Council Opinion of 7 March 2003 on the updated Stability programme for Portugal, 2003 to 2006
Date: 2003-03-07
Institutions: Council of the European Union
Subjects: Portugal, budget policy, economic policy, gross domestic product, public finance, stability programme

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Official Journal of the European Union

18.3.2003

On the basis of current policies, the Council considers that
public finances in Luxembourg are in a good position to
meet the projected costs of an ageing population. However,
the Council notes that the assessment of the sustainability of
public finances in Luxembourg is very sensitive to devel-
opments as regards the number of cross-border workers. The

Council considers that the commitment to sustain a balanced
budget position in coming years is broadly appropriate in light
of the projected budgetary impact of ageing populations, and
welcomes measures to improve the attractiveness of third pillar
private pensions.

COUNCIL OPINION

of 7 March 2003

on the updated Stability programme for Portugal, 2003 to 2006

(2003/C 64/02)

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(3) thereof,

Having regard to the recommendation by the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 7 March 2003 the Council examined the updated stability
programme for Portugal, which covers the period 2003 to
2006. The updated programme projects general government
finances to improve steadily, from a deficit of 2,8 % of GDP
in 2002 to a deficit of 0,5 % of GDP in 2006. Government
gross debt is expected to decrease from 58,8 % of GDP in 2002
to 52,7 % in 2006.

that

the updated programme broadly
The Council notes
complies with the requirements of
the revised ‘code of
conduct on the content and format of stability and converge
programmes’. The updated programme was adopted by the
government on 20 December and presented to parliament,
which discussed it and adopted early in January a declaration
of approval by a large majority, including the support of the
main opposition party. The updated programme was then
formally submitted to the Commission. The Portuguese auth-
orities have thus effectively kept the commitment made to the
Council on 5 November, in the framework of the recommen-
dation under Article 104(7), to present before the end of the
year an updated stability programme. The Council considers
reflected in the planned
that
measures in the programme update broadly comply with the
2002 Broad Economic Policy Guidelines.

the economic policies as

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

The update's macroeconomic scenario shows a small accel-
eration of GDP growth to 1,3 % in 2003 (from an estimated
growth rate of 0,7 % in 2002), which in the light of the most
recent information available, pointing to a further deceleration
looks
in economic activity in the second half of 2002,
somewhat optimistic. For the period 2004 to 2006, the macro-
economic scenario presented in the programme update appears
plausible as far as the pace of economic growth is concerned
(an average growth rate of close to 3 % per year). The planned
measures of structural reform should generate beneficial supply
side effects, allowing the economy to rely on greater export
strength.

The Council considers that regaining an appropriate level of
external competitiveness
importance for
is of paramount
Portugal
in the light of the level of inflation and real wage
developments over the last years. To that end, securing wage
moderation and sustained increases in productivity are key
requirements, also as a way to secure a decline in inflation.
In this context,
the government's
the Council welcomes
guideline to use, from 2003 onwards, the average inflation
forecast
the benchmark for wage
negotiations, as well as the freezing of most wages in the
government sector in 2003. This latter measure should have
favourable spill-over effects
the
economy.

in the private sector of

euro-area as

the

for

On 5 November 2002, in the light of a government deficit of
4,1 % of GDP in 2001, the Council decided that an excessive
deficit existed in Portugal and issued a recommendation to
the Treaty.
Portugal according to Article 104(7) of
In the
the Portuguese authorities
this
terms of
were urged to:

recommendation,

(i) implement with resolve their budgetary plans for 2002
to 2,8 % of GDP in
which aim at reducing the deficit
that year. The Council established a deadline of 31
December 2002 for the Portuguese government to take
all necessary measures to bring the excessive deficit to an
end;

(ii) adopt and implement the necessary budgetary measures to
ensure that
in 2003 is further
reduced clearly below 3 % of GDP and that the government
debt ratio is kept below the 60 % of GDP reference value.

the government deficit

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Official Journal of the European Union

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according to
The Council notes with satisfaction that,
preliminary figures, the general government deficit has been
reduced below 3 % of GDP in 2002, in spite of weaker-than-
anticipated growth. The Council acknowledges the firm resolve
of the Portuguese government in pursuing budgetary consoli-
dation. Budgetary developments in the further course of 2002
turned out
less favourable than expected in the rectifying
budget adopted in June, mainly due to the further weakening
in economic activity, but also to lower-than-expected proceeds
from sales of government property. As a consequence, and
with a view to reducing the deficit as recommended by the
Council,
the Portuguese authorities adopted a number of
one-off measures at the end of the year, which in total are
estimated to have raised additional revenue of about 1,5 % of
GDP.

The Council notes that substantial challenges remain in 2003
to achieve the deficit target of 2,4 % of GDP and to put the
appear
deficit on a downward trajectory. Two factors
particularly critical in this regard. First, in the light of recent
economic data confirming the marked slowdown in economic
activity in the
the programme's
second half of 2002,
assumption for GDP growth of 1,25 % for 2003 appears
somewhat optimistic, and further budgetary tightening might
be necessary. Second, additional measures to be taken in 2003
may be necessary as the beneficial
the one-off
measures
implemented in 2002 wears off. The Council
therefore urges the Portuguese authorities to ensure that the
deficit remains well below 3 % of GDP in 2003. A sustained
correction of the budgetary imbalance should help the revival
of economic confidence. Moreover, the Council considers that
an early and determined implementation of the comprehensive
and ambitious programme of structural reform envisaged in
the stability programme update should be conducive to
greater confidence, enabling a faster recovery of economic
growth.

impact of

The Council acknowledges the projected improvement in the
underlying balance by more than 0,5 % of GDP per year,
from about 3,5 % of GDP in
taking the underlying deficit
2002 to a situation close-to-balance by 2005,
in line with
in the recommendation
the commitments taken by Portugal
adopted by the Council on 5 November 2002.
In 2003,
however, the improvement in the underlying deficit amounts
to approximately 2 percentage points of GDP, the adjustment
effort being considerably higher due to the need to replace the
one-off measures adopted in 2002. The consolidation strategy
envisaged is thus front-loaded and in compliance with the
objectives of the Stability and Growth Pact.

The Council also notes with satisfaction that the consolidation
strategy adopted rests mainly on the restraint of government
expenditure, to be achieved partly by tighter control of the
public sector wage bill, and partly by the effects of a compre-
hensive programme of structural reform. Such a strategy is in
line with the general recommendations of the Broad Economic
Policy Guidelines. The Council urges the Portuguese authorities
to ensure that the implementation of this strategy offsets the
revenue losses caused by the announced gradual phasing-in of
a substantial lowering in corporate taxes, thereby leading to an
underlying budgetary position close-to-balance at the end of
the period.
In this context, the Council draws attention to
the potential budgetary risks associated with a significant tax
reduction that is not matched by firm control over government
expenditure, which could be facilitated by implementing expen-
diture ceilings. A sensitivity analysis suggests that in the event
the low growth scenario considered in the programme
of
the actual balance may deteriorate
update materialising,
discretionary
absence of offsetting
in the
significantly
measures.
the
that
In addition,
commitment made by the Portuguese authorities to continue
to improve the collection of government data is key to ensure
an effective budgetary surveillance.

the Council

reaffirms

The Council notes that while remaining below the 60 % of
GDP reference value, the government debt ratio has increased
in recent years. The Council welcomes the Portuguese auth-
orities' intentions to bring the debt level down to 52,7 % of
GDP by 2006, unwinding the sharp deterioration registered
between 2000 and 2002. The reduction in the debt ratio
over the programme period is to be achieved by the gradual
improvement of
together with the
the primary surplus,
assumption of no major net financial operations taking place
in the coming years.

On the basis of current policies,
the risk of unsustainable
public finances in the light of ageing populations cannot be
excluded. If debt reduction is to make a noticeable contribution
towards meeting the budgetary cost of ageing populations,
then reaching a balanced position by 2006 is essential; this
should be part of an ambitious three-pronged strategy to
the long-term budgetary consequences of ageing and
meet
surpluses. Running
may have to include the running of
sound public finances over
the long run will allow to
achieve a significant reduction of the debt ratio prior to the
budgetary impact of ageing populations taking hold. Therefore
determined implementation of the structural reforms in order
to curb the growth of age-related expenditure, to broaden the
tax bases, and to increase the overall growth potential of the
economy, is essential to achieve long-term stability.