Ministry of Finance

PORTUGUESE ECONOMY

November 2011

GPEARI - Office for Strategic Planning, Economic Policy and International Affairs

Portugal: small open economy

EuropePortugalShare of EU27, in 2009
Population
2.1%
Gross Domestic Product1.4%
Exports
Percentage of GDP
in 1986
28,0%
in 200832,5%
Geographic Distribution in 2009
EU-15
64.7
Non EU-15
35.3

Main Economic Events:
1986 - Portugal joins the European Communities
1992 - The Treaty of Maastricht is signed
1992 - The Escudo enters into the European Monetary System
1993 - The Single European market enters into force
1999 - Portugal becomes a founding member of the euro area
2

Portuguese Ministry of Finance2Assessment and Recent Developments

1. Main Macroeconomic Indicators: Potential GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

-0.5

Labour (p.p.)

Portuguese Ministry of FinanceCapital (p.p.)

TFP (p.p.)

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-1.0

Potential GDP (%)

3

Assessment and Recent Developments

1. Main Macroeconomic Indicators: Exports Performance Increase in the importance of medium and high-tech exports;
 Positive Technological Balance of Payments since 2007.

Technological Intensity of Portuguese Exports 1 400

Technological Balance of Payments(% of total exports)

70,0Medium and hightechnology

65,0(Million €)

1 200
1 000

Low technology
60,0

800

55,0

600
400

50,0

200

45,0
0

40,0

-200

2010*

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

-600

1992

30,0

1991

-400

1990

35,0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Balance

Sources: INE and MFAP; *Data available only for the Jan-September period.

Portuguese Ministry of Finance

Exports

Imports

Source: Banco de Portugal .

4

Assessment and Recent Developments

1. Main Macroeconomic Indicators: Exports Performance Big Effort in R&D investment - Eurostat (Nov, 2010): “Among the EU27,
the highest proportions of enterprises with innovation activity in thisperiod [between 2006 and 2008] were recorded in Germany (80% of
enterprises), Luxembourg (65%), Belgium and Portugal (both 58%) and
Ireland (57%).”
 Diversification of Portuguese Exports to non-EU markets.
30

Share of non-EU markets in the Portuguese
Exports (%)

Research & Development Expenditure(% of GDP)

2,50

2,19 2,21

1988

2,00

2,01

2009
1,80

25

1,66

1,50

1,38
1,19

1,27

1,00

20
0,69

0,50

0,41

0,00

Portugal

Spain

Source: Eurostat

Portuguese Ministry of Finance

Italy

FranceEU average

15
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010*

Source: INE; * data available until November.

5Assessment and Recent Developments

1. Main Macroeconomic Indicators: Most Recent Data•

… and a decline in financing needs of the economy
Current and capital account64

as % GDP

2

0
-2
-4.4

-4

-6

-6.7

-6.6

-8

-6.7
-8.9

-9.0
-9.2

-10

-8.9
-9.7

-9.5

-8.5

-11.4

-12
-14
-16
-18
2000

2001

2002

Goods
IncomeCapital Account

2003

2004

2005

2006

2007

2008

2009

2010

2011
IQ

Services
Current transfers
Net external borrowing requirem ents

Source: INE

Portuguese Ministry of Finance6Assessment and Recent Developments

1. Main Macroeconomic Indicators: Saving Rate•

… and a increase in saving rate
Saving Rate(% of Disposable Income)

12
11
10
9

8
7

6
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Portuguese Ministry of Finance7

Assessment and Recent Developments

Increase in sovereign market (became unsustainable )10 Years Bonds
650
450
250

b.p.

50
-150

-350
-550

Jan-11

Jul-09

Jan-08-750

Portugal vs Germany
Portugal vs Spain

Portuguese Ministry of FinancePortugal vs Greece
Portugal vs Ireland

Portugal vs Italy

8

STRUCTURAL CHANGESSINCE 2005

Structural Reforms

Policy Response: Deepening the Structural Reforms
launched before the crisis to Promote
Competitiveness and Economic Growth
Reform of Public Administration
 Public Administration Resizing and Human Resources Management
Improvement
Simplex Programme;

Public Sector Employees
760000 e-Government;

740000720000700000680000660000640000620000
2005

2006

2007

2008

2009

2010 (e) Governance Indicators andImproved Business
Environment (internationallyrecognized; e.g., World Bank
Governance Indicators, 2008;
Doing Business 2011 Report)

Source: MF.
Portuguese Ministry of Finance10Structural Reforms

Further Policy Response: Social Security
Reform of Social Security System, which placed Portugal in a good
relative position in terms of fiscal sustainability.
Sustainability gap S2 calculated by the EC (2009)(baseline scenario, % GDP)
16
14

12
10
8
6
4

2
0
-2

DK
HU
BG
EE
IT
SE
PL
FI
DE
AT
BE
PT
FR
EA
EU27
NL
MT
LT
CZ
SK
CY
RO
LV
ES
SI
UK
LU
EL
IE

-4

Source: European Commission, "The Long-term Sustainability of Public Finances in the European Union", 2009 EE no.9 and Commission Services.

Portuguese Ministry of Finance11Structural Reforms
Response

Further Policy Response: Labour Market

Positive effect of the reform of the Labour Law on market dynamics
Labour Market Rigidity
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Germany

Portugal

France

1998

2004

Spain

OECD average

2009

Source: OECD
Note: This indicator is calculated on a scale from 0 (less restrictive) to 6
(more restrictive) .

The OECD index on EPL (employment
protection legislation) improved significantly
after the labour market reform of 2009.
Portuguese Ministry of Finance

Current priority: improve
competitiveness in the short run ->Control unit labour costs
Wage restraints in the public
sector will be kept in place –private sector tends to follow;
Strengthen the link between
wage setting and productivity
dynamics;
Decrease employers’ social
security contributions (notpossible at the current juncture).
Encourage the return to work andreduce long-term unemployment
12Structural Reforms

Further Policy Response: Energy Strategy
National Energy Strategy 2020
Electricity generated from renewable sources(as % of gross electricity consumption)

Sources: BdP and INE

Portuguese Ministry of Finance Promoting renewable energy:
Portugal has now a leading role in
the use of renewable sources ofenergy (e.g., wind, hydro systems
and sunlight);
 Consolidating the electricalmobility programme; Promoting smart grids: energy
transport networks;
 Improving energy efficiency;
 Increasing competition in energy
markets;
 Introducing green taxation
measures.
13

Structural Reforms

Further Policy Response: Human Capital Qualifications as a key factor for productivity

Some measures already implemented
Basic and Secondary Education:

Qualification of the Labour Force: University degree
and uneducated(% of total)

14.0%• English teaching generalised tin basic
education• Thorough technological upgrade of schools
12.0%• ICT: PC Magalhães and broadband forstudents

10.0%
8.0%

• Programme of entrepreneurship education

6.0%

Higher Education:

4.0%• Reorganisation of universities;• Internationalisation: R&D partnerships

2.0%
University degree

Uneducated0.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

• Financial support to postgraduates• 1,000 new doctorates hired by Universities

Sources: I NE and MF.

Qualifications and employability:

Number of graduates in the labour force
increased sharply• New Opportunities Initiative: qualify 1
million working people by 2010.

Portuguese Ministry of Finance14

Public Finances

Budget balance
The budget deficit increased sharply in 2009
some methodological changes have occurred
Budget Balance (% of GDP)
2007

2008

-2,7

-3,1

2009

2010

2011

2012

0,0
-2,0

-0,4
-4,0

-5,9

-0,5

-4,5

-7,5
-9,5

-6,0
-8,0
-10,0

-0,5

-0,5
-1,3
-0,5

-12,0
Budget balance - previous methodology

Public transportation enterprises

BPN and BPP

PPPs

Sources: Eurostat (EDP), MF

Portuguese Ministry of Finance15

Public Finances

Public debt
Public debt (% of GDP)

120,0

100,0
2,5
6,8
80,0

60,0

7,0
5,7

6,2
101,9

40,0
62,5

65,4

2007

2008

75,9

110,5

83,4

20,0

0,0
2009

2010

2011

2012

Public debt (previous methodology)

Debt of public transportation enterprises

Debt BPP e BPN

PPP reclassifications

Sources: Eurostat (EDP), MF.

Portuguese Ministry of Finance16

ECONOMIC AND FINANCIAL ADJUSTMENTPROGRAMME
MAY 2011
MAIN GUIDELINES

Economic and Financial Adjustment Programme
Main challenges faced by the Portuguese economy:Consolidate public finances;

Promote economic
imbalances;

Strengthen the financial sector and improve the financing
conditions of the economy.

growthandcorrect

macroeconomic

The Programme is based on three pillars:

Ambitious fiscal adjustment strategy;Comprehensive set of structural reforms;



Safeguarding the financial sector against disorderly
deleveraging through market-based mechanisms supported byback-up facilities.

Portuguese Ministry of Finance18Economic and Financial Adjustment Programme

Fiscal Adjustment• Targets Public Deficit (%GDP): 5.9% in 2011, 4.5% in 2012 and 3% in 2013;
 Public Debt: stabilisation by 2013.
• Positive Primary Balance already in 2012

Portuguese Ministry of Finance19Economic and Financial Adjustment ProgrammeA) Reduction of Expenditure:B) Increase of Revenue:• Freezing of wages in the public sector and freezingof pensions until 2013 (except for lowest pensions);• Special contribution over pensions above €1500;• Civil servants reduction (1%/year in central adm.
and 2%/year in local and reg. adm.);• Tighter cost control on Health, Education andDefence;• Reduce costs of health benefit schemes for State
employees;• Rationalisation in Public Administration;• Reduction of expenditure on social benefits(including UB);
• Costs reduction in SOEs and Other Public Entities
and Bodies;• Reduction in transfers to local and regional
governments;• Reduction of capital expenditure.

• Freeze in tax expenditure;C) Accelerate the privatization
programme
Portuguese Ministry of Finance• Reduction of tax benefits and deductions inpersonal and corporate income taxes;• Set tighter limits to lower taxation in regional
administration;• Apply personal income taxes to all types of cashsocial transfers and ensure convergence of
personal income tax deductions applied topensions and labour income;• Rationalisation of VAT tax structure:• Review of excise taxes (tobacco, vehicles,
electricity) and indexation to core inflation;• Combat to informality and tax evasion;• Reassessment of property values; reduction of
temporary exemptions of the recurrent propertytax (IMI); gradual rebalance of taxation on realestate.

Broad scope of application: central, regional
and local administration

20

Economic and Financial Adjustment Programme

Structural reforms
Deepening of reforms to boost potential growth, create jobs, and improve
competitivenessFiscal-Structural Measures
Following the amendment of the Budgetary Framework Law, recently
approved by the Parliament, which includes a multi-annual framework withexpenditure and budget balance rules:• Further integrate the budget process, in particular in what concerns SOEs and
PPPs, and reinforce monitoring/assessment mechanisms;• Improve transparency (additional information provided on a regular andcomprehensive basis): arrears, budget execution, number of civil servants;• Reinforce the monitoring powers of the Ministry of Finance;• Set up the Fiscal Council;• Fully adapt the local and regional financing framework to the principles and rules
adopted by the recently revised Budgetary Framework Law.

Portuguese Ministry of Finance21Economic and Financial Adjustment ProgrammeState-Owned Enterprises (SOEs)
Operational costs reduction; Comprehensive
assessment of tariffs structure; Tighter debt
ceilings; Strength of governance in accordancewith international best practices; Report
reviewing the operations and finances of SOEs;
no additional SOEs will be created until thisreview is completed.
Public Private Partnerships (PPPs)
Assessment of the 20 most significant PPP
contracts; Assess the feasibility to renegotiate
any PPP or concession contract to reduce theGovernment financial obligations; Detailed study
to identify major contingent liabilities;
Strengthened legal and institutional framework
for assessing fiscal risks; Commitment of
avoiding engaging in any new PPP or concession
before the completion of the review and the legal
and institutional reforms.

Portuguese Ministry of FinancePublic Administration: improvement inbusiness environment at central, regional andlocal levels• Reduction of management positions andadministrative units (by 15%);• Cost/benefit analysis of all public and quasipublic entities (foundations, associations andother bodies); identification of potential
duplication of services;• Regulate by law the creation and functioningof these entities;• Reorganisationof
local
government
administration.

Fiscal devaluation: Reducing labour costs andboost competitiveness• Reduction of the social security contribution
compensated by tax measures (that do notaffect negatively competitiveness) and byadditional
permanent
cuts
inpublicexpenditure;•Budget neutral recalibration of the tax system;

22

Economic and Financial Adjustment ProgrammeLabour Market• Implementation of the Agreement withSocial Partners;• Severance payments;• Definition of dismissals;• Promote the use of flexible working timearrangements;• Wage Setting;Public Procurement: review of the legal framework andreinforcement of transparency and efficiency of public
spending.
Business Environment: reinforce previous measures ofsimplex programme, extending it to all levels of public
administration.
Goods and Services Markets(energy, telecommunications, postal services, transports)• Elimination of “golden-shares” and other special rights to theState in publicly quoted companies;• Review of unemployment benefits, including
by introducing a declining profile of benefits
over the unemployment spell;• Foster competition, namely
telecommunications sectors;• Reviewofemployment
legislation, fostering flexibility;

Housing Market

protection• Clarification of criteria underlying collective
agreements extension.

in

the

energyand• Reduction in the number of regulated professions.
• Promote the rental market;• Reduce incentives to households indebtedness;• Foster labour mobility.
Judicial System

Education: Improve the quality of
secondary education and of vocational
education and training; facilitate labour
market matching; tackle early school leaving; raise the quality of human capital

Portuguese Ministry of Finance

Health: improve efficiency and effectiveness in thehealth care system; increase moderating fees; reduce
tax allowances substantially; reinforce means-testingmechanisms;
reducepublicexpenditureonpharmaceuticals.

23

STATE BUDGET

2012

State Budget for 2012
Macro Scenario
GDP is expected to fall by 2.8% in 2012;
All domestic demand components are expected to decline in 2012;
GDP is seen to resume a positive growth trend from mid-2013 onwards

Portuguese Ministry of Finance25

State Budget for 2012
Public Finances
Deficit target for 2012 was set at 4.5% of GDP, a reduction of around €2.5bn in the budget
deficit vis-à-vis previous year;
Fiscal consolidation will be based on current primary expenditure, which is forecasted todecrease by 2.4p.p. of GDP in 2012;
Primary balance will be positive for the first time since 1999:

Important dates: 2012 general vote on the budget expected for November 4 th and final vote for
November 29 th.
Portuguese Ministry of Finance26

State Budget for 2012

Budget deficit(2011 – 2012)
10.0
1.5

9.0
0.7

8.0
7.0

5.3

1.8

6.0
5.0
4.0
3.0

5.9
4.5

2.0
1.0

0.0
Budget Deficit
2011

Portuguese Ministry of Finance

Temp.
Measures(2011)

Interest
Cyclical Effect
Increade (2012)

Consolidation
Measures

Budget Deficit
2012

27

General Government Account (national accounts basis)% of GDP
2010

2011

Change in p.p. of GDP
2012

2010

2011

2012

Current revenue

38.9

40.4

41.2

0.1

1.5

0.8

Tax revenue

22.2

23.4

24.4

0.5

1.2

0.9

Taxes on production and imports

13.3

14.0

15.2

0.7

0.7

1.2

Taxes on income and wealth

8.9

9.5

9.2

-0.2

0.6

-0.2

Social contributions

12.2

12.5

12.0

-0.3

0.2

-0.5

Other current revenue

4.4

4.5

4.9

-0.2

0.0

0.4

Capital revenue

2.7

3.1

1.4

1.8

0.4

-1.7

Total revenue

41.6

43.4

42.5

1.8

1.9

-0.9

Current expenditure

45.7

45.3

43.9

-0.1

-0.4

-1.4

Intermediate consumption

5.0

4.6

4.6

0.1

-0.4

0.0

Compensation of employees

12.2

11.6

10.0

-0.4

-0.6

-1.6

Social transfers

21.9

21.7

21.1

0.0

-0.2

-0.7

Subsidies

0.7

0.9

1.0

-0.1

0.2

0.1

Interest

3.0

4.3

5.2

0.1

1.3

1.0

Other current expenditure

2.8

2.2

2.1

0.3

-0.6

-0.1

5.6

4.0

3.1

1.5

-1.7

-0.9

Gross fixed capital formation

3.6

2.4

2.1

0.6

-1.2

-0.3

Other capital expenditure

2.1

1.6

0.9

0.9

-0.5

-0.6

Total expenditure

51.3

49.3

47.0

1.5

-2.0

-2.3

Overall balance

-9.8

-5.9

-4.5

0.4

3.9

1.4

Current primary expenditure

42.7

41.1

38.7

-0.2

-1.6

-2.3

Primary expenditure

48.3

45.0

41.8

1.3

-3.3

-3.3

Current primary balance

-3.8

-0.7

2.5

0.3

3.1

3.2

Primary balance

-6.8

-1.6

0.7

0.5

5.2

2.3

Capital expenditure

Sources: NSI and Ministry of Finance.

Portuguese Ministry of Finance28

State Budget for 2012

Measures for 2012(no policy change)
ProgrammeState Budget

2012

2012

10^6 Euro% GDP

10^6 Euro

% GDP

Total

4 506
740
1 073
684
702
312
150
846
1 535
1 085
450
:
:
6 041

2.7
0.4
0.6
0.4
0.4
0.2
0.1
0.5
0.9
0.6
0.3
:
:
3.6

7 460
2 694
2 066
1 000
690
88
0
923
2 890
2359
683
-335
183
10350

4.4
1.6
1.2
0.6
0.4
0.1
0.0
0.5
1.7
1.4
0.4
-0.2
0.1
6.1

Impact vis-à-vis previous year

5073.03.0

9042.3

5.3

Reduction of expenditure
Compensation of employees
Social transfers
Social transfers in kindIntermediate consumption
Subsidies
Other current expenditure
Capital expenditure
Increasing of revenue
Taxes on production and imports
Taxes on income and wealthSocial Contributions
Non-tax revenue

Portuguese Ministry of Finance29

State Budget for 20122012 Budget – Main Policy Measures
On the expenditure side:a) Reduction in public sector wage bill €2.7bn (1.6% of GDP). Mainly through:i) Wage freezing (maintaining the 5% on average wage cut of 2011);
ii) Reduction in number of public sector workers (close to 10,000 workers);iii) Elimination of the holiday and Christmas payments (yearly salary is paid in 14
equal installments, this measure fully cuts 2 of those payments, equivalent to a pay
cut of over 14%);b) Cuts in social transfers. Social payments will be reduced by €2.1bn (1.2% of GDP),
mainly through the cut of two pension payments out of the 14 yearly payments. Social
payments in kind will be cut by €1bn (0.6% of GDP), mainly through reductions inhealth related spending;c) Cuts in intermediate consumption amounting to €690m (0.4% of GDP), and in
subsidies, €88m (0.1% of GDP);d) Cuts in expenditures of public institutes, SOEs and Local and Regional Government,€923m (0.5% of GDP).

Portuguese Ministry of Finance30

State Budget for 2012
On the revenue side:a) Change in the VAT rate structure – for most goods and services VAT will
increase from 6% to 23% and from 13% to 23%;b) Increase in property taxes (lower exemptions, higher rates, revaluations);c) Increase in specific consumption taxes (for example tobacco and excise taxes onelectricity);d) Benefits and deductions will be strongly limited or cut, both in personal andcorporate income taxes;e) Households with higher taxable incomes will pay a special tax of 2.5%. The tax on
capital gains will increase from 20% to 21.5%;f) Corporate profits above €1.5m will be subject to a surtax of 3%. Profits above €10m
will be subject to a 5% surtax.

70% of the adjustment will come from the expenditure side.
Portuguese Ministry of Finance31

State Budget for 2012
Structural Agenda
Economic growth should be supported by the ongoing structural reforms:(i) increased flexibility in the labour market:- Reduction in severance payments (from 36 days per year to 20 days per year with a cap of 12 months)- Individual dismissals linked to productivity objectives- Reduction of the maximum duration of unemployment insurance benefits to no more than 18 months(ii) stronger competitive environment in the product market, through changes in:- New Competition Law,
- New Competition and Regulation Court- Privatizations Programme- The end of golden shares and special rights- The ability for the private sector to increase daily working hours by ½ hour(iii) reduction of the weight of the state in the economy:- Reduction of 15% of the SOE’s Operating Costs and 20% decrease on the number of companies- Number of Managers in the Public Service to be reduced from 6,286 to 4,575 (-27%)- Number of Administrative Units to be reduced from 359 to 217 (-40%)(iv) rental market reform(v) Judicial system reform:- New Arbitration Law- New out-of-court procedures for companies- New Insolvency Law(vi) goods and services markets:- Increase on Transportation tariffs by 15% and road map for the phasing out of regulated tariffs forelectricity and gas
Portuguese Ministry of Finance32