Recommendation for a Council Decision abrogating Decision 2005/730/EC on the existence of an excessive deficit in Portugal
Date: 2008-05-07
Institutions: European Commission
Subjects: Portugal, budget deficit, public finance, stability pact

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.5.2008 
SEC(2008) 573 final 

Recommendation for a  

COUNCIL DECISION 

abrogating Decision 2005/730/EC on the existence of an excessive deficit in Portugal 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1. 

BACKGROUND 

Article 104 of the Treaty establishes that Member States should avoid excessive deficits and 
lays down a procedure for their identification and correction. The excessive deficit procedure 
(EDP)  is  further  specified  in  Council  Regulation  (EC)  No  1467/97  on  “speeding  up  and 
clarifying  the  implementation  of  the  excessive  deficit  procedure”1,  which  is  part  of  the 
Stability and Growth Pact. According to Article 104(2) of the Treaty, the Commission has to 
monitor  compliance  with  budgetary  discipline  on  the  basis  of  two  criteria,  namely:  (a) 
whether the planned or actual government deficit exceeds the reference value of 3% of GDP 
(unless either the deficit ratio has declined substantially and continuously and reached a level 
that comes close to the reference value; or, alternatively, the excess over the reference value is 
only  exceptional  and  temporary  and  the  ratio  remains  close  to  the  reference  value);  and  (b) 
whether government debt exceeds the reference value of 60% of GDP (unless the debt ratio is 
sufficiently diminishing and approaching the reference value at a satisfactory pace). 

In accordance with the Protocol on the excessive deficit procedure annexed to the Treaty, the 
Commission provides the data for the implementation of the EDP. As part of the application 
of this Protocol, Member States have to notify data on government deficits and debt and other 
associated variables twice a year, namely before 1 April and before 1 October, in accordance 
with Article 4 of Council Regulation (EC) No 3605/932,3. 

On 22 June 2005, the Commission initiated the EDP for Portugal with the adoption of a report 
under Article 104(3), based on a planned general government deficit of 6.2% of GDP and an 
expected  government  debt  of  66.5%  of  GDP  in  2005  after  being  above  the  60%  of  GDP 
reference value already in 2003 and 2004, as revealed in the June 2005 update of the stability 
programme of Portugal4. On 20 September 2005, the Council decided, on a recommendation 
from the Commission, that Portugal was in excessive deficit according to Article 104(6)5. At 
the  same  time,  and  also  based  on  a  Commission  recommendation,  the  Council  addressed 
recommendations under Article 104(7) to Portugal with a view to bringing the situation of an 
excessive government deficit to an end, by 2008 at the latest6. 

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OJ  L  209,  2.8.1997,  p.  6.  Regulation  as  amended  by  Regulation  (EC)  No  1056/2005  (OJ  L  174, 
7.7.2005, p. 5). 
OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
The most recent notification of Portugal can be found at: 
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=2373,58110711&_dad=portal&_schema=portal. 
SEC(2005) 836. 
OJ L 274, 20.10.2005, p. 91. 
All EDP related documents for Portugal can be found at the following website: 
http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm. 

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In its recommendation under Article 104(7), the Council recommended that "The Portuguese 
authorities should bring the general government deficit below 3% of GDP in a credible and 
sustainable  manner  by  2008  at  the  latest  by  taking  action  in  a  medium-term  framework. 
Specifically, to this end, the Portuguese authorities should: limit the deterioration of the fiscal 
position  in  2005,  by  ensuring  a  rigorous  implementation  of  the  announced  corrective 
measures;  thoroughly  implement  the  necessary  measures  to  ensure  a  sustained  and  marked 
correction of the cyclically-adjusted deficit, excluding one-off and other temporary measures, 
by taking a very substantial step of a reduction of 1,5% of GDP in 2006 from 2005, followed 
by a further significant decrease of, at least, ¾% of GDP in each of the two subsequent years; 
rapidly  implement  reforms  to  contain  and  reduce  expenditure  over  the  coming  years;  seize 
any opportunity to accelerate the reduction of the budget deficit, and stand ready to adopt the 
additional measures which may be necessary to achieve the correction of the excessive deficit 
by 2008". The Council also recommended that "The Portuguese authorities should ensure that 
the  government  gross  debt  ratio  is  brought  onto  a  firm  downward  path  and  approaches  the 
reference value at a satisfactory pace by ensuring that debt developments reflect progress in 
the  reduction  of  the  deficit,  by  avoiding  debt-increasing  financial  transactions,  and  by 
considering  carefully  the  possible  impact  on  debt  of  major  public  investment  projects, 
including those in partnership with the private sector;" The Council required the Portuguese 
authorities to "further improve the collection and processing of general government data". 

In  addition,  the  Council  invited  the  Portuguese  authorities  "to  ensure  that  budgetary 
consolidation towards the medium term position of government finances close to balance or in 
surplus is sustained through a reduction in the cyclically-adjusted deficit, net of one-offs and 
other  temporary  measures,  by  at  least  0,5%  of  GDP  per  year  after  the  excessive  deficit  has 
been corrected". 

Table 1: Adjustment endorsed by the Council on 20 September 2005 

% of GDP, unless indicated otherwise 

2005 

General government balance 

deficit of (at most) 6.2 

change in structural balance 

2006 

-4.8 

+1.5 

2007 

2008 

deficit < 4 

deficit < 3 

+¾ (at least) 

+¾ (at least) 

p.m.: Real GDP growth (%) 
Note: structural balance = cyclically-adjusted balance excluding one-off and other temporary measures 
Source: Council recommendation under Article 104(7), quoting the June 2005 update of the stability programme 

0.8 

1.4 

2.2 

2.6 

On  22  June  2006,  i.e.  after  the  expiry  of  the  6-months  deadline  for  taking  action  set  in  the 
Council  recommendation,  the  Commission  carried  out  an  assessment  of  the  action  taken  by 
the  Portuguese  authorities  with  a  view  to  bringing  the  situation  of  excessive  government 
deficit to an end. On that basis, it adopted a communication to the Council, which concluded 
that  Portugal  had  taken  action  representing  adequate  progress  towards  the  correction  of  the 
excessive  deficit  within  the  time  limits  set  by  the  Council  and  that  no  further  steps  in  the 
excessive deficit procedure of Portugal were necessary at that time7. In its meeting of 11 July 
2006, the Council concurred with this assessment. 

According to Article 104(12), a Council decision on the existence of an excessive deficit is to 
be abrogated on the basis of a Commission recommendation, when the excessive deficit in the 
Member State concerned has, in the view of the Council, been corrected.  

7 

SEC(2006) 786. 

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2. 

RECENT DEFICIT DEVELOPMENTS 

Data  provided  by  the  Commission  (Eurostat)  following  the  reporting  by  Portugal  before  1 
April 2008, indicate that the general government deficit in 2007 represented 2.6% of GDP8, 
which follows government deficit outturns of 6.1% of GDP in 2005 and 3.9% of GDP in 2006 
(see  Table  2).  Given  the  currently  reported  deficit  and  the  deficit  reference  value,  the 
probability that any future revision raises the 2007 government deficit ratio to in excess of 3% 
of GDP is low9. 

The  recent  government  deficit  path  materialised  against  low  but  gradually  improving 
economic  growth,  with  real  GDP  growth  rates  moving  from  0.9%  in  2005  to  1.3%  in  2006 
and 1.9% in 2007. The negative output gap is estimated to have narrowed somewhat over the 
same period. 

The  budgetary  execution  in  2006  and  2007  was  better  than  targeted  at  the  time  the 
recommendation  under  Article  104(7)  was  issued10.  Notably,  deficit  outturns  in  those  two 
years were about 1 percentage point of GDP lower than originally planned in the June 2005 
update  of the stability  programme  of  Portugal11. The 2007 budgetary  outturn also compares 
with  an  estimate  of  3%  of  GDP  presented  in  the  December  2007  update  of  the  stability 
programme  of  Portugal.  In  all,  a  government  deficit  below  the  3%  of  GDP  reference  value 
was achieved one year before the deadline set by the Council. Indeed, as urged by the Council 
in its recommendation under Article 104(7), the opportunity to accelerate the reduction of the 
budget deficit was used, essentially by locking in better-than-expected revenue collection. 

The  narrowing  of  the  fiscal  deficit  achieved  in  2006  and  2007  owes  to  both  a  falling 
government  expenditure-to-GDP  ratio  and  a  rising  revenue-to-GDP  ratio.  The  expenditure 
ratio declined by about 1¼ percentage points of GDP in 2006 and almost ½ percentage point 
of GDP in 2007. In parallel, government revenue ratio increased by some ¾ percentage point 
of GDP in both 2006 and 2007. Fiscal consolidation hinged mainly upon structural measures, 
with a marginal contribution from a one-off operation worth 0.1% of GDP in 200712. 

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Eurostat News Release No 54 of 18 April 2008. 
Deficit ratios are usually revised - upwards or downwards - after the publication of the first outcome in 
the spring notification. For the EU Member States as a whole, the revisions are usually relatively small 
and  on  average  insignificantly  different  from  zero.  In  the  case  of  Portugal,  upward  revisions  in  the 
deficit ratio have been relatively more frequent than downward revisions; this might suggest that a bias 
exists in the compilation of the first outcomes. However, and even if future revisions in the Portuguese 
government accounts cannot be excluded, data for the latest years have shown to be more reliable than 
in the past.  
When compared with the fiscal targets presented in the June 2005 update of the stability programme of 
Portugal,  on  the  basis  of  which  the  present  excessive  deficit  procedure  was  initiated,  as  described  in 
Section 1. 
Revisions in late 2005 and early 2006 of the GDP data series have resulted in higher GDP levels, which 
mechanically have yielded a deficit ratio level reduction by about ¼ percentage point of GDP. 
Related to the long-term concession contract for the exploitation of a dam and recorded as reduction of 
other capital expenditure according to the ESA95 rules. 

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On  the  expenditure  side,  a  stabilisation  of  current  primary  expenditure  materialised  in  real 
terms  in  both  2006  and  2007.  In  particular,  reductions  of  compensation  of  government 
employees were crucial for the observed expenditure containment on the back of reductions in 
public  employment  and,  to  a  lesser  extent,  through  wage  restraint  coming  from  below-
inflation  annual  wage  updates  and  a  freeze  of  seniority-related  pay  increases.  At  the  same 
time, social transfers other than in kind decelerated somewhat from the very high growth rates 
of previous years. To that result contributed a slowdown in old-age pension outlays, mainly 
on  the  back  of  more  contained  retirement  flows,  and,  in  2007,  a  shrink  in  unemployment 
benefits. A  reduction  in  public investment contributed further to the expenditure curb and a 
subsequent deficit reduction of about ½% of GDP in 2006. Overall, these figures are in line 
with the Council recommendation to implement measures to contain expenditure, an example 
of which was the reform of old-age pension schemes. 

On the revenue side, tax proceeds expanded at a quick pace, especially given the context of 
low economic growth (and, more specifically, of domestic demand). That seems to have been 
the result of an increase in the VAT standard rate by 2 percentage points (to 21% from 19%) 
in July 2005, discretionary measures to increase the rates of some taxes (excise taxes, social 
contribution rate for some workers categories, new marginal personal income tax rate for high 
incomes)  and  lower  credits  on  some  direct  taxes.  Furthermore,  an  important  part  of  the  tax 
buoyancy can be ascribed to gains coming from improved tax administration and compliance 
that seem to have resulted into enlargement of the tax bases, which to a large extent have been 
carried forward. In addition, the more efficient tax administration has allowed higher rates of 
success  in  collecting  tax  arrears.  In  2007,  additional  tax  revenue  came  from  a  recovery  of 
profitability  of  some  large  corporate  tax  payers  and  from  taxes  on  real-estate  wealth.  Other 
revenue  (including  sales  of  goods  and  services  by  the  government)  grew  by  almost  ½ 
percentage point of GDP in accumulated terms in 2006 and 2007. To some extent, that was 
also  the  result  of  a  recovery  from  the  shortfall  in  dividend  payments  to  the  government  by 
state-owned enterprises observed in 2005. 

The budgetary and economic developments described above led to a significant reduction of 
the  structural  deficit  (i.e.,  the  cyclically-adjusted  deficit  net  of  one-off  and  other  temporary 
measures) in 2006 and 2007. In the former year, a reduction of some 2 percentage points of 
GDP was achieved, followed by a further decline by about 1 percentage point of GDP in the 
latter  (see  Table  2).  These  results  seem  to  have  gone  well  beyond  the  Council 
recommendation under Article 104(7) asking for a reduction of the structural balance by 1.5% 
of GDP in 2006 from 2005 and, at least, ¾% of GDP in 2007. 

3. 

DEFICIT PROJECTIONS FOR 2008 AND BEYOND 

According to the Commission services’ spring 2008 economic forecasts, with a projected real 
GDP growth of 1.7%, the general government deficit is expected to decline to 2.2% of GDP 
in 2008. This forecast compares with a budgetary target of 2.4% of GDP set in the December 
2007 update of the stability programme of Portugal (with real GDP growth assumed to come 
at  2.2%)  and  with  a  revised  target  of  2.2%  of  GDP,  as  announced  on  26  March  after  the 
publication of the 2007 budgetary outcome. 

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The  projected  improvement  of  the  fiscal  balance  in  2008  is  mainly  driven  by  revenue.  In 
2008, overall tax receipts are projected to continue increasing faster than nominal GDP, albeit 
clearly by a lower margin than in 2007. Indeed, tax elasticities are expected to start moving 
closer  to  their  historical  average  after  the  high  figures  of  recent  years,  reflecting  also  the 
assumption  that marginal  gains  of  improved tax administration  and  compliance may enter a 
declining phase. In 2008, tax revenue will benefit from a normalisation in VAT net revenues 
after  the  reduction  in  the  maximum  reimbursement  period  implemented  in  2006  and  2007. 
However, the reduction in the VAT standard rate by 1 percentage point (from 21% to 20%) as 
from  1  July  2008  will  dampen  tax  revenues.  In  addition,  other  government  revenue  is 
projected to increase somewhat as a share of GDP thanks to rising EU funds, in the context of 
the implementation of the new National Strategic Reference Framework13. The expenditure-
to-GDP ratio is forecast to remain stable. In particular, personnel expenditure is expected to 
fall  in  terms  of  GDP  by  about  0.4  percentage  point  on  account  of  wage  moderation  and 
declining employment in central government. Interest expenditure will be curbed as the result 
of  a  discretionary  reduction  in  the  interest  rate  structure  of  government-issued  savings 
certificates as from early 2008. Granting of concessions of electricity-generating dams by the 
government will post a one-off deficit-reducing contribution of almost 0.2% of GDP14. 

Under the assumption of unchanged policies, the Commission services spring 2008 economic 
forecasts projects a government deficit of 2.6% of GDP in 2009 against an assumption of real 
GDP  growth  of  1.6%  of  GDP.  The  December  2007  update  of  the  stability  programme  of 
Portugal set the 2009 budgetary target at 1.5% of GDP, against an assumed real GDP growth 
of  2.8%.  According  to  the  Commission  services  spring  2008  economic  forecasts,  the 
evolution  in  the  fiscal  balance  is  expected  to  be  driven  mainly  by  a  falling  tax  burden, 
reflecting still the impact of the reduction in the VAT standard rate in July 2008. In addition, 
important  macroeconomic  bases  for  tax  revenue  such  as  household  consumption  and 
compensation of employees are projected to track behind GDP, while tax revenue is assumed 
to, unlike in previous years, evolve in line with the relevant tax bases. Therefore, it is assumed 
that  the  enlargement  of  the  tax  bases  mentioned  in  Section  2  has  been  essentially  of  a 
permanent  nature.  However,  should  part  of  those  gains  show  ex-post  a  more  temporary  or 
non-sustainable nature or be hurt by the economic slowdown, the budgetary outlook would be 
gloomier.  The  discontinuation  of  the  one-off  operation  implemented  in  2008  will  drive  the 
nominal  deficit  further  up.  The  current  backdrop  of  higher-than-usual  uncertain  about 
financial and economic developments creates a number of risks to public finances. 

According to the Commission services spring 2008 economic forecasts, the structural balance 
is  expected  to  improve  by  a  ¼  percentage  point  of  GDP  in  2008.  At  unchanged  policies,  a 
worsening by ¼ percentage point  of GDP is  projected  for  2009.  On  this basis, a substantial 
step  towards  fiscal  consolidation  with  the  2008  budgetary  execution  and  an  ambitious  2009 
budget  are  required  to  ensure  compliance  with  the  Council  recommendations  under  Article 
104(7) for further reductions of the structural balance towards a medium-term position close 
to balance or in surplus by at least 0.5% of GDP per year after the excessive deficit had been 
corrected.  

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Concomitantly, these inflows will also imply additional spending, consequently mitigating considerably 
the impact of those receipts on the overall budget balance. 
Recorded  as  reduction  of  other  capital  expenditure  according  to  the  ESA95  rules,  but  part  of  the 
operation's proceed is used to pay to electricity-generating companies compensation for only gradually 
reflecting on consumer prices the production prices. 

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The December 2007 update of the stability programme of Portugal set deficit targets of 0.4% 
of GDP in 2010 and 0.2% of GDP in 2011. These plans have to be seen against the assumed 
backdrop  of  real  GDP  growth  rates  of  3%  in  both  years.  In  its  Opinion  on  the  programme 
update,  the  Council  considered  that  the  "budgetary  stance  in  the  programme  may  not  be 
sufficient to ensure that the Medium-term Objective of a structural deficit of 0.5% of GDP is 
achieved  by  2010,  as  envisaged  in  the  programme.  Although  the  planned  pace  of 
consolidation towards the MTO is in line with the Stability and Growth Pact, the adjustment 
may require additional efforts in view of the risks (…)"15. 

4. 

DEBT DEVELOPMENTS AND PROJECTIONS 

The government gross debt ratio exceeded the 60% of GDP reference value in 2005 when it 
jumped to 63.6% of GDP from 56.9% of GDP in 200416. In 2006, the debt ratio went further 
up  to  64.7%  of  GDP  in  2006  and  fell  back  to  63.6%  of  GDP  in  2007.  The  increase  in  the 
government debt ratio recorded in 2006 was the result of the high primary government deficit 
and, to a lesser extent, of the fact that the implicit interest rate on government debt exceeded 
nominal  GDP  growth  (the  so-called  "snow-ball  effect").  In  2007,  the  debt  ratio  decline  was 
mainly due to a debt-reducing stock-flow adjustment. To a lesser extent, the acceleration of 
GDP and a marginal primary surplus gave additional help to the debt ratio fall. 

To the extent that the debt ratio declined in 2007, the observed government debt path has been 
consistent with the Council recommendation under Article 104(7) of 20 September 2005. In 
addition,  in  2006  and  2007,  financial  operations  as  a  whole  have  contributed  to  a  negative 
stock-flow  adjustment  and  therefore  helped  the  reduction  of  the  government  debt  ratio:  in 
2006,  large  privatisation  proceeds  were  key  for  the  decline  in  financial  assets;  in  2007,  a 
reduction in deposits and currency was pivotal to the further decline in financial assets and a 
subsequent  debt-decreasing  stock-flow  adjustment.  Excluding  deposits  and  currency  and 
privatisation  proceeds,  the  net  acquisition  of  financial  assets  remained  positive  in  2006  and 
2007, consequently adding to the debt ratio. 

According to the Commission services spring 2008 economic forecasts, the government debt 
ratio is expected to rebound marginally to over 64% of GDP in 2008 and, on the basis of the 
no-policy change assumption, to come at 64¼% of GDP in 2009. These developments have to 
be seen against a backdrop of low nominal GDP growth and still relatively high government 
deficits  this  year  and  the  next.  In  2008,  on  the  basis  of  the  plans  outlined  in  the  December 
2007  update  of  the  stability  programme  of  Portugal,  the  debt  ratio  is  expected  to  reflect  a 
positive  stock-flow  adjustment  corresponding  to  0.4%  of  GDP17.  Further  pressure  to  the 
stock-flow  adjustment  is  given  by  the  assumption  that  redemptions  of  debt  above  its  face 
value will increase sizeably in the near future as the result of changes in the remuneration of 
savings certificates introduced in January 2008. Overall, the debt ratio path is consistent with 
the  Council  recommendation  under  Article  104(7)  in  the  sense  that  its  evolution  reflects 

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OJ C 73, 19.3.2008, p. 6.  
The differences in these debt figures and the ones estimated at the time of initiating the excessive deficit 
procedure reflect mainly the revisions in the GDP data mentioned in footnote 11. 
That  seems  to  be  owed  to  a  positive  difference  between  accrual-based  and  cash-based  deficits,  as 
implicit in the programme update. The stock-flow adjustment figures were adjusted to reflect the more 
recent  classification  by  the  Portuguese  authorities  of  some  capital  injections  in  some  government- 
owned hospitals as capital transfers instead of financial operations. 

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progress in the reduction of the deficit and that, between 2006 and 2009 on average, financial 
operations do not add to the debt ratio.  

5. 

OTHER CONSIDERATIONS 

Under  Article  104(7),  the  Council  recommended  Portugal  to  improve  the  collection  and 
processing of general government data, given the apparent deficiencies in the compilation of 
reliable public finance statistics. 

In  the  latest  number  of  years  there  have  been  institutional  changes  and  other  technical 
improvements  in  the  compilation  of  the  Portuguese  government  accounts.  These  include  a 
enhanced  cooperation  as  well  as  a  clearer  labour  division  between  the  National  Statistical 
Office,  the  Finance  Ministry  and  the  central  bank,  with  an  increase  in  the  resources, 
responsibility and accountability of the Statistical Office. Notably, in early 2006 an agreement 
was signed between those three institutions, foreseeing cooperation among them, and creating 
two working groups to analyse the government accounts before each fiscal notification and to 
discuss  methodological  issues18.  Those  changes  are  expected  to  contribute  to  the  quality  of 
government  sector  statistics.  The  compilation  and  publication  of  quarterly  government 
accounts  should  also  contribute  to  the  reliability  and  overall  quality  of  annual  accounts,  as 
transactions  that  require  specific  accounting  treatment  will  be  identified  earlier.  Timely 
reporting  of  data  by  government  subsectors  seems  to  have  been  enforced  more  actively;  in 
addition, information on budgetary execution has been made more detailed and more timely 
available. As a result, data for the latest years have shown to be more reliable than in the past. 
All in all, these developments indicate compliance with the Council recommendation. 

6. 

CONCLUSIONS 

The general government deficit declined significantly from 6.1% of GDP in 2005 to 3.9% of 
GDP  in  2006  and  to  2.6%  of  GDP  in  2007,  below  the  3%  of  GDP  reference  value.  The 
measures  underlying  the  deficit  reduction  have  been  mostly  of  a  permanent  nature.  The 
structural  balance,  i.e.  the  cyclically-adjusted  balance  net  of  one-off  and  other  temporary 
measures, improved by some 2 percentage points of GDP in 2006 and a further 1 percentage 
point of GDP in 2007, thereby well beyond the fiscal efforts recommended by the Council of 
1.5%  of  GDP  in  2006  and  of,  at  least,  ¾%  of  GDP  in  2007.  According  to  the  Commission 
services’ spring 2008 forecasts, the headline deficit is expected to narrow to 2.2% of GDP in 
2008 (including one-offs amounting to almost 0.2% of GDP, without which the deficit would 
nonetheless still be below 3% of GDP). On a no-policy change basis, the deficit is projected 
to rise to 2.6% of GDP in 2009. This indicates that the deficit has been brought below the 3% 
of GDP ceiling in a credible and sustainable manner. 

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‘Acordo  de  Cooperação  Institucional  no  Domínio  das  Estatísticas  das  Administrações  Públicas’ 
(Institutional  Cooperation  Agreement  in  the  Field  of  General  Government  Statistics);  English  version 
available  at  http://www.dgo.pt/FP/StatisticsAgreement_INE_BP_DGO.pdf.  See  also  ‘Consolidated 
at: 
Inventory 
http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_DS_GFS/PGE_DS_GFS_11/EDPI_PT_20
07_REV1.PDF. 

statistics]’, 

available 

methods 

sources 

EDP 

[for 

and 

of 

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General  government  gross  debt  declined  to  63.6%  of  GDP  in  2007  from  64.7%  of  GDP  in 
2006.  According  to  the  Commission  services’  spring  2008  forecasts,  debt  is  expected  to 
bounce back slightly to some 64% of GDP in 2008 and to 64¼% of GDP by 2009, the latter 
on a no-policy change basis, against a backdrop of low GDP growth rates and still relatively 
high government deficits. 

From an overall assessment, it follows that the excessive deficit situation in Portugal has been 
corrected. Accordingly, the Commission recommends to the Council to abrogate its decision 
on the existence of an excessive deficit in Portugal. 

Table 2: Budgetary developments, 2005-2009 

2005 

2006 

2007 

% of GDP, unless indicated otherwise 
General government balance 

-6.1

-3.9

-2.6

COM 
-2.2

2008 

2009 

SP(2)  COM(3)  SP(2) 
-1.5

-2.6 

- Total revenue 
- Total expenditure 
Of which : 

- interest expenditure 
- gross fixed capital formation 

Primary balance 
One-off and temporary measures 
Structural balance(1) 
Structural primary balance(1) 
Government gross debt(4) 
Change in debt ratio (a) = (b) + (c) + (d) (5) 
Contributions: 

- primary balance (b) 
- “snow-ball” effect (c) 
- stock-flow adjustment (d) 

41.6
47.7
2.6
2.9
-3.5
-0.1
-5.2
-2.6
63.6
5.3
3.5
0.7
1.1
0.9
-1.7

42.4
46.3
2.8
2.3
-1.1
0.0
-3.2
-0.4
64.7
1.1
1.1
0.3
-0.2
1.3
-1.6

43.1
45.7
2.8
2.4
0.2
0.1
-2.2
0.6
63.6
-1.1
-0.1
-0.2
-0.8
1.9
-1.1

43.6
45.7
2.8
2.4
0.6
0.2
-1.9
0.8
64.1
0.5
-0.6
0.4
0.7
1.7
-1.0

-2.4 
(-2.2) 
42.7 
45.1 
2.9 
2.2 
0.5 
0.0 
-1.6 
1.3 
64.1 
-0.3 
-0.5 
-0.1 
0.4 
2.2 
-1.8 

43.3 
45.9 
2.7 
2.4 
0.1 
0.0 
-2.2 
0.6 
64.3 
0.2 
-0.1 
0.3 
0.0 
1.6 
-1.0 

42.8
44.4
2.8
2.3
1.3
0.0
-1.0
1.8
62.5
-1.6
-1.3
-0.4
0.0
2.8
-1.1

Pm 
Pm 
(1) 
(2) 

(3) 
(4) 

(5) 

Real GDP growth (%) 
Output gap(2) 
Cyclically-adjusted (primary) balance excluding one-off and temporary measures. 
Cyclically-adjusted and structural balances and output gaps according to the programme as calculated 
by Commission services on the basis of the information in the programme. 
No-policy change assumption. 
The change in the gross debt ratio can be decomposed as follows: 
i
D
t
t
1
Y
t
where  t  is  a  time  subscript;  D,  PD,  Y  and SF  are the  stock  of  government  debt,  the  primary  deficit, 
nominal  GDP  and  the  stock-flow  adjustment  respectively,  and  i  and  y represent  the  average  cost  of 
debt and nominal GDP growth. The term in parentheses represents the “snow-ball” effect. 
The components may not add up to the total due to rounding. 

PD
t
Y
t

SF
t
Y
t

⎞
+⎟⎟
⎠

D
t
Y
t

D
t
Y
t

−
+

y
y

⎛
⎜⎜
⎝

−

=

+

*

1
−

1
−

1
−

1
−

t

t

Sources:  Commission  services’  spring  2008  forecasts (COM)  and  December  2007  update  of  the  stability 
programme (SP). In brackets, the new official projection announced by the Portuguese authorities on 
26 March 2008. 

EN 

9 

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Recommendation for a  

COUNCIL DECISION 

abrogating Decision 2005/730/EC on the existence of an excessive deficit in Portugal 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 104(12) thereof, 

Having regard to the recommendation from the Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

By  Council  Decision  2005/730/EC19,  following  a  recommendation  from 
the 
Commission  in  accordance  with  Article 104(6)  of  the  Treaty,  it  was  decided  that  an 
excessive  deficit  existed  in  Portugal.  The  Council  noted  that  the  planned  general 
government deficit for the year 2005 was 6.2% of GDP, above the 3% of GDP Treaty 
reference value, while general government gross debt was expected to reach 66.5% of 
GDP, above the 60% of GDP Treaty reference value.  

On  20  September  2005,  in  accordance  with  Article 104(7)  of  the  Treaty  and  Article 
3(4)  of  Council  Regulation  (EC)  No  1467/97  of  7  July  1997  on  speeding  up  and 
clarifying the implementation of the excessive deficit procedure20, the Council made, 
based  on  a  recommendation  from  the  Commission,  a  recommendation  addressed  to 
Portugal with a view to bringing the excessive deficit situation to an end by 2008 at 
the latest. The recommendation was made public. 

In accordance with Article 104(12) of the Treaty, a Council Decision on the existence 
of  an  excessive  deficit  is  to  be  abrogated  when  the  excessive  deficit  in  the  Member 
State concerned has, in the view of the Council, been corrected. 

In  accordance  with  the  Protocol  on  the  excessive  deficit  procedure  annexed  to  the 
Treaty, the Commission provides the data for the implementation of the procedure. As 
part  of  the  application  of  this  Protocol,  Member  States  are  to  notify  data  on 
government  deficits  and  debt  and  other  associated  variables  twice  a  year,  namely 
before  1  April  and  before  1  October,  in  accordance  with  Article  4  of  Council 
Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol 

19 
20 

OJ L 274, 20.10.2005, p. 91 
OJ  L  209,  2.8.1997,  p.  6.  Regulation  as  amended  by  Regulation  (EC)  No  1056/2005  (OJ  L  174, 
7.7.2005, p. 5). 

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10 

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on  the  excessive  deficit  procedure  annexed  to  the  Treaty  establishing  the  European 
Community21. 

(5) 

Based  on  data  provided  by  the  Commission  (Eurostat)  in  accordance  with  Article 
8g(1) of Regulation (EC) No 3605/93 following the notification by Portugal before 1 
April  2008  and  on  the  Commission  services’  spring  2008  forecasts,  the  following 
conclusions are warranted: 

– 

– 

– 

the  general  government  deficit  was  reduced  from  6.1%  of  GDP  in  2005  to 
3.9% of GDP in 2006 and to 2.6% of GDP in 2007, which is below the 3% of 
GDP deficit reference value. The latter compares with a target of 3% of GDP 
set in the December 2007 update of the stability programme of Portugal,  

both  a  falling  government  expenditure-to-GDP  ratio  and  a  rising  revenue-to-
GDP  ratio  contributed  to  the  improvement  in  the  government  balance.  The 
expenditure ratio declined by 1¼ percentage points of GDP in 2006 and almost 
½ percentage point of GDP in 2007. In parallel, the government revenue ratio 
increased by some ¾ percentage point of GDP in both 2006 and 2007. Fiscal 
consolidation  hinged  mainly  upon  structural  measures,  with  a  marginal 
contribution  from  a  one-off  operation  worth  0.1%  of  GDP  in  2007.  The 
improvement  in  the structural balance (i.e. the cyclically-adjusted balance net 
of one-off and other temporary measures) is estimated at 2 percentage points of 
GDP in 2006 and 1 percentage point of GDP in 2007, which is in line with the 
Council recommendation under Article 104(7) for a reduction of the structural 
balance by 1.5% of GDP in 2006 and, at least, ¾% of GDP in 2007, 

for 2008, the Commission services’ spring 2008 forecasts project the deficit to 
be reduced further, to 2.2% of GDP, mainly driven by some additional revenue, 
with the budgetary execution benefiting from a 0.2% of GDP one-off deficit-
reducing  operation.  This  is  broadly  in  line  with  the  official  deficit  targets  of 
2.4% of GDP set in the December 2007 update of the stability programme of 
Portugal and the revised target of 2.2% of GDP announced by the Portuguese 
authorities in late March 2008. For 2009, the spring forecasts project, on a no-
policy change basis, a government deficit at 2.6% of GDP. This indicates that 
the  deficit  has  been  brought  below  the  3%  of  GDP  ceiling  in  a  credible  and 
sustainable manner. The structural balance is projected to improve by about ¼ 
percentage point of GDP in 2008 and, on a no-policy change basis, to worsen 
by ¼ percentage point of GDP in 2009. This has to be seen against the need to 
make  progress  towards  the  medium-term  objective  (MTO)  for  the  budgetary 
position, which for Portugal is a structural deficit of 0.5% of GDP, 

– 

government  debt  declined  from  64.7%  of  GDP  in  2006  to  63.6%  of  GDP  in 
2007.  The  low  GDP  growth  and  still  relatively  high  government  deficits 
projected  in  the  Commission  services’  spring  2008  economic  forecasts  are 
expected to yield a government debt at some 64¼% of GDP in 2009. 

21 

OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 

EN 

11 

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(6) 

In  the  view  of  the  Council,  the  excessive  deficit  in  Portugal  has  been  corrected  and 
Decision 2005/730/EC should therefore be abrogated. 

HAS ADOPTED THIS DECISION: 

From an overall assessment it follows that the excessive deficit situation in Portugal has been 
corrected. 

Article 1 

Decision 2005/730/EC is hereby abrogated. 

Article 2 

Article 3 

This Decision is addressed to the Portuguese Republic. 

Done at Brussels,  

For the Council 
The President 

EN 

12 

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