eunbil · GT0N1427 · 2006-07-07 00:00:00 — IP/06/811 Commission assesses Portuguese action to correct excessive deficit by 2008 Commission considers that is on track to correct its excessive deficit by 2008 as recommended by the Council in , provided it strictly implements the 2006 budget and pursues a rigorous budgetary consolidation strategy in 2007 and following years. At present it does not appear necessary to recommend any further steps under the excessive deficit procedure. The Commission will continue to monitor the situation closely, particularly in light of the significant risks and uncertainties surrounding the evolution of the budget. "has adopted a comprehensive and courageous package of measures since mid-2005 to reduce its excessive deficit, but there remain significant risks and uncertainties, especially as some important measures have yet to be implemented. The consolidation efforts need to be stepped up, particularly on the expenditure side to put the public finances back on a firm and sound ground as a pre-condition for more and stronger economic growth and for the creation of jobs", said , Commissioner for Economic and Monetary Affairs. On , the Council decided that an excessive deficit existed in and recommended that the government take measures, before 19 2006, to "limit the deterioration of the fiscal position in 2005", "ensure a sustained and marked correction of the cyclically-adjusted deficit, excluding one-off and other temporary measures, by (reducing the deficit by) of GDP in 2006, followed by a further significant decrease of, at least, ¾% of GDP in each of the two subsequent years". also called on to "contain and reduce expenditure over the coming years; seize any opportunity to accelerate the reduction of the budget deficit" and to "stand ready to adopt the additional measures which may be necessary to achieve the correction of the excessive deficit by 2008". It requested to "ensure that the government gross debt ratio is brought onto a firm downward path and approaches the reference value at a satisfactory pace". Lastly, the Council invited the Portuguese authorities to "further improve the collection and processing of general government data" and to achieve a balanced budget in the medium term. In a Communication to the Council adopted today, the Commission considers that the action taken by represents adequate progress towards the correction of the excessive deficit within the set time limit. In particular, (i) achieved the deficit target for 2005 (of GDP); (ii) adopted a comprehensive package of corrective measures whose full planed effect should deliver the required structural adjustment this year; (iii) confirmed the deficit target for 2008 below of GDP and a structural adjustment path that follows the Council recommendation; (iv) implemented expenditure reforms and kept fiscal targets in spite of less benign GDP growth ; (v) plans to return government debt to a declining path as from 2008; and (vi) has taken action to improve statistics. particularly increased its standard VAT rate to from , raised taxes on oil and tobacco products and improved the collection of tax revenues, something which is already wielding effects. The 2006 budget also aims at stabilising expenditure in real terms namely through a freeze of transfers to local governments, stricter hiring rules for civil servants as well as a freeze on automatic career promotions. permanent measures include the phasing out of the civil servants pension scheme and their integration into the general regime as well as health-expenditure cuts. While there remain uncertainties about the effectiveness of the expenditure- containment measures and mechanisms, preliminary data on budgetary execution suggest that the plans have been broadly observed so far this year. As a result, the Commission considers that no further steps under the excessive deficit procedure are needed at present. At the same time, it stresses that there are significant risks and uncertainties surrounding the objective of correcting the excessive deficit by 2008 - the chief proviso being that the budgetary outcomes can be achieved only if all the announced corrective measures are effectively implemented. It notes that, should the planned measures prove ineffective, further corrective efforts will be needed in order to attain the fiscal targets. The Commission will continue to monitor budgetary developments in closely, in particular in the light of the fragile situation of its public finances. The Commissions communication to the Council is available at: The following table compares budgetary targets contained in the and 2005 Stability Programmes as well as the Commissions services spring economic forecasts of 8 this year. Comparison of key macroeconomic and budgetary projections 2004 2005 2006 2007 2008 2009 Real GDP (% change) SP 1.2 0.5 1.1 1.8 2.4 3.0 Spring forecasts 1.1 0.3 0.9 1.1 n.a. SP 2005 1.0 0.8 1.4 2.2 2.6 3.0 HICP inflation (%) SP * 2.4 2.3 2.3 2.2 2.2 2.1 Spring forecasts 2.5 2.1 2.7 2.4 n.a. SP 2005 2.5 2.5 2.9 2.5 2.5 2.4 Output gap (% of potential GDP) SP -1.5 -2.3 -2.7 -2.5 -1.8 -0.7 Spring forecasts6 -1.2 -1.9 -2.2 -2.3 n.a. SP 20051 -2.1 -2.7 -2.8 -2.3 -1.6 -0.7 General government balance (% of GDP) SP -3.0 -6.0 -4.6 -3.7 -2.6 -1.5 Spring forecasts -3.2 -6.0 -5.0 -4.9 n.a. SP 2005 -2.9 -6.2 -4.8 -3.9 -2.8 -1.6 Primary balance (% of GDP) SP -0.3 -3.2 -1.7 -0.6 0.6 1.5 Spring forecasts -0.5 -3.3 -2.1 -1.8 n.a. SP 2005 -0.1 -3.3 -1.6 -0.5 0.7 1.8 Cyclically-adjusted balance (% of GDP) SP -2.3 -5.0 -3.4 -2.6 -1.8 -1.2 Spring forecasts -2.7 -5.1 -4.0 -3.8 n.a. SP 20051 -2.2 -5.3 -3.8 -3.1 -2.3 -1.4 Structural balance2 (% of GDP) SP n.a. -5.0 -3.4 -2.6 -1.8 -1.2 Spring forecasts4 -4.8 -5.2 -4.1 -3.9 n.a. SP 20055 -4.5 -5.5 -3.8 -3.1 -2.3 -1.4 Government gross debt (% of GDP) SP 59.4 65.5 68.7 69.3 68.4 66.2 Spring forecasts 58.7 63.9 68.4 70.6 n.a. SP 2005 61.9 66.5 67.5 67.8 66.8 64.5 Notes: 1Commission services calculations on the basis of the information in the programme. 2Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures. 3There are no one-off and other temporary measures in the programme. 4One-off and other temporary measures taken from the Commission services spring forecast: of GDP in 2004, of GDP in 2005 and of GDP in 2006 and of GDP in 2007; all deficit-reducing. 5One-off operations taken from the 2005 programme: of GDP in 2004 and of GDP in 2005; all deficit-reducing. 6Based on estimated potential growth of , , and respectively in the period 2004-2007. *Private consumption deflator Stability programme (SP); Commission services spring economic forecasts (COM); Commission services calculations