Council Opinion

of 13 March 2000

on the updated stability programme of Portugal, 2000 to 2004

(2000/C 111/03)

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 13 March 2000 the Council examined the updated stability programme of Portugal which covers the period 2000 to 2004. The Council notes with satisfaction that the Portuguese economy has been growing at rates above the EU average, to which the implemented structural reforms have contributed. The Council also notes with satisfaction that the defict target for 1998 and 1999 set in the orginal stability porgramme were met despite somewhat lower than expected economic growth. The updated programme envisages a gradual decline in the general government deficit from 2,0 % of GDP in 1999 to a balanced position in 2004.

The macroeconomic scenario of the updated programme assumes that the Portuguese economy will grow at an annual average of 3,5 % over the period 2000 to 2004, a quarter of a percentage point above the original programme's assumption and mainly driven by domestic demand, while the contribution of net exports remains negative, thus widening further the already high external imbalances. While considering that an average growth rate of 3,5 % cannot be considered as overambitious for a catching-up country like Portugal, the Council considers that the growth pattern assumed in the programme relies mainly on domestic demand with investment being its most dynamic component; the Council, therefore, encourages the Portuguese Government to monitor closely macroeconomic developments and to take corrective action if needed. This might require, in addition to reinforcing competitiveness through, inter alia a moderation of wage increases and structural measures, a tightening of budgetary policy with a view to dampening domestic demand.

As regards government finances the Council notes that the deficit out-turn in 1999 (and 1998) was made possible mainly because higher-than-projected revenue, thanks mainly to domestic-demand driven growth, was able to offset significant overruns of current primary expenditure, due chiefly to overspending in the health sector and a strong rise in the government's wage bill. Government revenue and primary expenditure are planned to continue to increase strongly in 2000, and only after that year they are projected to decline marginally. The Council considers that the implementation of this adjustment strategy, should be in keeping with the broad economic policy guidelines, as already noted in its opinion(2) on the original programme. Moreover, the Council considers that the reduction of the ratio of current primary expenditure to GDP after 2000 should be achieved by enlarging the scope for expenditure restraint in a more efficient and sustainable way.

The Council considers that the budgetary position underlying the medium-term deficit target of the Portuguese stability programme update is in line with the requirements of the Stability and Growth Pact. However, as the government balance is projected to reach the required minimum position only from 2002, the Council reiterates the recommendation in its opinion on the original programme that a faster decline in the deficit ratio should be achieved with a view to increasing the necessary safety margin allwing Portugal to let the automatic stabilisers work in the event of a cyclical downturn. The Portuguese authorities should do their best to achieve better than planned results. Moreover, the Council urges the Portuguese government to adhere firmly to the deficit target for 2000 by tightly controlling expenidture; the Council welcomes the ex-ante freezing of some expenditures in the budget for 2000 and considers that, if necessary for achieving the target, they should not be used.

The Council welcomes the planned budgetary and structural reform measures that are outlined in the programme which are broadly in line with the recommendations on the broad economic policy guidelines. Among those, the most urgent are the implementation of a new basic law for the budget, and a new law on social security pensions. The measures announced in the area of health care to improve expenditure control and efficiency are also needed to underpin the process of budgetary consolidation. A rapid and detremined implementation of these reforms, some of which were already announced in the original programme, would therefore be necessary in order to strengthen the effectiveness of the economic policy strategy.

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

(2) OJ C 68, 11.3.1999, p. 2.