Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Portugal
Date: 2013-05-29
Institutions: European Commission
Subjects: Portugal, administrative reform, budget deficit, budgetary equilibrium, public expenditure, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 394 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Portugal 

{SWD(2013) 394 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Portugal 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

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2 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) Member States are to avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

On 2 December 2009, the Council decided, in accordance with Article 126(6) of the 
TFEU,  that  an  excessive  deficit  existed  in  Portugal  and  issued  a  recommendation  to 
correct  the  excessive  deficit  by  2013  at  the  latest,  in  accordance  with  Article  126(7) 
TFEU  and  Article  3  of  Council  Regulation  (EC)  No  1467/971  of  7  July  1997  on 
speeding up and clarifying the implementation of the excessive deficit procedure2.  

On 15 June 2010, the Commission concluded that Portugal had taken effective action 
in  compliance  with  the  Council  recommendation  of  2  December  2009  to  bring  its 
government  deficit  below  the  3%  of  GDP  reference  value  and  considered  that  no 
additional step in the excessive deficit procedure was therefore necessary at that point 
in time. 

On 9 October 2012, the Council concluded, in accordance with Article 3(5) of Council 
Regulation (EC) No 1467/97, that effective action had been taken but that unexpected 
adverse  economic  events  with  major  unfavourable  consequences  for  government 
finances had occurred. The Council therefore adopted a revised recommendation under 
Article 126(7) TFEU (the 'revised EDP recommendation') and recommended Portugal 

OJ L 209, 2.8.1997, p. 6. 
All documents related to the excessive deficit procedure of Portugal can be found at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/portugal_en.htm 

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(6) 

(7) 

(8) 

(9) 

to  correct  the  excessive  deficit  by  2014  at  the  latest.  In  order  to  bring  the  headline 
government  deficit  below  the  3%  of  GDP  reference  value  by  2014,  Portugal  was 
recommended to deliver an improvement of the structural balance of 2.3% of GDP in 
2012,  1.6%  of  GDP  in  2013  and  1.3%  of  GDP  in  2014.  The  headline  deficit  targets 
consistent with the requested improvements of the structural budget balance were 5% 
of GDP for 2012, 4.5% of GDP for 2013 and 2.5% of GDP for 2014.  

The  Portuguese  authorities  were  also  recommended  to  implement  the  measures 
adopted  in  the  2012  budget  and  its  March  supplement  and  that  they  take  additional 
measures  worth  0.3%  of  GDP.  Portugal  was  recommended  to  adopt  permanent 
consolidation  measures  of  at  least  3%  of  GDP  to  be  included  in  the  2013  budget, 
adopting additional measures in case of slippages, and to define measures worth 1¾ % 
of  GDP  in  2014  following  a  comprehensive  Public  Expenditure  Review  (PER).  In 
addition,  Portugal  should  implement  the  requirements  of  the  Council  Implementing 
Decision 2011/344/EU on granting Union financial assistance to Portugal of 17 May 
2011 and its successive amendments. The Budget Framework Law should be adapted 
to incorporate the EU fiscal governance rules and Portugal should continue enhancing 
tranparency and control at all budgetary stages as well as respecting the medium-term 
budgetary framework.  

According to Article 3(5) of Regulation (EC) No 1467/97, the Council may decide, on 
a  recommendation  from  the  Commission,  to  adopt  a  revised  recommendation  under 
Article  126(7)  TFEU,  if  effective  action  has  been  taken  and  unexpected  adverse 
economic  events  with  major  unfavourable  consequences  for  government  finances 
occur after the adoption of the initial recommendation. The occurrence of unexpected 
adverse economic events with major unfavourable budgetary effects is to be assessed 
against the economic forecast underlying the Council recommendation.  

In  accordance  with  Article  126(7)  of  the  TFEU  and  Article  3  of  Council  Regulation 
(EC)  No  1467/97,  the  Council  is  required  to  make  recommendations  to  the  Member 
State  concerned  with  a  view  to  bringing  the  situation  of  excessive  deficit  to  an  end 
within  a  given period.  The  recommendation has to establish a maximum deadline of 
six months for effective action to be taken by the Member State concerned to correct 
the excessive deficit. Furthermore, in a recommendation to correct an excessive deficit 
the Council should request the achievement of annual budgetary targets which, on the 
basis of the forecast underpinning the recommendation, are consistent with a minimum 
annual  improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance 
excluding  one-off  and  other  temporary  measures,  of  at  least  0.5%  of  GDP  as  a 
benchmark.  

In the forecast underpinning the revised recommendation of October 2012, real GDP 
was  expected  to  contract  by  3%  and  1%  in  2012  and  2013,  respectively.  Growth 
prospects have deteriorated markedly since then, after the last quarter of 2012 turned 
out  significantly  worse  than  expected  for  both  economic  activity  and  labour  market 
developments  leading  to  a  real  GDP  contraction  of  3.2%  in  2012.  In  view  of  the 
negative  carry-over  from  2012  and  the  deterioration  in  the  growth  outlook  for 
Portugal's  export  markets,  the  Commission  services'  latest  update  of  the  economic 
outlook for Portugal revised real GDP growth downwards to -2.3% in 2013.  

(10)  The  general  government  deficit  in  2012  reached  6.4%  of  GDP,  which  is  above  the 
5.0% EDP target. The headline deficit was affected by a number of one-off operations 

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which  were  not  known  at  the  time  of  the  EDP  recommendation.  These  operations 
include:  a  capital  injection  into  the  state-owned  bank  CGD  (0.5%  of  GDP);  the  re-
routing  through  government  of  the  conversion  into  equity  of  shareholder  loans  of 
Parpública  to  SAGESTAMO,  two  companies  outside  the  general  government 
perimeter (0.5% of GDP); the impairments associated with the transfer of assets from 
BPN  (0.1%  of  GDP).  In  addition,  following  an  advice  by  Eurostat  the  sale  of  the 
operating  concession  for  the  major  airports  in  Portugal  was  treated  as  equity 
withdrawal and hence not impacting the general government balance, contrary to what 
the government had  foreseen in  the budget (0.7%  of  GDP).  Excluding  the  impact  of 
these one-off factors from the headline balance, the general government deficit would 
have amounted to 4.7% of GDP, below the target. 

(11)  Tight  expenditure  control  compensated  for  the  large  macroeconomically-driven 
underperformance of revenues in the last quarter of the year. Expenditure savings were 
achieved  mostly  in  the  public  wage  bill,  with  the  reduction  in  public  employment 
proceeding  ahead  of  plans,  by  reducing  intermediate  consumption  and  freezing 
budgetary  appropriations  for  new  investment  projects.  Regional  and  local  budget 
execution  also  turned  out  better  than  expected.  On  the  whole,  Portugal  adopted 
permanent consolidation measures amounting to nearly 6% of the GDP in 2012, above 
the amount of measures required by the revised EDP recommendation. According to 
the  Commission  services'  May  2013  forecast,  the  improvement  in  the  structural 
balance in 2012 amounted to 2.4% of GDP compared with the 2.3% of GDP required 
by  the  revised  EDP  recommendation.  Taking  into  account  the  revision  in  potential 
output  growth  since  the  revised  EDP  recommendation,  the  fiscal  effort  would  have 
been at least 0.2 pp. higher. In addition, the estimated change in the structural balance 
was  affected  by  revenue  shortfalls  compared  with  the  scenario  underlying  the  EDP 
recommendation  when  applying  standard  revenue  elasticities.  These  shortfalls 
amounted to around 0.4 pp. Taking these effects into account, the adjusted change in 
the structural balance amounted to 3.0% of GDP, thus well above the effort required 
under the revised EDP recommendation. 

(12)  For  2013,  the  Commission  services'  May  2013  update  of  the  economic  outlook  for 
Portugal  projects  the  general  government  deficit  to  reach  5.5%  of  GDP,  compared 
with  a  target  of  4.5%  of  GDP  in  the  revised  EDP  recommendation.  Budgetary 
consolidation in 2013 needs to compensate for a large negative primary balance drift 
which  reflects  more  subdued  labour  market  and  growth  developments  as  well  as  the 
continued  rebalancing  towards  a  more  export-driven  but  also  less  tax-intensive 
economy compared with the projections underlying the revised EDP recommendation. 
In addition, on 5 April, the Constitutional Court ruled against various measures worth 
0.8%  of  GDP  included  in  the  2013  budget,  which  needed  to  be  compensated  for.  In 
particular, the ruling concerned the cut of one  of the two  bonus payments for public 
sector  workers,  the  cut  of  90%  of  one  of  the  two  bonus  payments  for  pension 
beneficiaries  and  the  introduction  of  social  security  contributions  on  unemployment 
and sick leave benefits.  

(13)  The  Commission  services'  May  2013  update  of  the  economic  outlook  for  Portugal 
foresees  a  structural  effort  in  2013  of  0.6%  of  GDP.  This  falls  short  of  the  1.6%  of 
GDP  effort  recommended  by  the  Council.  However,  correcting  for  the  downward 
revision of potential output growth since the time of the revised EDP recommendation, 
the estimated structural effort in 2013 would be about 0.2 pp. higher. In addition, the 
change  in  the  structural  balance  is  also  severely  affected  by  revenue  shortfalls  (i.e. 

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relative  to  GDP  developments  using  standard  revenue  elasticities)  which  amount  to 
around 0.5 pp. Overall, taking these factors into account, the estimated structural effort 
would be 1.3% of GDP. The adjusted fiscal effort is thus somewhat below the effort 
required by the revised EDP recommendation.  

(14)  The  budgetary  adjustment  in  2013  is  underpinned  by  permanent  consolidation 
measures with a net worth of 3.5% of GDP, which comprise the measures included in 
the  2013  budget  law,  to  be  amended  by  a  supplementary  budget  by  end-May,  the 
frontloading of expenditure reducing measures identified in the context of the public 
expenditure review as well as other measures to replace the budget measures that were 
ruled  unconstitutional.  The  amount  of  consolidation  measures  goes  beyond  that 
foreseen at the time of the October 2012 revised EDP recommendation. The measures 
include,  inter  alia,  a  restructuring  of  the  personal  income  tax  (PIT)  and  increases  in 
excise duties and property taxation. On the expenditure side, the measures envisage a 
sizeable  reduction  in  the  public  sector  wage  bill  through  employment  restraint  and  a 
reduction  in  overtime  payments  and  compensations;  increased  efficiency  in  the 
functioning of public administration; lower intermediate public consumption including 
savings on PPPs; further rationalisation efforts in the health sector and in SOEs; and 
the frontloading of revenues from EU Funds.  

(15) 

In  2014,  according  to  the  Commission  services'  May  2013  update  of  the  economic 
outlook  for  Portugal  the  general  government  deficit  is  expected  to  fall  to  4.0%  of 
GDP,  compared  with  the  2.5%  of  GDP  target  of  the  October  2012  revised  EDP 
recommendation.  The  deviation  reflects  the  higher  headline  deficits  in  the  previous 
years  as  well  as  a  more  muted  economic  recovery.  The  structural  effort  in  2014  is 
forecast  to  be  1.4%  of  GDP,  0.1  pp.  above  the  required  effort  in  the  revised  EDP 
recommendation. The evolution of potential output between the projections underlying 
the revised EDP recommendations and the updated forecast would add 0.1 pp. to the 
estimated  fiscal  effort.  In  addition,  adjusting  for  unexpected  revenue  shortfalls,  the 
effort  would  increase  to  1.8%  of  GDP.  The  adjusted  structural  effort  in  2014  would 
thus be well above the amount required by the revised EDP recommendation. 

the  public  sector  functions  and  entities, 

(16)  These  projections  are  underpinned  by  discretionary  measures  worth  at  least  2%  of 
GDP.  On  the  expenditure  side,  these  measures  will  draw  on  the  results  of  the  PER 
which  aims  at  streamlining  and  modernising  the  public  administration,  addressing 
redundancies  across 
the 
sustainability of the pension system and achieving targeted cost savings in individual 
line  ministries.  In  the  course  of  April  and  early  May,  the  government  adopted  a 
package of permanent expenditure-reducing measures with cumulative yields of EUR 
4.7  billion  (2.8%  of  GDP)  over  2013-2014.  The  government  has  initiated  a  broad-
based consultation with social and political partners with a view to fully defining and 
implementing  these  reforms.  On  the  revenue  side,  the  authorities  foresee  a 
comprehensive  reform  of  the  corporate  income  tax  in  2014.  The  goal  is  to  boost 
investment  and  growth  by  simplifying  the  corporate  income  tax  system.  Given  the 
limited fiscal space, the reform should be revenue-neutral. 

improving 

(17)  Gross  public  debt  rose  from  108.3%  in  2011  to  123.6%  of  GDP  in  2012  and, 
according  to  the  Commission  services'  latest  update  of  the  economic  outlook  for 
Portugal,  is  expected  to  peak  at  around  124.2%  in  2014,  thus  exceeding  the  Treaty 
reference  value  in  all  years.  The  upward  shift  in  the  projections  for  2012  is  mostly 
driven  by  the  statistical  treatment  of  the  transfer  of  privatisation  receipts  from 

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(18) 

Parpública  to  the  State  as  well  as  the  effect  of  the  lower  GDP  path  and  the  revised 
deficit  projections.  The  government  will  put  forward  various  measures  to  curb  the 
increase in the debt ratio such as the sale of foreign assets of a social security fund and 
the  completion  of  privatisation  efforts.  Albeit  small,  a  primary  surplus  is  already 
expected  in  2014  reflecting  the  strength  of  fiscal  consolidation  and  the  more  benign 
macroeconomic developments.  

Important steps have been taken to improve public financial management in Portugal. 
Portugal  was  also  asked  to  continue  improving  transparency  and  control  at  all 
budgetary  stages  for  all  levels  of  government.  In  December  2012,  the  Budget 
Framework Law was amended to incorporate the principles of the Treaty on Stability, 
Coordination and Governance in the Economic and Monetary Union (fiscal compact) 
and  the  six-pack.  An  additional  revision  is  foreseen  by  the  end  of  2013  to  further 
enhance  budgetary  procedures  and  principles  of  budgetary  management, 
accountability, transparency and simplification. In addition, draft Regional and Local 
Finance Laws were submitted to Parliament at  the  end of December  2012.  The laws 
set improved coordination mechanisms between the central and the local and regional 
administrations, a multi-annual budgetary framework and tighter fiscal rules as well as 
applying  the  principles  of  the  amended  Budget  Framework  Law.  Portugal  has  also 
strengthened  efforts  to  limit  contingent  liabilities  by  engaging  in  a  far-reaching 
renegotiation  process  for  Public-Private-Parnerships  with  significant  savings  already 
foreseen  in  2013  and  State-Owned  Enterprises  restructuring  is  progressing  at  good 
pace.  SOEs  at  sectoral  level  reached  operational  balance  by  the  end  of  2012  and 
further  efficiency  gains  are  expected  going  forward.  The  authorities  are  exploring 
ways  to  manage  the  heavy  debt  load  of  SOEs.  These  reforms  show  an  important 
commitment towards fiscal sustainability over the medium term.  

in 

targets  established 

the  nominal  budgetary 

(19)  According to the Commission services' latest update of the economic outlook, Portugal 
will  not  meet 
the  Council 
Recommendation  of  9  October  2012.  However,  taking  into  account  the  changes  in 
the  macro-economic  scenario 
economic  developments  when  compared  with 
underlying  the  revised  Council  recommendation,  it  appears  that  Portugal  has  taken 
effective  action  that  represents  adequate  progress  towards  correcting  the  excessive 
deficit in 2012 and 2013 within the limits specified by the Council on 9 October 2012. 
In  particular,  Portugal  has  adopted  sizeable  consolidation  measures  amounting  to 
nearly  6%  of  GDP  in  2012  and  to  3½  %  of  GDP  in  2013.  The  structural  effort 
delivered  in  2012,  corrected  for  potential  output  growth  and  revenue  shortfalls,  was 
well  above  the  required  effort  in  the  revised  EDP  recommendation.  In  2013,  the 
structural  effort  is  expected  to  fall  short  of  the  required  effort,  primarily  due  to 
unfavourable economic developments as well as the timing of the Constitutional Court 
ruling  well  within  the  budgetary  year,  which  made  it  difficult  to  find  substituting 
measures  of  equal  structural  quality.  In  2014,  the  structural  effort  is  expected  to  be 
again  above  the  required  effort.  Considering  all  these  factors  and  in  line  with  the 
flexibility  provided  by  the  Stability  and  Growth  Pact,  an  additional  year  for  the 
correction of the excessive deficit appears warranted.  

(20)  Granting  an  additional  year  for  the  correction  of  the  excessive  deficit  would  require 
intermediate headline deficit targets of 5.5% of GDP in 2013, 4.0. % of GDP in 2014 
and 2.5% of GDP in 2015, which, based on the Commission services' latest update of 
the economic outlook for Portugal, is consistent with an improvement of the structural 
fiscal  balance  of  0.6%  of  GDP  in  2013,  1.4%  of  GDP  in  2014  and  0.5%  of  GDP  in 

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2015, the last corresponding to the minimum improvement required by Article 5(1) of 
Council  Regulation  (EC)  No  1466/97  of  7  July  19973.  In  parallel  to  the  regular 
reviews  of  the  Economic  Adjustment  Programme  for  Portugal  as  defined  in  Council 
Implementing Decision 2011/344/EU, monitoring of progress on implementation of its 
EDP commitments will be carried out at an interval of three months. 

(21)  Portugal  fulfils  the  conditions  for  the  extension  of  the  deadline  for  correcting  the 
excessive general government deficit as laid out in Article 3(5) of Regulation (EC) No 
1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure, 

HEREBY RECOMMENDS: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

The  Portuguese  authorities  should  put  an  end  to  the  present  situation  of  excessive 
deficit by 2015. 

The Portuguese authorities should bring the headline deficit targets to 5.5% of GDP 
in 2013, 4.0% of GDP in 2014 and 2.5% of GDP in 2015, which is consistent with an 
improvement  in  the  structural  balance  of  0.6%  of  GDP  in  2013,  1.4%  of  GDP  in 
2014  and  0.5%  of  GDP  in  2015,  based  on  the  Commission  services'  May  2013 
update of the economic outlook for Portugal.  

The Portuguese authorities should implement measures amounting to 3½% of GDP 
to confine the 2013 deficit to 5.5% of GDP. These include the measures defined in 
the 2013 budget law and additional reductions in the wage bill, increased efficiency 
in the functioning of public administration, lower public consumption and better use 
of EU funds.  

The  Portuguese  authorities  should,  building  on  the  PER,  adopt  permanent 
consolidation  measures  worth  at  least  2%  of  GDP  in  view  of  attaining  a  headline 
deficit of 4.0% of GDP in 2014. It should aim at streamlining and modernising of the 
public administration, addressing redundancies across the public sector functions and 
entities,  improving  the  sustainability  of  the  pension  system  and  achieving  targeted 
cost savings in individual line ministries.  

The  Portuguese  authorities  should  adopt  the  necessary  permanent  consolidation 
measures to achieve the 2015 deficit target of 2.5% of GDP.  

The  Portuguese  government  is  to  take  effective  action  to  implement  this 
recommendation  by  1  October  2013  and,  in  accordance  with  Article  10(2a)  of 
Regulation (EC) No .../2013 of the European Parliament and of the Council, to report 
in detail the consolidation strategy that is envisaged to achieve the targets. 

Portugal should also maintain reform momentum in public financial management by 
revising the Budget Framework Law by the end of 2013 to further enhance budgetary 
procedures  and  principles  of  budgetary  management,  accountability,  transparency 
and  simplification;  to  continue  efforts  to  limit  contingent  liabilities  stemming  from 
SOEs and PPPs.  

3 

OJ L 209, 2.8.1997, p. 5. 

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Done at Brussels,  

For the Council 
The President 

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