Recommendation for a

COUNCIL DECISION

giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(9) thereof,

Having regard to the recommendation from the European Commission,

Whereas:

(1)According to Article 126 of the Treaty on the Functioning of the European Union, Member States shall avoid excessive government deficits.

(2)The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. The Stability and Growth Pact includes Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure, which was adopted in order to further the prompt correction of excessive general government deficits.

(3)On 2 December 2009, the Council decided, in accordance with Article 104(6) of the Treaty establishing the European Community (TEC), that an excessive deficit existed in Portugal and issued a recommendation to correct it by 2013 at the latest, in accordance with Article 104(7) of the TEC and Article 3 of Council Regulation (EC) No 1467/97. Following the request by the Portuguese authorities for financial assistance from the European Union, the Member States whose currency is the euro and the International Monetary Fund (IMF), the Council granted financial assistance to Portugal. The Memorandum of Understanding on Specific Economic Policy Conditionality (the "Memorandum of Understanding") between the Commission and the Portuguese authorities was signed on 17 May 2011. Since then, the Council has addressed two new recommendations to Portugal (on 9 October 2012 and 21 June 2013) on the basis of Article 126(7) of the Treaty on the Functioning of the European Union, which extended the deadline for correcting the excessive deficit to 2014 and 2015 respectively. In both recommendations, the Council considered that Portugal had taken effective action, but unexpected adverse economic events with major unfavourable consequences for government finances had occurred.

(4)According to the provisions of Article 126(8) of the Treaty, the Council decided on 12 July 2016 that Portugal did not take effective action in response to the Council Recommendation of 21 June 2013.

(5)If actual data pursuant to Regulation (EC) No 479/2009 indicate that an excessive deficit has not been corrected by a participating Member State within the time limits specified in a recommendation issued under Article 126(7) of the Treaty, the Council should immediately take a decision under Article 126(9) of the Treaty.

(6)The Commission 2016 spring forecast projects a moderate recovery of the Portuguese economy. In 2016, real GDP is projected to grow by 1.5%, at the same pace as in 2015, mainly driven by domestic demand amid still high macroeconomic imbalances. Private consumption is expected to lose momentum in 2016 due to higher indirect taxes and a slight recovery in energy price inflation. The strong rebound in the consumption of durable goods in the first half of 2015 is not forecast to be maintained over the medium term as still high unemployment and debt levels are projected to keep upward pressures on household savings. Business investment already decelerated significantly over the second half of 2015 and is not expected to resume its previous growth rate soon, despite a relatively high capacity utilisation rate. Total investment is anticipated to gain some pace in 2017, supported by EU structural funds and the improvement in financing conditions. Exports are forecast to grow in line with foreign demand, but imports are still expected to outbalance exports. As a result, the contribution of net trade to GDP growth is forecast to remain slightly negative although significantly less so than in 2015. HICP inflation is expected to increase to 0.7% in 2016, mainly driven by higher indirect taxes. While downward risks to the outlook have increased since the publication of the spring forecast, data on the first quarter of 2016 and preliminary information on the second quarter overall confirm the outlook of the forecast for the rest of the year.

(7)According to the Commission 2016 spring forecast, the general government deficit is expected to decrease to 2.7% of GDP in 2016. The 2016 Budget, which entered into force on 31 March 2016, targets a deficit of 2.2% of GDP, which was confirmed in the 2016 Stability Programme. The difference between the government's target and the Commission forecast is due to the Commission's less optimistic macroeconomic scenario, leading to lower tax revenues and higher social expenditure, as well as the Commission's more conservative assessment of the yields of some consolidation measures, in particular as regards planned savings in intermediate consumption and other current expenditure. The Commission 2016 spring forecast projects the general government deficit to decline further to 2.3% of GDP in 2017. The projected improvement is largely linked to a deficit improving one-off operation linked to the expected recovery of the Banco Privado Português (BPP) bank guarantee worth about ¼% of GDP. Adjusted for this one-off budgetary impact, the deficit would be projected to reach 2.6% of GDP in 2017. Based on the Commission's assessment of the yields of the measures indicated in the 2016 Budget and in the 2016 Stability Programme, the structural deficit is expected to deteriorate by ¼% of GDP each year in 2016 and 2017 according to the Commission 2016 spring forecast.

(8)The general government gross debt-to-GDP ratio has broadly stabilised during the period 2013-2015, reaching 129.2% in 2013, 130.2% in 2014 and 129.0% in 2015. Taking into account significant debt-reducing stock-flow adjustments in 2016 and continued primary surpluses, the Commission 2016 spring forecast projects the debt ratio to decrease to 126% of GDP in 2016, and subsequently to 124.5% of GDP in 2017. Portugal does not appear to face considerable risks of fiscal stress in the short term, while short-term challenges are nevertheless not excluded (stemming from gross and net public debt, gross financing needs, the net international investment position, as well as the level and the change in the share of non-performing loans or general capital needs in the banking system). In the medium term, however, risks appear to be significant due to the high stock of debt and the high sensitivity of the debt ratio to possible interest rate increases and negative nominal growth shocks. In the long term, provided that adequate structural primary balances are consistently preserved, sustainability risks appear low owing to the pension reforms implemented in the past.

(9)Under the fiscal policy measures taken in the 2016 Budget, the general government deficit would be below 3% of GDP in 2016. However, according to the Commission 2016 spring forecast, the safety margin against breaching the Treaty reference value is narrow. Against the background of high uncertainties regarding economic and budgetary developments, the budgetary targets recommended for the correction year should be set at a level clearly below the Treaty reference value of 3% of GDP, in order to guarantee a durable correction of the excessive deficit situation within the requested deadline.

(10)According to Article 5 of Regulation (EC) No 1467/97, in the Council decision to give notice to take measures for the deficit reduction in accordance with Article 126(9) of the Treaty, the Council shall request that the Member State achieve annual budgetary targets which, on the basis of the forecast underpinning the notice, are consistent with a minimum annual improvement of at least 0.5% of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary measures. As this Council decision to give notice is adopted in the second half of the year, and taking into consideration the current Commission estimates of the spring forecast, an unchanged structural balance would be warranted for 2016 to provide a sufficient safety margin towards a durable correction of the excessive deficit.