Council Opinion of 12 March 2001 on the updated stability programme of Portugal, 2001-2004
Date: 2001-03-12
Institutions: Council of the European Union
Subjects: Economic and Monetary Union, Portugal, economic policy, economic stabilisation, gross domestic product

C 109/4

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Official Journal of the European Communities

10.4.2001

the

increasing role of

The Council considers that the budgetary adjustment should be
facilitated by its being shared by all levels of government, and
in particular notes with satisfaction that
territorial
governments are targeted to be in balance from 2001 on.
in
territorial governments
Given the
various categories of expenditure (notably investment),
this
requires the continued effective functioning of
the existing
coordination between general government sub-sectors, which
should be reinforced through the appropriate instruments
the proposed law of
under domestic discussion,
budgetary
the
also welcomes
The
commitment
to apply any better-than-expected budgetary
results of central government to public debt redemption.

such as
Council

stability.

The Council considers that the programme is consistent with
the broad economic policy guidelines. The Council notes with
approval
the importance given in the update to structural
policies. Structural reforms play an important role in increasing
the Spanish economy while easing
the potential output of
inflationary pressures. The Council, therefore, encourages the
Spanish Government
the envisaged structural
reforms, which must be closely monitored and speeded up
and reinforced if necessary.

to implement

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 present update maintains the
The Council notes that
budgetary targets of the previous programme update, i.e. the
general government balance is projected to improve from an

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

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.

10.4.2001

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Official Journal of the European Communities

C 109/5

is,

that

therefore, essential

The Council notes that the growth scenario underlying the
current update is more realistic than the previous one. The
Council considers
the current conditions of excess
demand, which have translated into a large and widening
imbalance, pose a downward risk to sustained
external
economic growth. To achieve a more balanced and sustainable
growth pattern it
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.
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.

seems crucial,

in particular,

that

that

It

the Council notes

regards government

As
that,
finances,
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
in 2001 and requires control of current expenditure,
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 forth-
swiftly and with determination in the
coming measures
framework of
the envisaged public finance consolidation
programme. Moreover the Council considers that control of
in public
total expenditure should not
investment given the catching-up needs of Portugal and the
for
broad economic policy guidelines for 2000, which call
redirecting government
relative
importance to investment in physical and human capital, inno-
vation and information technologies.

spending to give greater

rely on cutbacks

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 expen-
diture 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 (1). 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
risks as tax efficiency
collection of
measures might deliver diminishing returns.

taxes is not without

The Council considers that the budgetary position underlying
the medium-term deficit
the Portuguese stability
targets of
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,
introduce
concrete measures to attain such a more ambitious pace of
budgetary consolidation.

Portuguese Government will

the

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 effi-
ciency are also needed to underpin the process of budgetary
consolidation. Moreover, with a view to ensuring the sustain-
ability of government finances in the longer term, the Council
encourages
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 popu-
lation. Therefore, the Council invites the Portuguese authorities
to address this issue more extensively in the next update of its
stability programme.

Portuguese

authorities

the

to

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