 5: Implement the labour market reforms and take additional measures to increase the effectiveness of active labour market policies by improving their targeting, by increasing the use of training, advisory and job matching services, by strengthening their links with passive policies, and by strengthening coordination between the national and regional public employment services, including sharing information about job vacancies. || Spain has implemented the CSR partially. Implementation of the 2012 labour market reform continues; its impact will be subject to an evaluation currently being developed by the government. The Royal Decree-Law of 13 July 2012 on measures to ensure budget stability and promote competitiveness has strengthened the links between active and passive labour market policies, tightening job-search conditionality and revising conditions for unemployment assistance. New measures were taken in the area of ALMPs, namely as regards youth unemployment and the links between ALMPs and PLMPs. Further reform is considered urgent to increase employability. Coordination between the national and regional public employment services (PESs) has been improved with the adoption of the measures contained in the RDL 4/2013, which sets the conditions for information sharing among PES and introduces regulatory changes for public-private cooperation in the field of job intermediation and placement. No other measures have been taken or announced so far concerning the reinforcement or modernisation of PES themselves.

CSR 6: Review spending priorities and reallocate funds to support access to finance for small and medium-sized enterprises (SMEs), research, innovation and young people. Implement the Youth Action Plan, in particular as regards the quality and labour market relevance of vocational training and education, and reinforce efforts to reduce early school-leaving and increase participation in vocational education and training through prevention, intervention and compensation measures. || Spain has implemented the CSR partially. Following the work of the youth action team, € 286.3 million from the European Social Fund and €1026.9 million from European Regional Development Fund have been reallocated. The Youth Employment and Entrepreneurship Strategy 2013-2016 (in the pipeline) will encompass around 100 short, medium and long-term measures to support education and training, counterbalance youth unemployment and enhance entrepreneurship, with an overall budget of 3.5 billion. Early school leaving (ESL), although decreasing, is still very high (25 %   in 2012). Measures to fight ESL have been maintained in 2012 in cooperation with the Autonomous Communities, but funding is no longer provided in the 2013 budget.  The main objective of the draft Organic Law for the Improvement of Quality in Education (LOMCE) is also fight against ESL. The 2012 labour market reform significantly amended the contract for training and apprenticeship, and foundations were laid to launch a dual vocational training system (Royal Decree 1529/2012 of November 2012).  The 2013 NRP does not provide for the reallocation of public spending to research and innovation, where no progress has been made since 2009.

CSR 7: Improve the employability of vulnerable groups, combined with effective child and family support services in order to improve the situation of people at risk of poverty and/or social exclusion, and consequently to achieve the well-being of children. || There is limited progress in relation to this CSR. The 2012 labour market reform presented a set of general measures tending to promote employability, but failed to take a specific approach to support the active inclusion in the labour market of those furthest away from the labour market. No additional measures have been announced since the reform, except for the revision and extension of the PREPARA programme until unemployment rates fall below 20 %. Spain also approved a National Strategy for the Social Inclusion of the Roma Population 2012-2020 and an Action Plan on Drugs 2013-2016, but budget allocations are yet to be confirmed. Limited progress was made on measures to tackle child poverty and improve the efficiency of family support services, although the approval in April 2013 of the Second National Strategic Plan for Children and Adolescents 2013-2016 (PENIA II) gives a positive signal.

CSR 8: Take additional measures to open up  professional services, including highly regulated professions, reduce delays in obtaining business licences and eliminate barriers to doing business resulting from overlapping and multiple regulations by different levels of government. Complete the electricity and gas interconnections with neighbouring countries and address the electricity tariff deficit in a comprehensive way, in particular by improving the cost efficiency of the electricity supply chain. || There is limited progress in relation to this CSR. Submission of the draft Law on Professional Services has been repeatedly delayed. The Entrepreneurship Plan[65] was announced in February 2013 and confirmed in the NRP 2013. It comprises several measures to promote business growth, entrepreneurship, employment and competitiveness, and  to ease access to finance. The measures announced are being formally adopted[66] and should contribute to introducing more dynamism into the economy. The first draft of the Market Unity Law was approved by the Council of Ministers on 25 January 2013. If the degree of ambition of the current text is maintained through the adoption process, it could help to eliminate barriers to operating across the national territory and to further simplify administrative requirements. The electricity tariff deficit was around EUR 5 billion in 2012. Measures adopted in December 2012 (e.g. taxes on electricity generation), and more announced in February 2013 (e.g. revised support for renewable energy sources) are intended to reduce the deficit in 2013 and to finance the remainder from the state budget. Additional systemic measures are needed. Works to improve electricity interconnection capacity with Portugal and France are ongoing, but there is still a lack of integration with the French energy market. This means that the potential for trade in gas and electricity to boost Spain’s economic growth is underexploited.

Europe 2020 (national targets and progress)

Employment rate target: 74 % || Employment rate population aged 20-65,  62.5 % in 2010, 61.6 % in 2011 and  58.5 % in 2012 Q4

R&D target: 2 % || In 2011, Spanish R&D intensity was 1.33 %. The government R&D budget was reduced by 4.12 % in 2010, by 7.38 % in 2011 and by 25.6 % in 2012 (estimate subject to Eurostat calculation).

Greenhouse gas (GHG) emissions target: National Target: -10 % (compared to 2005 emissions, ETS emissions not covered by the national target) || Change in non-ETS greenhouse gas emissions between 2005 and 2011: -10 % According to the latest national projections submitted to the Commission and when existing measures are taken into account, the target is expected to be missed: -1 % in 2020 compared to 2005 (with a projected gap of 9 percentage points).

Renewable energy target: 20 % Share of renewable energy in all modes of the transport sector: 10 % || The share of total renewable energy in gross final energy consumption was 15.1 % in 2011 and 5.9 % in the transport sector. (Source: Eurostat. April 2013. For 2011, only formally reported biofuels compliant with Articles 17 and 18 of Directive 2009/28/EC are included.)

Indicative national energy efficiency target for 2020: 20 % energy savings to be achieved in 2020. This implies reaching a 2020 level of 135 Mtoe final/primary energy consumption in 2020. || Spain has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). However, it has neither expressed it with the clarity required by Article 3 of Directive 2012/27/EU, in terms of absolute primary and final energy consumption, nor has provided information on how and on the basis of which data the target was calculated.

Early school leaving target: 15 % || Early leavers from education and training (percentage of the population aged 18-24 with at most lower secondary education and not in further education or training): 28.4 % in 2010, 26.5 % in 2011 and 24.9 % in 2012. The decreasing trend since 2009is also due to the effect of the economic crisis.

Tertiary education target: 44 % || Spain has been performing well with regard to the Europe 2020 tertiary educational attainment target. Tertiary educational attainment  40.6 % in 2010 and 2011, and 40,1% 2012.

Risk of poverty or social exclusion target: reduction of 1.4 -1.5 million people at risk || The number of people at risk of poverty or social exclusion was 11 675 000 in 2010 and 12 371 000 in 2011. No progress has been made towards achieving the target, on the contrary.

5.           Annex

Table I. Macroeconomic indicators

Table II. Comparison of macroeconomic
developments and forecasts

Table III. Composition of the budgetary
adjustment

Table IV. Debt dynamics

Table V. Sustainability indicators

Table VI. Taxation indicators

Table VII. Financial market indicators

Table VIII. Labour market and social indicators

Table IX. Product market performance and policy indicators

Table X. Green Growth

[1] http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp134_en.pdf.

[2] http://ec.europa.eu/europe2020/pdf/nd/csr2012_spain_en.pdf

[3] http://register.consilium.europa.eu/pdf/en/12/st11/st11273.en12.pdf

[4] http://ec.europa.eu/europe2020/pdf/ags2013_en.pdf

[5] Source: National Statistics Institute, Labour Force Survey, Q1-2013.

[6] http://ec.europa.eu/economy_finance/assistance_eu_ms/spain/index_en.htm.

[7] Estimated, EUROSTAT.

[8] For a number of regions, the slippage was larger.

[9]               Cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission on the basis of the
information provided in the programme, using the commonly agreed methodology. These
estimates have to be interpreted with great caution given the major
uncertainties surrounding the methodological estimation of potential growth and
output gaps in an economy like Spain, facing profound structural
transformations.

[10]According
to the Fiscal Sustainability Report 2012 public pension expenditure in Spain will increase from 10.1% of GDP in 2010 to 13.7% in 2060, higher than the EU average
of 12.7% in 2060. The budgetary effect of the latest restrictions in early
retirement has not yet been taken into account in these projections.

[11] Royal Decree Law 5/2013, of 15 March.

[12] See: http://www.minhap.gob.es/Documentacion/Publico/PortalVarios/FinanciacionTerritorial/Autonomica/Resumen%20Ejecutivo%20Presupuestos/Resumen%20ejecutivo%20PRESUPUESTOS%20CC.AA.%202013.pdf.

[13] See ʼTax Reforms in EU Member States. 2012 Reportʼ,
European Economy No 6/2012 and Taxation Paper No 34, European
Commission.

[14] The allowance amounted to over EUR 5.7
billion in 2009. Source: Memoria de la
Administración Tributaria 2010 (2010 Report of the
Tax Administration).

[15] This is due to, among other reasons, the increased number of
entities applying reduced tax rates, e.g. for the maintenance or increase in
employment, the tax credit for reinvestment of capital gains from assets amounted
EU 863,8 million and the tax credit for R&D amounted EUR 326,9 million in
2009. See Memoria de la Administración Tributaria 2010 (2010 Report of
the Tax Administration)

[16] Memoria de la Administración Tributaria 2010 (2010 Report of
the Tax Administration)

[17] Tax credits for housing
amounted to EUR 5 billion in 2009. Memoria de la
Administración Tributaria 2010 (2010 Report of the Tax
Administration)

[18] The programme expires at end-December 2013. However, the
restructuring of the banks receiving public support under the State aid rules
is expected to take up to five years.

[19] http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp130_en.pdf

[20] Source: 2012 European Payment Index, which refers to 2011 data.

[21] European Payment Index 2012, Intrum Justitia.

[22] Royal Decree Law 4/2012 of 24 February, and Royal Decree Law 7/2012
of 9 March.

[23] On 10 February 2012 the Spanish government approved
Royal Decree- Law 3/2012. Parliament passed the subsequent Law 3/2012 in July
2012.

[24] The average effective tax rate for second earners is high when
entering the labour market at the same income level: the second earnerʼs
income is taxed at the same marginal rate as that of the main earner when
partners file jointly, whereas the main earner loses the deduction for
dependent spouse if partners file individually.

[25] Royal Decree-Law 20/2012, of 13 July.

[26] ʼPREPARAʼ provides for financial support for long-term
unemployed people who have no further right to unemployment benefit or
insurance, and who are receiving job-search-related training and guidance.

[27] Of the 307 000 who completed the programme up to July 2012, 70 %
have not found employment yet. However, the specific profiles of the
beneficiaries combined with the shortage of job opportunities in the current
context of crisis, also need to be taken into account.

[28] Royal Decree-Law 4/2013, adopted on 22 February.

[29] The
Royal Decree Law 5/2013 introduced relevant measures, such as an increase of
penalties to be paid by companies with more than 100 employees when including
workers over 50 years of age in collective dismissals, up to 50 % of which
would be reinvested in ALMPs for older workers. It also opens up the
possibility of being an active pensioner, by continuing working while receiving
50 % of the pension.

[30] Most of the short-term measures were included in Royal Decree-Law
4/2013, of 22 February.

[31] The new measures will be applicable as
long as the unemployment rate stands above 15 %.

[32] Council
Recommendation of 22 April 2013 on establishing a Youth Guarantee (2013/C
120/01) to ensure that all young people under the age of 25 receive a
good-quality offer of employment, continued education, an apprenticeship or a
traineeship within four months of becoming unemployed or leaving formal
education.

[33] Plan de Lucha contra el Empleo Irregular y
el Fraude a la Seguridad Social (2012-2014).

[34] Estimated, EUROSTAT.

[35] Royal Decree 1529/2012, adopted on 8 November, which complements
the 2012 labour market reform.

[36] Source: EUROSTAT.

[37]National provisional data for the year 2012 (LCS, October 2012) show
a slight decrease in the at-risk-of poverty and social exclusion rate to 26.8%,
due to the decrease to 16.9% for the group over 65 years old. For the group
below 16 years old, it decreased to 25.9%, while for the group between 16 to 64
years old rose to 21%. The number of persons in low work intensity households
increased in 2012, standing now at 1,833,700 (EPA, QIV-2012). Provisional data
showed also an increase in in-work poverty up to 13.3 % in 2012.

[38] 27.2% of children in ES are at risk of poverty, against 21.8% for
the overall population in ES (EU rate of children at risk of poverty: 20.6%).
30.6% for children in ES are at risk of poverty or social exclusion, against a
rate of 27% for the overall population in ES (EU average of children at risk of
poverty or social exclusion: 27%). Moreover, this rate increased by more than
4pp since 2008.

[39] Annual Growth Survey 2013, ʼPursuing differentiated,
growth-friendly fiscal consolidationʼ (p. 5).

[40] To this end, Spain approved a National Strategy for the Social
Inclusion of Roma Population 2012-2020 and an Action Plan on Drugs 2013-2016,
containing actions for these specific groups, but budget allocations for
implementation remain to be confirmed. The NRP also refers to the future
preparation of an Action Plan for the Spanish Strategy on Disabilities
2012-2020, but not timetable for approval has yet been set.

[41] Adopted on 5 April 2013. The plan has a budget of EUR 5.159 million
for the next 4 years, to be implemented by the state, regions and local
entities. It comprises eight objectives and 125 measures, covering the
following areas: knowledge and awareness raising, family support and
conciliation, emphasis on groups at risk of social exclusion or special needs,
prevention and rehabilitation of conflictive cases, safe use of new
technologies, quality education, health and participation in the environment.
The Plan includes measures to fight against child poverty, including the
preparation of a National Plan to Fight against Child Poverty (also priority
objective in the NAPin).

[42] Royal Decree-Law 27/2012.

[43] Court case C-415/11, of 14 March.

[44] E.g. non-discrimination, necessity and proportionality of
restrictions, mutual cooperation, national validity of administrative
requirements, administrative simplification and transparency.

[45] See Eurostatʼs Annual detailed enterprise statistics for
services (NACE-rev2).

[46] Only some measures
of the plan to support entrepreneurship (Plan de estímulo económico y de
apoyo al emprendedor) of 22 February 2013 have been formally adopted
through Royal Decree Law 4/2013 of 22 February (Medidas de apoyo al
emprendedor y de estímulo del crecimiento y de la creación de empleo).

[47] Crisis Económica y deudores hipotecarios:
actuaciones y propuestas del Defensor del Pueblo,
Defensor del Pueblo 2012.

[48] OECD Economic Surveys: Spain, OECD 2012.

[49] Informe sobre el sector energético español,
Comisión Nacional de Energía, March 2012,
http://www.cne.es/cne/Publicaciones?accion=3&id=3026&id_nodo=32

[50] Informe sobre la consulta efectuada por la
Secretaría de Estado de Economía y Apoyo a la Empresa sobre el mercado de
carburantes de automoción en España. Comisión Nacional
de la Competencia, 2012.
http://www.cncompetencia.es/Inicio/Informes/InformesyEstudiossectoriales/tabid/Default/aspx

[51] Informe sobre el sector energético español, Comisión Nacional de Energía, March 2012 http://www.cne.es/cne/Publicaciones?accion=3&id=3026&id_nodo=32.

[52] Low voltage electricity consumers whose contracted power does not
exceed 10 kW are entitled to this tariff.

[53] The functioning of retail electricity markets for consumers in
the European Union, European Commission, 2010.

http://ec.europa.eu/consumers/consumer_research/market_studies/docs/retail_electricity_full_study_en.pdf.

[54] Law 15/2012. Law 17/12 allocates 90 % of the revenues from the EU
ETS allowances to the tariff deficit.

[55] Royal Decree-Law 2/2013.

[56] The scheme for remuneration of domestic coal compensates for costs
derived from a public service obligation and was approved by the European
Commission. The capacity remuneration scheme is remuneration for availability
and environmental investment under the Large Combustion Plant Directive.

[57] EU Regulation 913/2010.

[58] Source: Innovation Union Scoreboard.

[59] Eighth Consumer Markets Scoreboard, December 2012, European
Commission, http://ec.europa.eu/consumers/consumer_research/editions/cms8_en.htm. The functioning of the market for internet access
and provision from a consumer perspective, Study on behalf of the European
Commission.

[60] E.g.., the Comisión para la Reforma de las
Administraciones Públicas (CORA).

[61] It is expected that the platform for the publication of contract
notices and awards (Plataforma de Contratación del Estado) will become
mandatory for all general government entities upon the entry into force of the
market unity law (currently, it is mandatory for the central government only).
This change will ease access to information on business opportunities, which
will no longer be scattered across various portals.

[62] E-procurement take-up is measured as value of procurement carried
out using electronic submission of tenders divided by the total value of
procurement.

[63]  http://ec.europa.eu/justice/effective-justice/files/justice_scoreboard_communication_en.pdf

[64] Law 5/2012, of 6 July, de mediación en asuntos civiles y
mercantiles.

[65] Plan de Estímulo Económico y de Apoyo al
Emprendedor.

[66] Various measures have been adopted already through Royal Decree Law
4/2013 of 22 February.