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Commission assesses updated stability programme of Portugal (2002-2005)

Commission Européenne - IP/02/165   30/01/2002

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IP/02/165

Brussels, 30 January 2002

Commission assesses updated stability programme of Portugal (2002-2005)

The European Commission has today adopted a recommendation to the Council of Ministers on the updated Stability Programme of Portugal, which covers the period 2002-2005. The general government deficit in Portugal rose from 1.4% of GDP (1.8% excluding UMTS licenses) in 2000 to an estimated 2.2% in 2001, clearly above the 1.1% of GDP target included in the update. The economic slowdown explains part of this outcome but other factors also contributed to it, notably unexpected tax shortfalls following the 2001 tax reform and overruns in current primary expenditure. In the short-term, however, government finances in Portugal remain very vulnerable to unfavourable developments to economic growth or budgetary developments. With a view to securing close monitoring and the needed reduction in the deficit to create a safety margin to avoid breaching the 3% of GDP deficit laid down in the Treaty, the Commission proposes to the Ecofin Council to give Portugal an early warning on the basis of Regulation 1466/97 of the Stability and Growth Pact (SGP). Nevertheless, in spite of the budgetary slippage in 2001, the updated programme maintains the objective of balancing the government finances by 2004. This implies a much stronger, but necessary, adjustment effort than before and it has to be made against a less favourable macroeconomic environment. The programme expects annual average output growth of 2.5%. Under the programme's projections Portuguese government finances will comply with the requirements of the Stability and Growth Pact of a position "close to balance or in surplus" from 2004 onwards. The consolidation strategy is based on expenditure restraint as recommended in the Broad Economic Policy Guidelines. A balanced budget by 2004 is an essential stepping stone towards sustainability of government finances in light of the budgetary costs of ageing populations. On the basis of the Commission's recommendation, the Council is expected to adopt an Opinion on the updated Portuguese stability programme and the early warning on [12 February 2002].

The Commission recommendation is adopted on the initiative of Pedro Solbes, EU Commissioner for economic and monetary affairs. The Commission's main conclusions are the following:

  • The programme estimates the government deficit to have reached 2.2% of GDP in 2001. In the previous update (January 2001), the general government deficit was projected to decline to 1.1% of GDP in 2001. Part of this shortfall is explained by the unexpected economic slowdown. But other factors also contributed to it, notably an underestimation of revenue losses implied by the reform of direct taxes implemented in 2001, lower-than-projected efficiency gains in tax collection and administration and overruns in current primary expenditure.

  • The government identified the risk of budgetary slippage in the early summer of 2001 and adopted a savings package amounting to 0.6% of GDP. While these measures made for a marked deceleration in expenditure growth in the state sector in the second half of 2001 they were not sufficient to prevent government finances from exceeding the deficit target. As a result, the structural position of Portuguese government finances deteriorated significantly in 2001.

  • The macroeconomic scenario underlying the updated Portuguese stability programme projects output growth to bottom out in 2002 at 1.75%, to accelerate slightly to 2.5% in 2003 and to level off at 3% in the years 2004/05. Although annual average growth of some 2½% seems low for a catching-up country like Portugal, it appears plausible in view of the ongoing adjustment process towards lower levels of indebtedness of private sector agents.

  • In spite of the budgetary slippage in 2001, the updated programme maintains the objective of balancing the government finances by 2004 (for 2005 even a small surplus is projected). Obviously, the adjustment efforts required by the programme's objectives are now much stronger, due also to the less favourable macroeconomic environment. The envisaged adjustment will allow government finances in Portugal to comply with the requirements of the Stability and Growth Pact of a position "close to balance or in surplus" from 2004 onwards.

  • In the short-term, however, government finances in Portugal remain very vulnerable to unfavourable developments to economic growth or budgetary developments. The programme's deficit target of 1.8% of GDP in 2002 must therefore be met. With a view to securing the needed reduction in the deficit to create a safety margin to avoid breaching the 3% of GDP deficit laid down in the Treaty, the Commission proposes to the Ecofin Council to give Portugal an early warning on the basis of Regulation 1466/97 of the Stability and Growth Pact (SGP).

  • The consolidation strategy is based on expenditure restraint as recommended by the Broad Economic Policy Guidelines. For central government finances, current nominal primary expenditure will be capped at 4% per year until 2005, i.e. about 1¾ pp below average nominal GDP growth. Furthermore, structural reform measures are to be implemented in various areas with a direct impact on public finances, notably in the domains of health care and public pensions. These measures are welcome and need to be implemented with determination.

  • The general government debt ratio in 2001 and the projected values for the coming years in the current update have been substantially revised upwards compared to the projections of the previous update. Although remaining well below the 60% ceiling, the debt ratio target in 2004 is now planned to be nearly 6 percentage points above the last update's projection, suggesting the existence of unspecified financial operations which are not accounted for in the deficit.

  • Given the need to ensure the sustainability of government finances and in view of the significant pressures for increased public spending due to an ageing population, the slow decline in the debt ratio remains a source of concern. In addition to intensified budgetary consolidation efforts structural reforms are necessary to strengthen the financial sustainability of government finances. In this respect, the reform of the pension system recently agreed by the social partners is welcome. A major challenge facing Portugal is to complete the process of pension reform and to continue with the reforms of the health care sector.

Key figures from the stability programme of Portugal

2001

2002200320042005
Real GDP growth (percentage change)December

2001

 2.0 1.75 2.5 3.0 3.0
January

2001

 3.3 3.2 3.2 3.2 --
General government balance

(% of GDP)

December

2001

 -2.2 -1.8 -1.0 0.0 0.4
January

2001

 -1.1 -0.7 -0.3 0.0 --
General government debt

(% of GDP)

December

2001

 55.9 55.7 55.5 54.0 51.9
January

2001

 53.4 51.5 49.8 48.1 --
Inflation

(HCPI),

(annual percentage change)

December

2001

 4.4 2.8 2.3 2.1 2.0
January

2001

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