(1)

The Council granted financial assistance to Portugal, at the latter’s request, on 17 May 2011 by means of Council Implementing Decision 2011/344/EU (2). Such financial assistance was granted in support of a strong economic and financial reform programme (the ‘Programme’) which aims to restore confidence, enable the return of the economy to sustainable growth, and safeguard financial stability in Portugal, the euro area and the Union.

(2)

In line with Article 3(10) of Implementing Decision 2011/344/EU, the Commission, together with the International Monetary Fund (IMF) and in liaison with the European Central Bank (ECB), has conducted, between 16 September and 3 October 2013, the combined eighth and ninth reviews of the Portuguese authorities’ progress on the implementation of the agreed measures under the Programme.

(3)

Quarterly real gross domestic product (GDP) growth returned into positive territory in the second quarter of this year and short-term indicators also point to a progressive bottoming out of the recession. Real GDP is expected to contract by 1,8 % this year and to grow by 0,8 % and 1,5 % in 2014 and 2015, respectively. Tensions in the labour market are expected to ease somewhat. Still, the unemployment rate is expected to peak at 17,7 % next year before starting to decrease progressively. Uncertainties with regard to the macroeconomic outlook are high as the sustainability of the projected recovery in 2014 and 2015 is contingent on positive trade and financial market developments, which remain fragile.

(4)

Up to August 2013 the government cash deficit recorded an improvement of 0,6 percentage points of GDP (net of extraordinary factors) compared with the same period of the preceding year. Solid tax revenue performance and tight execution of most expenditure items are supporting the budgetary execution. However, some deviations have been identified with respect to the fiscal outlook of the seventh review of the Portuguese authorities’ progress on the implementation of the agreed measures under the Programme (‘seventh review’). These deviations include shortfalls related to the reprogramming of Union funds and the postponement of the sale of a port concession (one-offs) and other factors, such as the higher than expected contribution to the Union budget, the underperformance of some non-tax revenue, the transfer to Greece of dividends from Greek bonds holdings in Banco de Portugal’s investment portfolio, the lower than expected social contributions to the public employees’ pension scheme and overruns in the wage bill and intermediate consumption. After the use of the provisional budget allocations (0,3 % of GDP), the net effect of the deviations is estimated to increase the 2013 deficit by 0,5 % of GDP. In addition, a capital injection into BANIF — Banco Internacional do Funchal, SA amounting to 0,4 % of GDP also increased the budget gap although this operation should not be considered for Programme purposes.

(5)

The Government is taking corrective measures to ensure attainment of the 5,5 % of GDP programme deficit target, in particular through the reduction of available funds for investment and tighter control on the intermediate consumption of line ministries (0,1 % of GDP). In addition, the Government announced a one-off tax-and-social-security-contributions debt recovery scheme, which is expected to recover revenue of about 0,4 % of GDP and is accompanied by increased sanctions for criminal tax offenders.

(6)

The updated fiscal projections show a fiscal effort for 2013, measured by the improvement in the structural balance, of 0,5 % of GDP — slightly below the 0,6 % of GDP envisaged at the seventh review. The projected underperformance is mainly explained by delays in the implementation of the initially planned consolidation package and its partial replacement by one-offs while unexpected pressure has weighed on the budget reserves. The implementation delays are due to several constraints, including the political crisis in July and the subsequent government reshuffle; the challenge of responding to the Constitutional Court ruling of 29 August deeming some provisions of the draft law for a new requalification system unconstitutional and the technical difficulties in implementing certain measures, in particular the redesigned social security contributions from unemployment and sickness benefits above a minimum level, following the Constitutional Court ruling of 5 April.

(7)

The Government has reaffirmed its commitment to the deficit target of 4 % of GDP in 2014. In this respect, the Government has adopted consolidation measures amounting to about 2,3 % of GDP, which also cover for part of the slippages in 2013 that will carry over into 2014. The consolidation measures are to a large extent included in the draft Budget Law, whilst some measures are implemented through specific legislation. The measures are primarily of a permanent nature and rest predominantly on expenditure savings. Overall, the cumulative value of the consolidation package necessary to achieve the envisaged fiscal adjustment has not changed with respect to the seventh review — approximately EUR 4,7 billion of permanent saving measures over 2013-2014, or 2,8 percent of GDP. However, part of the consolidation effort is now back-loaded to 2014 as a result of the aforementioned implementation delays in 2013.

(8)

Most of the consolidation in 2014 — about 1,8 percent of GDP — should be drawn from the public expenditure review, which was carried out over the past year with the objective of increasing equity and efficiency in the provision of social transfers and public services. The main public expenditure review measures will be along three principal axes: (1) limiting outlays in the public sector wage bill by reducing the public-sector work force while shifting its composition towards higher-skilled employees, aligning the public sector work rules with those of the private sector and making the remuneration policy more transparent and merit-based; (2) pension reform; and (3) sectoral expenditure cuts across line ministries and programmes.

(9)

To compensate for the negative carry-over from the 2013 budgetary execution and achieve the 4 % of GDP deficit target, the public expenditure review package is to be complemented by other permanent measures aiming to further improve the efficiency and equity of the current tax and benefit structure (worth 0,4 % of GDP). Moreover, a number of one-off measures worth 0,2 % of GDP will be implemented, more than offsetting the costs arising from the one-off upfront payments related to the introduction of a mutual agreement redundancy scheme in the public sector.

(10)

The debt-to-GDP ratio is expected to peak at 127,8 % in 2013 and to decline thereafter. The upward revision with respect to the seventh review is explained by the correction of the 2012 debt data, which is now slightly higher, and the non-realisation of some short-term debt-reducing operations. In particular, the Social Security Stabilisation Fund is now expected to increase its holdings of Portuguese Government bonds more gradually and General Government payables to Parpublica will be higher than previously foreseen until the new ESA 2010 enters into force and the status of the company is defined. Moreover, the Treasury cash balance at the end of the year is estimated to be higher than previously assumed (by about EUR 4 billion).

(11)

The budgetary adjustment process is flanked by a range of fiscal structural measures to enhance control over government expenditure and improve revenue collection. In particular, a comprehensive reform is bringing the budgetary framework, including at central, regional and local government levels, in line with best practices in public finance management. The new commitment control system is showing results but implementation needs to be monitored closely to ensure that commitments are covered by available funding. Reforms in the public administration continue with a view to modernising and rationalising public sector employment and entities. Progress in the reform agenda of the revenue administration is enhancing monitoring and strengthening revenue compliance. The renegotiation of public-private partnerships (PPPs) has made good progress and significant savings are projected for 2013 and beyond. State-owned enterprises (SOEs) reached operational balance on average by the end of 2012 and additional reforms are foreseen to avoid a renewed deterioration of their results. Reforms in the health care sector are producing significant savings and implementation is continuing broadly in line with targets.

(12)

The banks’ capital ratios increased substantially in the past year allowing them to meet the European Bank Authority regulatory capital buffers as well as the 10 % core tier 1 Programme target. This capital buffer remains adequate across the board when using the new Capital Requirements Directive (CRD) IV rules for evaluating the banks’ own funds. These new capital rules will apply from January 2014 onwards. Banco de Portugal is currently developing a transition approach to introduce CRD IV. The indicative loan-to-deposit target of 120 % by 2014 is likely to be met, with some banks already below this threshold. Efforts to diversify the sources of funding for the corporate sector are being strengthened. Building on the recent external audit of the existing government-sponsored credit lines and on a set of policy recommendations, the authorities submitted a plan with measures aiming to improve the performance and governance of those instruments. The crisis management toolkit is being finalised. The bank resolution fund is functioning, early intervention powers have been introduced and the recapitalisation law is being amended to reflect the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (3).

(13)

Further progress has been made in implementing growth and competitiveness-enhancing structural reforms. A new reduction of severance payments entered into force on 1 October 2013 and two compensation funds have been established with the purpose of a partial financing of severance payments. Additional steps have been taken to strengthen active labour market policies. Additional measures have been adopted in the area of education, in which progress is overall satisfactory.

(14)

The implementation of Directive 2006/123/EC of the European Parliament and the Council (4), which aims to reduce barriers to entry and boost competition and economic activity by facilitating access for new entrants to the market in the different economic regimes, is proceeding at a good pace and its transposition is now close to completion. The framework law for improving the functioning of the regulated professions involving a professional body was adopted and the revision of the statutes of the eighteen professions concerned is the next step to complete this reform. The framework law to set the main principles of the functioning of the most important national regulatory authorities, including their endowment with strong independence and autonomy entered already into force and the bylaws of the various sectoral regulators are to be adopted soon. Implementation of the measures to reduce the electricity tariff debt has been delayed, though the Government has recently presented a new levy to partially deal with this matter. Some legal provisions which aim to ease licensing procedures and other administrative burdens have been adopted such as the proposal of the new base law for soil, spatial planning and urbanism.

(15)

Further progress is still necessary to make the transport sector more sustainable and open to competition. There has been some improvement in the financial position of the rail infrastructure manager, but significant additional effort is needed to bring it to operational balance by 2015. The reforms in ports need to be stepped up.

(16)

Some additional measures have been adopted to improve the liquidity conditions of the business sector, in particular Small and Medium Enterprises (SMEs).

(17)

Reforms of the judicial system are close to completion. Progress has been achieved in reducing the backlog of cases and landmark reforms such as the geographical reorganisation of the court districts and the reform of the Code of Civil Procedure have been or are on the way to being completed. Continued improvement of the functioning of the judicial system, which is essential for the proper and fair functioning of the economy, through: (i) ensuring effective and timely enforcement of contracts and competition rules; (ii) increasing efficiency by restructuring the court system, and adopting new court management models; (iii) further reducing the slowness of the courts in dealing with cases (including tax court cases) is nevertheless necessary.

(18)

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