(1)

In line with Article 3(10) of Council Implementing Decision 2011/344/EU (2), the Commission, together with the International Monetary Fund (IMF) and in liaison with the European Central Bank (ECB), has conducted the sixth review of the Portuguese authorities’ progress on the implementation of the agreed measures under the economic and financial adjustment programme (‘Programme’) as well as of their effectiveness and economic and social impact.

(2)

After a strong decline of 3 % in 2012 in real terms, economic activity is expected to gradually recover starting from the second half of 2013 with quarterly growth rates returning to positive territory. Looking forward, the economic recovery is expected to gather pace in 2014 despite risks to the macroeconomic outlook. This includes potential headwinds from domestic consumption and a stronger-than-expected deterioration of the economic climate in some euro area Member States, which could have spill-over effects on Portugal.

(3)

The 5 % of gross domestic product (GDP) budget deficit target for 2012 remains valid, even though there are some risks. While the budgetary execution on the expenditure side remains under control, revenues until October continued to fall short of already downward revised targets. Additional saving measures worth around 0,3 % of GDP are being implemented to meet the deficit target, but there are some uncertainties with regard to their final yield. Finally, the statistical authorities are still assessing whether the sale of the airport concession (ANA), estimated at 0,7 % of GDP, can be treated as a deficit-reducing operation.

(4)

The 2013 budget law, which was adopted on 27 November 2012, includes discretionary measures of more than 3 % of GDP to achieve the deficit target of 4,5 % of GDP in 2013. On the expenditure side, the budget envisages a sizeable reduction in the public sector wage bill through lower employment coupled with a reduction in overtime payments and other compensations. Rationalisation efforts in the health sector, state-owned enterprises (SOEs) and public-private partnerships (PPPs) will be deepened, while social spending will be further streamlined. On the revenue side, the 2013 budget provides for a comprehensive restructuring of the personal income tax that will reduce the number of brackets and increase the average tax rate in line with European standards, while preserving progressivity and curbing tax benefits. In addition, a surcharge of 3,5 % will be imposed on the part of taxable income above the minimum wage and a solidarity surcharge of 2,5 % on income above EUR 80 000 and of 5 % on income above EUR 250 000. Corporate income tax revenues will be increased by means of limiting the deductibility of interest costs, reducing the threshold for applying the highest surcharge on profits and changing the methodology for special prepayment to companies under group taxation, among others. The 2013 budget also includes changes in indirect taxation, in particular an increase in excise taxes on tobacco, alcohol and natural gas, a broadening of the base of property taxation after a revaluation of properties, and the creation of a financial transaction tax. In addition, social contributions will rise as they will also be charged on supplementary payments for public employees and on unemployment benefits.

(5)

Taking into account the measures in the 2013 budget, revenue increases will contribute by 80 % to the fiscal adjustment in 2013 while the remaining 20 % will come from expenditure reductions (after considering the effect of the reinstatement of the 13th salary in the public sector and 1,1 monthly pensions, following the decision of the Constitutional Court). In view of the risks associated with the strongly revenue-based adjustment, the Portuguese authorities are preparing contingency measures amounting to 0,5 % of GDP which will be activated if risks materialise. The measures will mainly consist of expenditure savings, in particular further reductions in payroll costs, and will be further specified in early 2013 in time for the seventh review.

(6)

The budgetary adjustment process is underpinned by a range of structural measures to enhance control over government expenditure and improve revenue collection. In particular, a comprehensive reform of the budgetary framework is provided for to bring it in line with best practices in budgetary procedures and management. The new commitment control system is starting to show results but implementation needs to be monitored closely in order to ensure that commitments are in line with funding. Reforms in the public administration, which have already produced significant savings, will continue. Key reforms to restructure the revenue administration are close to completion and the authorities are enhancing monitoring and strengthening revenue compliance. The renegotiation of PPPs has started and significant savings are projected for 2013 and beyond. SOEs are expected to reach operational balance on average by the end of 2012. Reforms in the health care sector are producing significant savings and implementation is continuing broadly in line with targets.

(7)

A comprehensive expenditure review has been initiated with the objective of enhancing the efficiency and equity of public services, while generating spending savings of about EUR 4 billion or 2,5 % of GDP. The exercise aims at reducing redundancies across the public sector functions and entities, and reallocating resources toward growth-friendly spending areas. The identification, quantification and timetable of the implementation of the measures should be specified by February 2013. The 2013 Stability Programme will provide further information on the medium-term fiscal consolidation plan.

(8)

Under the Commission’s current projections for nominal GDP growth (– 1,0 % in 2011, – 2,7 % in 2012, 0,3 % in 2013 and 2 % in 2014) and the fiscal targets of 5 % of GDP in 2012, 4,5 % in 2013 and 2,5 % in 2014, the debt-to-GDP ratio is expected to develop as follows: 108,1 % in 2011, 120 % in 2012, 122,2 % in 2013 and 122,3 % in 2014. The debt-to-GDP ratio would level off from 2012 onwards and be placed on a downward path after 2014, assuming further progress in the reduction of the deficit. Debt dynamics are affected by several below-the-line operations, including sizeable acquisitions of financial assets, in particular for possible bank recapitalisation and financing to SOEs and differences between accrued and cash interest payments.

(9)

The capital augmentation exercise amounting to EUR 8,2 billion is nearly completed and will allow the participant banks to meet the European Banking Authority regulatory capital buffers as well as the end-of-year target for 2012 of a Core Tier 1 ratio of 10 %. The indicative loan-to-deposit target of 120 % by 2014 will likely be met with some banks already below the threshold at this stage. Efforts to diversify the sources of funding for the corporate sector are being strengthened. The legal acts on bank resolution, including recovery plans, bridge banks and a resolution fund, are being finalised.

(10)

Further progress has been made in implementing growth and competitiveness enhancing structural reforms. In addition to strengthening active labour market policies, the authorities are committed to reducing severance payments in order to promote labour market flexibility and job creation. The implementation of the action plans on secondary school and vocational training is overall progressing as scheduled.

(11)

The transposition of Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market (3) aiming at reducing barriers to entry and boosting competition and economic activity, by facilitating access for new entrants to the market in the different economic regimes, is proceeding at good pace. Licensing procedures and other administrative burdens are also being simplified in different economic sectors such as environment and territorial planning, agriculture and rural development, industry, and geology. A framework law to set the main principles of the functioning of the most important national regulator authorities, including their endowment with strong independence and autonomy, is under preparation.

(12)

Reforms of the judicial system continue to advance according to the agreed schedule. Further progress has been achieved on the reduction of backlog cases and broader reforms such as the geographical reorganisation of the court districts and the reform of the Code of Civil Procedure.

(13)

Each measure required by this Decision is instrumental in re-establishing a sound economic and financial situation in Portugal and restoring its capacity to finance itself on the markets.

(14)

In the light of these developments, Implementing Decision 2011/344/EU should be amended,

(1)

paragraph 7 is replaced by the following:

(*1)   OJ L 376, 27.12.2006, p. 36.’;"

(2)

paragraph 9 is replaced by the following: