Council opinion of 9 March 2004 on the updated Stability Programme of Portugal, 2004-2007
Date: 2004-03-09
Institutions: Council of the European Union
Subjects: Portugal, stability programme

18.3.2004

EN

Official Journal of the European Union

C 68/5

The economic policies as reflected in the updated programme
are partly consistent with the recommendations in the Broad
Economic Policy Guidelines, specifically those with budgetary
implications. While
renewed
the programme
to allocate, as a matter of priority, proceeds
commitment
stemming from higher than expected economic growth to

contains a

the updated programme
improve the budgetary position,
lacks information on how the authorities intend to comply
with the recommendation to limit the increase in real expen-
diture in Entity I (Federal Government and Social Security) to
1,5 %.

COUNCIL OPINION

of 9 March 2004

on the updated Stability Programme of Portugal, 2004-2007

(2004/C 68/04)

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 9 March 2004 the Council examined the 2003 update of
the stability programme of Portugal which covers the period
from 2004 to 2007. The updated programme was submitted in
December 2003 and
data
requirements of the revised ‘Code of conduct on the content
and format of
and convergence programmes’.
information notably on expected privatisation
However,
revenue would have been desirable.

complies with the

stability

largely

On 5 November 2002, the Council decided that an excessive
deficit existed in Portugal and issued a recommendation
requesting Portugal to bring this situation to an end by 2003
at the latest.

the
The medium-term budgetary consolidation strategy of
2003 update of the stability programme is similar to that
adopted in the previous update. It is centred on three axes:
1. a comprehensive programme of structural reforms with a
particular
incidence in areas that bear directly on public
such as public administration, health-care, and
finances,
education; 2. a sustained policy of curbing government
consumption via wage moderation and a quasi-employment

(1) OJ L 209, 2.8.1997.

improvement

freeze; and 3. a gradual
in productivity and
competitiveness to be fostered, inter alia, by a substantial cut
in the corporate tax rate. In addition, the adoption in 2002 of
a Budgetary Framework Law (‘Lei de Estabilidade Orçamental’)
is expected to have reinforced fiscal coordination between
different government levels. As a consequence, the Portuguese
this
the
authorities
medium-term adjustment strategy will bring about a cumu-
lative decline by 3.2 percentage points in the government
primary expenditure-to-GDP ratio over the period 2004 to
2007, partly offset by lower tax revenue to the amount of
0.7 percentage points of GDP.

implementation

project

that

of

by

adopted

budgetary

consolidation strategy

an adjustment
rather

The
the
Portuguese authorities appears to be economically sound. In
relies on expenditure
strategy that
fact,
restraint
considered to
than on tax increases
improve the confidence of private economic agents, thereby
supporting growth over the medium-term. Moreover, such a
in public
strategy should secure a lasting improvement
finances, and prevent the emergence of major imbalances in
the private sector of the economy.

is

The 2003 update projects real GDP to increase by 1,0 % in
2004, after having declined by an estimated 0,8 % in 2003. For
the period from 2005 to 2007, real GDP growth is estimated
to average by 2,75 % per year. Employment growth is expected
to pick up from 0,4 % in 2004 to 1,3 % on average in the
period from 2005 to 2007. Declining from 3,3 % in 2003,
HICP inflation is expected to stabilise at 2 % throughout the
period from 2004 to 2007. The macroeconomic scenario
underlying the update seems realistic, notably because the
to be
ongoing correction of major
completed; moreover, it incorporates an element of prudence
that could absorb moderate unfavourable shocks. The ‘caution
bias’ is built around two assumptions: 1. an average growth
rate only 0,25 of a percentage point above the figure projected
for the EU as a whole, a plausible deviation for a catching-up
country; and 2. constant export market-shares, in spite of the
in (labour) productivity and a
expected moderate gains
significant deceleration in wage growth,
in line with the
Commission's Autumn 2003 forecast.

imbalances

is about

C 68/6

EN

Official Journal of the European Union

18.3.2004

The update targets a general government deficit of 2,8 % of
GDP in 2004, following an expected deficit of 2,8 % of GDP in
2003 which was largely due to the repeated recourse to
sizeable one-off measures.
the
projections are for a gradual reduction in headline deficits, to
a ratio of 1,1 % of GDP in 2007. In cyclically-adjusted terms,
based on Commission calculations according to the commonly
agreed methodology, the deficit is set to fall by 0,4 percentage
points to 1,7 % of GDP in 2004, and eventually to 0,7 % of
GDP by 2007.

subsequent years,

In the

Largely on account of substantial nominal deficits and sluggish
growth, the debt ratio is rising by almost 7 percentage points
of GDP between 2000 and 2004,
reaching exactly the
reference value of 60 % in 2004. Subsequently, it is projected
to abate to 57 % of GDP by 2007.

transfers to the extent

Compliance with the budgetary targets of
the programme
update is subject to two major risks: first, the likelihood of a
tax revenue shortfall in 2004, and second, failure to restrain
growth in total social
(implicitly)
envisaged in the programme already in 2004. In such circum-
stances, a slippage in the budgetary targets for 2004 would
entire programme period,
the
have
requiring either appropriate offsetting measures or a revision
of budgetary targets. Naturally, the determined implementation
of the structural reforms with a budgetary impact is crucial for
the attainment of the programme objectives.

repercussions over

On the basis of the current policies, risks of imbalances in the
long term cannot be completely ruled out for Portugal. The
high deficit and the rising debt-to-GDP ratio may undermine
the sustainability of public finances in the longer term, hence
the timely achievement of a budgetary position close to balance
strategy outlined in the
is

imperative. The budgetary

strategy

finances. This

programme is compatible with improving the sustainability
is mainly based on
of public
budgetary consolidation over
resulting
from government consumption restraint, and the expected
gains from the completion of structural reforms. A strict moni-
toring of pension and health-care expenditure trends is crucial
to avoid future budgetary imbalances. Failure to do so would
imply a rising debt over time once the impact of ageing takes
place.

the medium-term,

Pension regimes have been undergoing reform since 2001, a
process which has not yet been completed. The long-term
projections for pension expenditure presented in the 2003
programme update seem not to have taken into consideration
the impact of some measures already adopted and of others
which are planned. Moreover, an early assessment of the effects
of the 2001 reform of the general social security pension
regime seems to suggest that its long-term sustainability has
not been improved. Against this background, the programme
implicitly assumes a sharp deceleration in the average annual
growth rate of total social transfers, without spelling out the
measures required to secure this result.

The economic policies as reflected in the 2003 update are
broadly consistent with the recommendations of the Broad
Economic Policy Guidelines, specifically those with budgetary
implications. Although the improvement
in the cyclically-
adjusted deficit for 2006 and 2007 appears to be less than
0,5 percentage point
the
budgetary adjustment follows the recommendation that calls
for deficit reduction to be obtained mainly through expenditure
restraint. Moreover, the recommendation requesting Portugal to
undertake structural reforms in areas with a direct impact on
budgetary consolidation is being followed in a timely fashion.

composition of

annually,

the