COUNCIL OPINION of 8 February 1999 on the stability programme of Portugal, 1999-2002 (1999/C 68/02)

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(1) and (2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 8 February 1999 the Council examined Portugal's Stability Programme which covers the period 1999-2002. The programme envisages a decline in the general government budget deficit to 0,8 % of GDP by 2002, while the gross debt ratio is expected to decrease to 53,2 % of GDP. The Council notes with satisfaction that the programme builds on the budgetary consolidation realised in the run-up to EMU and commends the regular achievement of better-than-targeted budgetary outcomes. The Council notes, however, that in 1998, in view of the above trend growth and a strong fall in interest payments, only a small reduction in the budget deficit was achieved.

The central macroeconomic scenario underlying the programme assumes output growth to decline from its current high rate towards growth close to trend during the latter part of the projection period. The Council considers that this scenario appears plausible but notes that there are risks. On the one hand, short-term downside risks are related to the current international economic situation. On the other, the regime change implied by monetary union will continue to exert substantial expansionary effects which should lead to stronger domestic demand, allowing Portugal to catch up faster. To secure such a development, inflationary pressures, which could turn out stronger than expected, should be resolutely addressed by economic policy, in particular budgetary policy and further wage moderation.

The Council notes that the envisaged medium-term deficit target of 0,8 % of GDP would allow Portugal, in the event of a normal cyclical downturn, to let the automatic stabilisers work without any large risk of exceeding the 3 % of GDP reference value. In this sense it is compatible with the requirements of the Stability and Growth Pact. A wider safety margin could be advocated to provide for unforeseen shocks in economic activity or in government finances. The Council welcomes the commitment of the Portuguese authorities to undertake the appropriate corrective actions if necessary. The Council notes, moreover, that in view of the current high level of economic activity in Portugal a faster decline in the deficit ratio would have been compatible with the Council's declaration of 1 May 1998. Such an option would also have been preferable under the aspect of a balanced macroeconomic policy mix. The Council supports, however, the Portuguese Government's emphasis on the role of investment, particularly in infrastructure, in its overall goal of real convergence and welcomes the fact that that government investment is kept at high and rising levels over the planning horizon. The Council acknowledges the need of a catching-up country like Portugal to expand expenditure in areas which are essential to its development, such as the upgrading of its human capital and infrastructure. To match this need for additional expenditure in these areas with the requirements of sound government finances, the Council invites the Portuguese Government to finance them through savings in other areas.

A critical element of the government strategy is that the envisaged budgetary consolidation is predominantly due to an increase in current revenue while the contribution of expenditure will be comparatively small. The increase in revenue will be the result primarily of continued efforts to improve the tax administration. The Council considers it appropriate that the Portuguese Government seeks to exploit the room that still exists to enhance the efficiency of the tax administration while continuing to avoid discretionary tax increases. The Council notes, nevertheless, that a budgetary consolidation based on current primary expenditure restraint compatible with the priorities of the Portuguese Government would have been more in keeping with its Recommendations (2) on the Broad Economic Policy Guidelines of the Member States for 1998.

The Council welcomes the planned budgetary and structural reform measures that are outlined in the programme. The envisaged reform measures appear appropriate and in line with the Recommendation on the Broad Economic Policy Guidelines. The Council encourages the Portuguese Government to implement the reforms expeditiously and effectively as this will be crucial for the achievement of the goals set in the stability programme.

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

(2) OJ L 200, 16.7.1998, p. 34.