Council Opinion

of 12 February 2002

on the updated stability programme for Portugal, 2001 to 2005

(2002/C 51/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 February 2002 the Council examined the updated stability programme for Portugal which covers the period 2002 to 2005. The updated programme projects general government finances to improve from a deficit of 2,2 % of GDP in 2001 to a balanced position in 2004, with a small surplus expected in 2005. The government gross debt is expected to decrease from 55,9 % of GDP in 2001 to 51,9 % in 2005. The Council notes that the new update broadly complies with the requirements of the revised "code of conduct on the content and format of stability and converge programmes(2)".

The Council notes that the estimated deficit outcome for 2001 (2,2 % of GDP) is clearly higher than projected in the January 2001 update (1,1 % of GDP). The Council acknowledges that this important nominal divergence is partly due to the slowdown in the economy, with 2001 real GDP growth around 1,25 percentage points below projections of the January 2001 update of the programme. However, the Council also notes that lower growth can explain only a part of the shortfall relative to the target. Factors not related to the growth slowdown contributed to this, notably an underestimation of the revenue losses implied by the reform of direct taxes implemented in 2001 and lower-than-projected efficiency gains in tax collection and administration, as well as less favourable developments in current primary expenditure. The Council acknowledges that the Portuguese government took, in a corrective budget adopted in June 2001, measures with a view to curtailing expenditure growth. These measures, which amounted to 0,6 % of GDP were, however, not sufficient to offset the shortfall in tax revenues in order to meet the deficit target set in the previous update of the programme.

The baseline macro-economic scenario of the updated programme expects output growth to accelerate from 1,75 % in 2002 to 3 % in the last two years of the programme, yielding annual average growth of some 2,5 %. This seems realistic in view of the current imbalances in the Portuguese economy, with the necessary adjustment process likely to dampen output growth in the medium term. Given the strong rise in unit labour cost in recent years and its adverse effects on the external competitiveness of the Portuguese economy, the needed increase in export growth is not likely to be strong enough to make up for the shortfall in domestic demand. The Council considers that, for these reasons, the cautious line taken by the programme regarding the medium-term outlook for the Portuguese economy appears appropriate.

The Council notes that the Portuguese authorities maintain their intentions to balance the budget by 2004, as planned in last year's update and as recommended in the broad economic policy guidelines. In cyclically adjusted terms the government accounts would move into a small surplus in 2004. Portugal would thus comply with the requirements of the stability and growth pact from 2004 on. The Council welcomes the confirmation of a balanced budget target for 2004. While acknowledging that achieving a balanced budget target in 2004 requires a considerable effort, the Council considers it necessary and encourages the Portuguese government to pursue it with determination. Once economic recovery is established, the Portuguese government should strengthen its efforts to move rapidly towards its medium-term objective of a zero deficit in 2004. This will require strict respect in the budgets for 2003 and 2004 of the 4 % capping rule for growth of nominal current primary expenditure in general government, and may also require additional discretionary measures.

The Council notes that the budgetary outcome for 2001 departed from the Portuguese budgetary path towards a "close to balance or in surplus" position. The Council welcomes the intentions of returning to such a path in 2002 and considers that the budgetary objective for that year must be met. The Portuguese government should closely monitor budgetary developments in 2002. It should implement its budgetary plans for this year carefully in order to secure an improvement in the deficit. Therefore, any measures likely to lead to a further deterioration in the government deficit should be avoided, and any revenue shortfall other than explained by slower than expected economic growth should be compensated by additional measures. Given that Portugal has not yet achieved a sufficient safety margin against breaching the 3 % of GDP deficit threshold, deviations from the objective must be addressed in good time.

The Council urges the Portuguese authorities to ensure strict budgetary implementation for all sectors of government. Moreover, a number of important reforms have been announced in the programme update, particularly in some areas with a direct impact on public finances, whose timely and determined implementation will be paramount for a successful implementation of the budgetary consolidation strategy.

The Council notes that the debt ratio remains clearly below the 60 % ceiling, but has been revised upwards throughout the programme period. Only part of this revision can be explained by the developments of the government deficit and GDP growth. The Council invites the authorities to provide more detailed information on financial operations in future programme updates in order to allow a better understanding of debt developments.

The Council notes that the sustainability of government finances should be strengthened in light of the budgetary costs of ageing populations. If debt reduction is to make a noticeable contribution towards the sustainability of government finances, the target of a balanced budget position by 2004 must be reached. In addition, structural reforms are necessary to strengthen the financial sustainability of the pension system. The Council notes with satisfaction that the reform of the pension system recently agreed by the social partners goes in the right direction. The main challenge facing Portugal is to complete the process of pension reform and to continue with the reforms of the health-care sector.

(1) OJ L 209/1, 2.8.1997, p. 1.

(2) Revised Opinion of the Economic and Financial Committee on the content and format of stability and convergence programmes, endorsed by the Ecofin Council on 10.7.2001.