Council Opinion

of 12 March 2001

on the updated stability programme of Portugal, 2001-2004

(2001/C 109/04)

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 12 March 2001 the Council examined the updated stability programme of Portugal which covers the period 2001-2004. The Council notes that the present update maintains the budgetary targets of the previous programme update, i.e. the general government balance is projected to improve from an estimated deficit of 1,4 % of GDP in 2000 to a balanced position in 2004, while the general government consolidated gross debt should be brought to below 50 % of GDP by the end of the programme period. The present update assumes annual average output growth of 3,25 % over the period 2001-2004, which is slightly below the growth projections of the previous programme update.

Regarding the budgetary implementation in 2000, the Council notes that overruns in current primary expenditure and lower than estimated revenues from mineral oil taxes (0,5 % of GDP) were only partially offset by lower than projected capital expenditure and higher than budgeted tax revenues in some areas (income taxes, VAT). The deficit target of 1,5 % of GDP was achieved only because of the proceeds from the sale of Universal Mobile Telecommunications System (UMTS) licences, which were not initially budgeted and amounted to 0,4 % of GDP. The overruns in current primary expenditure in 2000 were not in line with the 2000 broad economic policy guidelines in so far as these recommended strict adherence to the budgetary target through tight expenditure restraint. The Council notes with concern that such overruns have been a feature of the budgetary implementation in earlier years. The Council further notes that the underlying budgetary position, net of UMTS proceeds, has hardly changed from 1999 to 2000. This appears inappropriate in the current conditions of excess demand in the Portuguese economy and in view of the need to achieve a budgetary position in line with the stability and growth pact, both of which call for a tighter budgetary stance, as advocated by the broad economic policy guidelines.

The Council notes that the growth scenario underlying the current update is more realistic than the previous one. The Council considers that the current conditions of excess demand, which have translated into a large and widening external imbalance, pose a downward risk to sustained economic growth. To achieve a more balanced and sustainable growth pattern it is, therefore, essential that the projected recomposition of growth away from domestic demand towards exports materialises. The Council urges the Portuguese authorities in this context to monitor closely price and wage developments in the economy with a view to strengthening competitiveness. It seems crucial, in particular, that the current acceleration in consumer price inflation does not feed into a wage price spiral. The Council recommends that the Portuguese authorities should be ready to tighten fiscal policy further should inflationary pressures persist.

As regards government finances, the Council notes that, abstracting from UMTS proceeds, the projected improvement in the government balance in 2001 amounts to 0,7 % of GDP. This implies an appropriate tightening of the budgetary stance in 2001 and requires control of current expenditure, in particular through the reinforcement of budgetary procedures. In the absence of such reinforced control mechanisms, there is a risk of continuing expenditure overruns, particularly in the area of health care and the government wage bill. The Council welcomes the efforts which are being made in this respect and encourages the Portuguese Government to implement forthcoming measures swiftly and with determination in the framework of the envisaged public finance consolidation programme. Moreover the Council considers that control of total expenditure should not rely on cutbacks in public investment given the catching-up needs of Portugal and the broad economic policy guidelines for 2000, which call for redirecting government spending to give greater relative importance to investment in physical and human capital, innovation and information technologies.

The Council notes that according to the programme update the overall consolidation effort is spread more or less evenly over the period 2001-2004. Moreover, the reduction in the deficit ratio results from similar cumulative changes of 0,75 of a percentage point of GDP on both the revenue and the expenditure side of the budget. The Council notes the intention of the Portuguese authorities to further increase tax revenues in the coming years, as a consequence of broadening the tax base and a more efficient tax administration brought about by ongoing reform of the tax system. However, this budgetary consolidation strategy should be consistent with a reduction in the tax burden as advocated in the broad economic policy guidelines and already noted by the Council in its opinion on the previous update(2). In fact, the tax burden in Portugal has risen rapidly in recent years and may have reached a level that could impede more dynamic growth. Moreover, while acknowledging that the increase in the revenue ratio is brought about despite ongoing cuts in tax rates, the Council considers that continued reliance on higher efficiency in the collection of taxes is not without risks as tax efficiency measures might deliver diminishing returns.

The Council considers that the budgetary position underlying the medium-term deficit targets of the Portuguese stability programme update is in line with the requirements of the stability and growth pact only after 2002. The Council therefore reiterates its recommendation in the opinion on the previous update to aim for a faster decline in the deficit ratio with a view to increasing the necessary safety margin that allows Portugal to let the automatic stabilisers work in the event of a cyclical downturn. The Portuguese authorities should, therefore, do their best to achieve better results than planned. The Council expects that, in the next update of the programme, the Portuguese Government will introduce concrete measures to attain such a more ambitious pace of budgetary consolidation.

The Council welcomes the planned budgetary and structural reform measures outlined in the programme which are broadly in line with the broad economic policy guidelines. Among the most urgent reforms are the implementation of the new basic law for the budget. Additional measures in the area of health care to improve expenditure control and efficiency are also needed to underpin the process of budgetary consolidation. Moreover, with a view to ensuring the sustainability of government finances in the longer term, the Council encourages the Portuguese authorities to implement expeditiously the enabling legislation required by the recently adopted social security framework law. A rapid and determined implementation of these reforms, some of which were already announced in previous updates of the programme, is necessary to strengthen the overall credibility of the economic policy strategy. Also Portugal needs to develop a comprehensive strategy to address the budgetary challenges of ageing population. Therefore, the Council invites the Portuguese authorities to address this issue more extensively in the next update of its stability programme.

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

(2) OJ C 111, 18.4.2000, p. 3.