COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Portugal following the adoption of the COUNCIL RECOMMENDATION to Portugal of 9 October 2012 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document 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  
SWD(2013) 394 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Portugal following 
the adoption of the COUNCIL RECOMMENDATION to Portugal of 9 October 2012 
with a view to bringing an end to the situation of an excessive government deficit 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

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

{COM(2013) 394 final} 

EN 

   EN 

 
 
 
 
  
 
 
1. 

INTRODUCTION  

On 2 December 2009, the Council decided, in accordance with Article 126(6) of the Treaty on 
the Functioning of the European Union (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 1467/97 
of  7  July  1997  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure1.  

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 necessary2. 

On  9  October  2012,  the  Council  decided,  in  accordance  with  Article  3(5)  of  Council 
Regulation  (EC)  No  1467/973,  that  effective  action  had  been  taken  but  that  unexpected 
adverse economic events with major unfavourable consequences for government finances had 
occurred after the adoption of the 2 December 2009 recommendation. Notably, a worsening in 
the  growth  outlook  and  the  shift  to  a  less  tax-rich  growth  composition  had  major  negative 
budgetary  implications.  The  Council  therefore  adopted  a  revised  recommendation  under 
Article  126(7)  TFEU  ("the  revised  EDP  recommendation")  and  recommended  Portugal  to 
correct the excessive deficit by 2014 at the latest4. In order to bring the headline government 
deficit below the 3% of GDP reference value by 2014, Portugal was recommended to deliver 
an improvement in the structural balance by 2.3% of GDP in 2012, 1.6% of GDP in 2013 and 
1.3%  of  GDP  in  2014,  based  on  the  Commission  services'  October  2012  update  of  the 
economic  outlook  in  Portugal.  The  headline  deficit  targets  consistent  with  the  requested 
improvements in the structural balance were 5.0% of GDP for 2012, 4.5% of GDP for 2013 
and 2.5% of GDP in 2014.   

Portugal was also recommended to implement the measures adopted in the 2012 budget and 
in its March supplement and to take additional consolidation measures worth 0.3% of GDP. 
For 2013, Portugal was recommended to implement permanent consolidation measures worth 
3.0%  of  GDP  considering  also  contingency  measures  to  cater  for  potential  budgetary 
slippages.  For  2014,  Portugal  was  recommended  to  implement  permanent  consolidation 
measures  of  1¾%  of  GDP  drawing  on  the  results  of  a  comprehensive  Public  Expenditure 
Review (PER). The medium-term budgetary strategy would be further developed in the 2013 
Stability  Programme.  In  addition,  Portugal  was  asked  to  further  improve  public  financial 
management  by  reforming  the  Budget  Framework  Law  to  comply  with  the  new  European 
Union fiscal governance rules and to deepen transparency and control at all budgetary stages 

1 

2 

3 
4 

All  documents  related 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/portugal_en.htm 

the  excessive  deficit  procedure  of  Portugal  can  be  found  at: 

to 

http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/communication_to_the_c
ouncil/2010-06-15_be_cz_de_ie_es_fr_it_nl_at_pt_si_sk_communication_on_action_taken_en.pdf 
OJ L 209, 2.8.1997, p. 6. 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-07_council/2012-10-
09_pt_126-7_council_en.pdf 

2 

 
 
                                                 
as  well  as  ensuring  adherence  to  the  medium-term  budgetary  framework  and  targets  for  all 
levels of general government.  

2. 

RECENT MACRO-ECONOMIC DEVELOPMENTS  

After  a  1.6%  contraction  in  2011,  real  GDP  fell  by  3.2%  in  2012  and,  according  to  the 
Commission services' May 2013 forecast, is projected to fall by a further 2.3% in 2013  (see 
Table 1). Economic activity is expected to bottom out in the second half of this year and to 
start growing in 2014 with an annual average rate of 0.6%. The necessary private and public-
sector  deleveraging  is  expected  to  remain  a  drag  on  domestic  demand  over  the  forecast 
horizon.  At  the  same  time,  the  rebalancing  of  the  economy  towards  export-oriented  sectors 
has taken place faster than expected with significant gains in export market shares as trade has 
been redirected towards extra-EU markets. This export-driven growth is, however, expected 
to  temporarily  loose  some  momentum  on  the  account  of  decelerating  external  demand.  The 
outlook for the labour-market remains bleak, with employment having fallen by a cumulated 
5.7% over 2011 and 2012 and expected to drop further by 3.9% and 0.5% in 2013 and 2014, 
respectively,  driven  largely  by  the  contraction  of  job-intesive  domestically-oriented  sectors 
such as construction and the resizing of the public administration.  

Table 1: Comparison of macroeconomic developments and forecasts 

2011

2012

20132013

2014

outturn            

outturn
-1.6

COM Oct 2012
-3.0

(COM May 2013) COM Oct 2012 COM May 2013 COM Oct 2012 COM May 2013
-2.3

-3.2

-1.0

0.6

1.2

Real GDP (% change)
Contributions to real GDP growth (pp)
Domestic demand
Changes in inventories
Net exports

-5.5
-0.6
4.5
-1.5
0.5
-1.8
-0.5

-7.1
0.1
4.1
-3.9
0.3
-4.3
-1.2

-7.2
0.1
4.0
-4.2
-0.1
-3.5
-1.5

-2.7
0.0
1.8
-1.6
1.2
-4.5
-0.8

-4.2
0.0
1.9
-3.9
1.7
-4.6
-1.3

0.3
0.0
1.0
0.3
1.0
-3.0
-0.4

0.0
0.0
0.6
-0.5
1.3
-3.5
-0.5

Employment (% change)
GDP deflator (% change)
Output gap (% of potential GDP)
Potential output growth (% change)
Source: COM Oct 2012: Commission services' October 2012 update of the economic forecast; COM May 2013: Commission services' May 
2013 update of the economic forecast 

In  the  macroeconomic  scenario  of  the  revised  EDP  recommendation  of  October  2012,  real 
GDP was projected to contract by 3% in 2012 and start expanding in the second half of 2013, 
resulting in an annual average growth rate of -1.0% in 2013. As the recovery was expected to 
materialise  earlier,  annual  real  GDP  growth  was  also  forecast  to  be  higher  in  2014. 
Eventually, real GDP growth in 2012 turned out somewhat more negative than foreseen in the 
revised EDP recommendation. This was mainly due to a smaller contribution of net exports to 
GDP growth but also a somewhat larger contraction in domestic demand than expected at the 
time of the revised EDP recommendation. Importantly, however, both economic activity and 
employment  fell  particularly  strongly  in  the  last  quarter  of  2012,  which  significantly 
worsened the carry-over effect and the outlook for the year 2013. Moreover, the outlook for 
external demand also deteriorated since the Commission services' October 2012 forecast. As a 
result, the Commission services' May 2013 forecast projects a sharper contraction of real GDP 
in 2013 and a more subdued recovery in 2014 than the macro-economic scenario underlying 
the revised EDP recommendation. This includes a sharper drop in domestic demand in both 
years and a more protracted slump in employment.  

3 

 
 
 
3. 

ASSESSMENT OF EFFECTIVE ACTION 

3.1 Background information 

The  current  assessment  of  effective  action  is  based  on  the  Commission  services'  May  2013 
forecast.  It  takes  into  account  the  economic  and  budgetary  developments  since  9  October 
2012, when the revised EDP recommendation was issued. The seventh review mission of the 
Economic Adjustment Programme to Portugal, which took place between 25 February and 14 
March  2013,  and  subsequently  between  14  and  17  April  2013  and  between  8  and  11  May 
2013, concluded that the programme implementation was broadly on track against a difficult 
economic background. A condition for the finalisation of the review was the full specification 
of the measures planned under the PER. The objective of the PER was to reduce redundancies 
across  the  public  sector  functions  and  entities,  and  reallocate  resources  towards  growth-
friendly  spending  areas.  In  addition,  the  government  had  committed  to  adopt  and  publish  a 
medium  term  fiscal  framework  by  end-April,  in  which  the  PER  measures  were  to  be  fully 
specified, as a prior action for the conclusion of the seventh review.  

Table 2: Key macroeconomic and budgetary variables underlying the October 2012 
recommendation addressed to Portugal 

% of GDP 
Revenues  
Current revenues 
Discretionary measures with impact on 
current revenue (EUR bn)5 
Expenditure 
Real GDP growth (%)  
Nominal GDP growth (%)  
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m Output gap (% of pot. Output) 

* revised later to -1.6% 

2011 
44.7 
40.3 

4.2 

48.9 
-1.7* 
-1.0 
-0.6 
-6.3 
-4.2 
-2.5 

2012 
41.7 
40.2 

2.4 

46.7 
-3.0 
-2.7 
-1.2 
-4.1 
-5.0 
-4.3 

2013 
43.0 
41.7 

3.8 

47.5 
-1.0 
0.3 
-0.8 
-2.5 
-4.5 
-4.5 

2014 
42.7 
41.4 

- 

45.2 
1.2 
2.2 
-0.4 
-1.2 
-2.5 
-3.0 

On  5  April,  the  Portuguese  Constitutional  Court  ruled  against  key  measures  in  the  2013 
budget, thereby opening a budgetary gap amounting to 0.8% of GDP. A replacement and/or 
redesign  of  the  measures  annulled  by  the  Constitutional  Court  became  necessary  and  thus 
another prior action for the conclusion of the seventh review.    

In  response  to  these  requirements,  the  government  adopted  in  the  course  of  April  and  early 
May a package of permanent savings measures, predominantly on the expenditure side, with a 
cumulative yield of EUR 4.7 billion or 2.8% of GDP over 2013-2014.  

The assessment of effective action starts by comparing the recommended fiscal effort in the 
revised  EDP  recommendation  with  the  apparent  fiscal  effort,  measured  by  the  change  in 
structural  budget  balance,  and  with  the  adjusted  structural  effort.  The  adjustment  of  the 
structural  balance  takes  into  account  (i)  the  impact  of  revisions  in  potential  output  growth 
relative to the one underlying the growth scenario of the Council recommendation and (ii) the 

5 

Measures clearly specified and committed to by government ahead of the recommendation. 

4 

 
 
 
                                                 
impact  on  revenue  of  revisions  of  the  tax  intensity  of  economic  activity  (composition  of 
economic growth or of other windfalls/shortfalls) relative to the assumptions underlying the 
revised EDP recommendation. This top-down approach in the assessment is complemented by 
a bottom-up assessment of consolidation measures undertaken by the Portuguese government.  

3.2 Assessment of effective action 

3.2.1 Budgetary implementation in 2012 

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 which were not 
known at the time of the revised 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 to 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, the general government deficit would have amounted to 4.7% of GDP, 
thus below the target (see Table 3). 

Fiscal  consolidation  in  2012  was  nonetheless  remarkable  with  an  improvement  in  the 
structural  balance  by  2.4%  of  GDP,  which  is  above  the  2.3%  required  in  the  revised  EDP 
recommendation of 9 October 2012 (see Table 4). Accounting for the downward revision of 
potential output since the time of the revised EDP recommendation, the estimated fiscal effort 
in 2012 would increase by 0.2 pp. 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 
0.4 pp. Overall, taking these effects into account, the adjusted change in the structural balance 
in 2012 amounted to 3.0% of GDP, thus well above the effort required under the revised EDP 
recommendation. 

5 

 
 
 
Table 3: Composition of the budgetary adjustment 

2011

2012

2013

2014

Outturn Outturn

(%  of 
GDP)

45.0

(%  of 
GDP)

41.0

13.7

9.9

12.2

9.2

49.4

13.6

9.2

11.6

6.5

47.4

COM 
October 
2012
(%  of 
GDP)

COM 
October 
2012
(%  of 
GDP)

41.7

43.0

13.7

9.5

11.7

6.8

46.7

13.8

11.0

11.6

6.6

47.5

COM May 
2013

(%  of 
GDP)

42.6

13.2

11.0

12.0

6.4

48.0

COM 
October 
2012
(%  of 
GDP)

42.7

13.7

10.9

11.6

6.5

45.2

COM May 
2013

(%  of 
GDP)

42.1

13.3

10.6

12.0

6.1

46.1

45.3

43.0

42.2

42.8

43.6

40.2

41.7

11.4

4.7

22.0

0.7

1.4

5.2

4.0

-4.4

-0.4

3.0

-6.6

2.2

-

-1.6

0.5

-1.0

9.9

4.6

22.6

0.6

1.8

3.5

4.4

-6.4

-2.0

-0.6

-4.2

2.4

-

-3.2

-0.1

-3.3

9.8

4.5

22.1

1.0

2.0

2.8

4.5

-5.0

-0.5

1.0

-4.1

2.2

2.5

-3.0

0.3

-2.7

9.9

4.4

22.4

1.0

1.7

3.4

4.7

-4.5

0.2

-

-2.5

1.6

-

-1.0

1.2

0.3

10.5

4.4

23.9

0.5

1.8

2.5

4.4

-5.5

-1.1

0.2

-3.6

0.6

0.8

-2.3

1.8

-0.6

9.5

4.1

21.7

0.8

1.5

2.6

5.0

-2.5

2.5

-

-1.2

1.3

1.4

1.2

1.0

2.2

9.3

4.3

23.3

0.5

1.7

2.6

4.4

-4.0

0.4

-0.3

-2.2

1.4

-

0.6

1.3

1.8

Revenue

of which:

- Taxes on production and imports

- Current taxes on income, wealth, etc.

- Social contributions

- Other (residual)

Expenditure

of which:

- Primary expenditure

of which:

        Compensation of employees

        Intermediate consumption

Social payments

Subsidies

Gross fixed capital formation

Other (residual)

- Interest expenditure

General government balance (GGB)

Primary balance

One-off and other temporary measures

Structural balance

Change in structural balance

Corrected change in structural balance due to 
revision of potential output growth (alpha)
Real GDP growth

GDP deflator

Nominal GDP

Table 4: Change in structural balance corrected for revisions in potential output gap 
and revenue windfalls/shortfalls6 

Uncorrected fiscal 
effort ( SΔ ) 

Fiscal effort corrected 

for α and β 

*SΔ

(

)

Required fiscal effort in 
the latest Council 
recommendation (R) 
2014 

2012  2013

Deadline for 
correction 

  2012  2013  2014 
1.4 
0.6 

2.4 

PT 

  2012  2013

2014 

3.0 

1.3 

1.8 

2.3 

1.6 

1.3 

2014 

6 

Detailed calculations for parameters 'alpha' and 'beta' are provided in the Annex. 

6 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Table 5: Main discretionary measures in 2012-2014 (% of GDP) 

Revenue 

Expenditure 

2012 

•  VAT change in tax structure and energy rates 

(1.2% of GDP)  

•  Excise tax rate increases (0.1% of GDP) 
•  Other indirect taxes exemptions (0.1% of 

GDP) 

•  PIT and CIT reduction of tax benefits (0.4% 

of GDP) 

•  PIT surcharge (0.1% of GDP) 
•  PIT taxation capital gains (0.1% of GDP) 
•  CIT surcharge (0.1% of GDP) 
•  Other non-tax revenues  (0.1% of GDP) 

•  Employment restraint  (0.3% of GDP) 
•  Elimination of the 13th and 14th salary (1.0% 

of GDP) 

•  Elimination of the 13th and 14th pension 

(1.0% of GDP) 

•  Social transfers reduction (0.1% of GDP) 
•  Health reform (0.6% of GDP) 
•  Reduction of intermediate consumption  

(0.2% of GDP) 

•  Reduction of investment in various sectors 

(0.6% of GDP) 

Total: 2.2% of GDP 

Total: 3.7% of GDP 

2013 

•  PIT restructuring and surcharges (1.6% of 

•  Lower wage bill -  employment restraint and 

GDP) 

•  CIT base broadening (0.1% of GDP) 
•  Real estate tax base broadening  (0.2% of 

GDP) 

remuneration- (0.9% of GDP) 

•  Reduction in other social benefits (0.4% of 

GDP) 

•  Savings in intermediate consumption across 

•  Extraordinary solidarity contribution on 

line ministries (0.3% of GDP) 

pensions (0.3% of GDP) 

•  Broadening of social security base and other 

non-tax revenues (0.2% of GDP) 

•  Excise taxes and other indirect taxes (0.1% of 

•  Savings in SOEs and PPPs (0.3% of GDP) 
•  Savings in health sector (0.1% of GDP) 
•  Other savings (0.2% of GDP) 
•  Reinstatement of the 13th and 14th salary (-

GDP) 

•  Larger use of EU funds (0.3% of GDP) 

1.5% of GDP) 

Total: 0.7% of GDP 

Total: 2.8% of GDP 

2014 

•  Higher contributions to special health 

subsystems (0.1% of GDP) 

•  Employment restraint  (0.5% of GDP) 
•  Upfront costs associated to employment 

•  Pension sustainability contribution –if needed 

restraint (-0.3% of GDP) 

(0.2% of GDP) 

•  Revision of wage/supplement scales (0.3% of 

GDP) 

•  Savings in intermediate consumption across 

line ministries (0.3% of GDP) 

•  Change to sustainability factor/retirement age 

(0.2% of GDP) 

•  Convergence civil servant's pension regime 
(CGA) to the general regime (0.4% of GDP) 

Total: 1.4% of GDP 

Note: Negative sign denotes a deficit increasing measure. Some measures are grouped by sector. Only measures 
yielding more than 0.1% of GDP are listed. 

Total: 0.3% of GDP 

7 

 
 
 
 
 
 
 
This  analysis  is  confirmed  by  a  more  in-depth  analysis  of  the  budgetary  developments  in 
2012, including a bottom-up assessment of measures taken. Confining the deficit in 2012 was 
challenging in view of the macro-driven underperformance of revenues that required a tight 
budgetary  execution  on  the  expenditure  side  and  the  implementation  of  consolidation 
measures  on  top  of  those  foreseen  in  the  original  budget.  A  supplementary  budget  was 
approved  in  March,  with  the  total  amount  of  measures  reaching  5½%  of  GDP.  In  order  to 
compensate  for  the  higher-than-expected  revenue  shortfalls  additional  expenditure  measures 
of  0.3%  of  GDP  were  taken  in  the  last  quarter  of  the  year,  particularly  in  the  areas  of  the 
public  wage  bill,  with  the  reduction  in  public  employment  proceeding  ahead  of  plans, 
intermediate  consumption  and  capital  expenditure.  The  budgetary  execution  of  regional  and 
local  governments  also  turned  out  better  than  expected.  On  the  whole,  Portugal  adopted 
permanent  consolidation  measures  amounting  to  nearly  6%  of  the  GDP  in  2012,  of  which 
about one-third were on the revenue side and two-thirds on the expenditure side (see Table 5).  

3.2.2 Budgetary developments in 2013 

According to the Commission services' updated forecast, the government deficit is projected 
to reach 5.5% of GDP, compared with the EDP target of 4.5% of GDP. Hence, the headline 
deficit target for 2013 is not expected to be met. The primary balance is expected to improve 
by 0.9 pp. Budgetary consolidation 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 than 
expected  at  the  time  of  the  revised  EDP  recommendation.  GDP  growth  was  revised 
downwards to -2.3% and the unemployment rate was revised upwards to 18.2%. In addition, a 
Constitutional Court ruling against several measures of the 2013 budget opened a fiscal gap of 
0.8% of GDP. In particular, the Court annulled 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.  

The  Commission  services'  May  2013  forecast  projects  the  structural  deficit  to  decrease  by 
0.6%  of  GDP  compared  with  a  recommended  effort  of  1.6%  of  GDP.  Correcting  for  the 
change in the estimated potential growth between the projections underlying the revised EDP 
recommendations and the May 2013 forecast would increase the estimated fiscal effort by 0.2 
pp.  In  addition,  correcting  for  changes  in  expected  revenue  raises  the  effort  by  0.5 pp. 
reflecting the large amount of revenue-based consolidation measures foreseen in  2013. This 
brings the adjusted fiscal effort to 1.3% of GDP, which is somewhat below the effort required 
by the revised EDP recommendation.  

The budgetary adjustment in 2013 is underpinned by consolidation measures with a net worth 
of 3.5% of GDP. These include the measures defined 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 PER as well as other measures to replace the budget measures 
that  were  ruled  unconstitutional.  Given  the  timing  of  the  Constitutional  Court  ruling  well 
within the budgetary year and the subsequent need for a rapid reaction, some of the measures 
in 2013 are of temporary nature which will be replaced by permanent measures in 2014. On 
the  whole,  revenue  increases  will  bear  the  brunt  of  the  adjustment  in  2013  but  the  balance 
between  revenue  and  expenditure-based  consolidation  will  be  re-established  in  2014  (see 
Table 5).  

8 

 
 
On  the  revenue  side,  a  comprehensive  reform  of  the  personal  income  tax  (PIT)  was 
implemented by reducing the number of brackets and increasing the average tax rate in line 
with European standards, while preserving progressivity and curbing tax benefits. In addition, 
a tax surcharge is imposed on incomes above a certain threshold. Corporate tax revenues will 
be increased by means of limiting the deductibility of interest costs, reducing the threshold for 
applying  the  highest  surcharge  on  profits  and  changing  the  methodology  for  special 
prepayment  to  companies,  among  others.  The  budget  also  considers  changes  in  indirect 
taxation by means of higher excises on tobacco, alcohol and natural gas and broadening the 
scope of property taxation after revaluation of properties. In addition, social contributions will 
also rise as they will be also charged on supplementary payments for public employees and on 
unemployment  and  sick  leave  benefits.  The  latter  reform  will  be  redesigned  so  as  to 
accommodate the Constitutional Court ruling. An extraordinary solidarity contribution will be 
levied on pensions. 

On the expenditure side, a comprehensive package of measures is implemented to reduce the 
public  sector  wage  bill  through  employment  restraint  and  a  reduction  in  overtime  payments 
and  compensations.  These  include  the  measures  foreseen  in  the  2013  budget  law  and 
additional measures decided by the government in April and May. In particular, it foresees a 
further  reduction  in  public  employment  through  the  transformation  of  the  Special  Mobility 
Scheme into a Requalification Programme and the convergence of public and private sector 
working rules – especially by raising working hours in the public sector from 35 to 40 hours 
per week, the increase in the public employees' contributions to the special health insurance 
schemes  and  the  reduction  of  fringe  benefits.    Rationalisation  efforts  across  line  ministries, 
SOEs  and  PPPs  will  be  deepened  plans  and  social  spending  will  be  further  streamlined.  In 
addition, the government will also adopt non-permanent measures including a frontloading of 
revenue from of EU Funds through the transfer of Cohesion Fund resources from less mature 
projects  to  more  advanced  ones  and  a  reduction  in  investment.  These  will  be  replaced  by 
permanent measures the following year. 

3.2.3 Budgetary developments in 2014 

The economic recovery should gather pace in 2014, albeit at a slower pace than foreseen in 
the  October  EDP  recommendation,  with  real  GDP  forecast  to  grow  by  0.6%,  driven  by  net 
exports  and  investment  as  well  as  a  turnaround  in  private  consumption.  The  unemployment 
rate is forecast to reach 18½% in 2014 as a consequence of the weaker growth outlook and 
expected further cuts  in  public-sector employment.  The  government  announced  on  2  May  a 
substantial package of permanent fiscal consolidation measures which were derived from the 
PER.  Against  the  backdrop  of  weaker-than-expected  growth  prospects,  these  measures  are, 
nonetheless,  insufficient  to  bring  the  deficit  below  the  3%  of  GDP  threshold  by  2014. 
According to the Commission services' May 2013 forecast, the government headline deficit is 
projected  to  reach  4.0%  of  GDP  in  2014.  This  would  represent  an  improvement  in  the 
structural deficit by 1.4% of GDP, which is above the effort of 1.3% of GDP required by 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. 

9 

 
 
The main impact of the PER measures will be in 2014 and beyond, acting along three main 
axes:  (1)  reduction  of  the  public  sector  wage  bill;  (2)  reduction  of  pension  benefits  and  (3) 
sectoral expenditure cuts across line ministries and programmes. The PER measures are part 
of a wider effort to reform the state with the objective of increasing equity and efficiency in 
the provision of social transfers and public services. The package adopted on 2 May includes 
measures amounting to about 1.7% of GDP for 2014 – net of the estimated upfront costs (of 
EUR 500 million or 0.3% of GDP) of the planned voluntary redundancy scheme.  

The  reduction  in  the  wage  bill  in  2014  aims  at  reducing  the  size  of  the  public-sector  work 
force  while  changing  its  composition  towards  higher-skilled  employees,  aligning  the  public 
sector work rules with those of the private sector and making the remuneration policy more 
transparent  and  merit-based.  These  include  the  utilisation  of  the  new  Requalification 
Programme,  the  further  convergence  of  public  and  private  sector  work  rules,  the 
implementation  of  a  voluntary  redundancy  scheme  –  with  an  upfront  one-off  cost  of  about 
0.3%  of  GDP,  the  introduction  of  a  single  wage  and  supplement  scales.  Savings  in 
intermediate  consumption  across  line  ministries  will  also  be  stepped  up.  Finally,  a 
comprehensive pension reform will generate another important part of the savings and will be 
based on equity principles and income progressivity, thereby protecting the lowest pensions. 
Specifically,  the  reforms  will  take  into  consideration  the  need  to  reduce  the  current 
differences between the civil servants' regime (CGA) and the general system, increasing the 
statutory retirement age and applying – if necessary– a progressive sustainability contribution.  

3.2.4 Public debt 

Gross public debt rose from 108.3% in 2011 to 123.6% in 2012, above the 119% projected at 
the time of the recommendation. The upward shift in the projections for 2012 is mostly driven 
by the statistical treatment of the transfer of privatisation receipts from 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. Public debt is expected to 
peak at about 124.2% of GDP in 2014 and to decline thereafter. 

3.2.5 Budgetary framework 

In the revised EDP recommendation of October 2012, Portugal was also required to maintain 
the reform momentum in public financial management by reforming the Budget Framework 
Law  to  comply  with  the  new  the  principles  of  the  Treaty  on  Stability,  Coordination  and 
Governance  in  the  Economic  and  Monetary  Union  (fiscal  compact)  and  the  six-pack  and  to 
continue  improving  transparency  and  control  at  all  budgetary  stages  as  well  as  ensuring 
adherence  to  its  medium-term  budgetary  framework  and  targets  for  all  levels  of  the  general 
government.  

The Budget Framework Law was amended to transpose, ahead of schedule, the principles of 
the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union 
(fiscal  compact)  and  the  six-pack.  This  reform  shows  the  authorities'  commitment  towards 
fiscal  sustainability  over  the  medium  term.  An  additional  revision  is  foreseen  by  the  end  of 
2013  to  further  enhance  budgetary  procedures  and  principles  of  budgetary  management, 
accountability, transparency and simplification. The process will be conducted in consultation 

10 

 
 
with  the  relevant  stakeholders.  Regional  and  local  policy  frameworks  are  also  being 
strengthened. Draft Regional and Local Finance Laws were submitted to Parliament at the end 
of December 2012, applying the principles of the amended Budgetary Framework Law. The 
laws  set  improved  coordination  mechanisms  between  the  central  and  the  local  and  regional 
administrations,  a  multi-annual  budgetary  framework  and  tighter  fiscal  rules.  The  new 
framework  law  of  local  attributions  and  competences  was  adopted  in  Parliament  and  will 
provide  the  legal  basis  for  a  more  efficient  division  of  labour  between  the  central  and  local 
administrations.  

A three-year action plan aimed at developing the institutional setting for the sustainability of 
public finances was published as an annex to the 2013 budget law. It proposes actions in three 
fronts: improving the legislative and procedural framework, raising technical capacity within 
the  field  of  public  finances  and  developing  a  broad-based  reform  of  public  administration. 
Several reforms are already in place to ensure progress in all areas.  

4. 

PROPOSED NEW ADJUSTMENT PATH 

Portugal  will  not  meet  the  nominal  budgetary  targets  established  in  the  Council 
Recommendation of 9 October 2012. However, Portugal has implemented a structural effort 
in 2012 substantially above the effort required in the revised EDP recommendation. In 2013, 
primarily on the account of unexpected adverse economic developments and the timing of the 
Consitutional Court ruling well within the budgetary year, the structural effort required will 
not be met although the amount of consolidation measures implemented significantly exceeds 
the amount foreseen at the time of the recommendation. These unexpected adverse economic 
developments  have  entailed  major  unfavourable  consequences  for  government  finances.  In 
particular, the decline in real GDP was more severe than expected. The economic recession 
has  weighed  on  labour  market  developments  with  unemployment  above  the  expectations  at 
the  time  of  the  recommendation.  Together  with  the  changing  composition  of  GDP  growth, 
this  has  had  adverse  effects  on  both  the  revenue  and  expenditure  side  with  a  shortfall  of 
current tax revenue and social contributions as well as higher expenditure on social transfers. 

Considering  all  these  factors  and  using  the  flexibility  foreseen  in  the  Stability  and  Growth 
Pact, and given in particular the marked deterioration in the growth outlook since the October 
2012  recommendation,  an  additional  year  for  the  correction  of  the  excessive  deficit  would 
therefore be warranted. This would translate into intermediate headline deficit targets of 5.5% 
of GDP in 2013, 4.0% of GDP in 2014 and 2.5% of GDP in 2015. The attainment of these 
deficit targets is consistent with an annual improvement in the primary balance (net of one-off 
measures) of 1.1% of GDP on average over the period 2013-2015. The improvement in the 
structural  budget  balance  implied  by  the  headline  targets  is  0.6%  of  GDP  in  2013,  1.4%  of 
GDP  in  2014,  0.5%  of  GDP  in  2015,  the  last  corresponding  to  the  minimum  improvement 
required  by  Article  5(1)  of  Council  Regulation  (EC)  No  1466/97  of  7  July  19977.  These 
targets for the annual improvement in the structural budget balance take into account the need 
to  compensate  for  the  negative  second-round  effects  of  fiscal  consolidation  on  public 
finances,  through  its  impact  on  GDP  growth.  The  more  gradual  adjustment  path  takes  into 

7 

The  required  structural  fiscal  efforts  have  to  be  interpreted  with  great  caution  given  the  major 
uncertainties  surrounding  the  methodological  estimation  of  potential  growth  and  output  gaps  in  an 
economy like Portugal, facing profound structural transformations.  

11 

 
 
                                                 
account  the  current  difficult  economic  environment  and  the  on-going  major  structural 
transformation of the Portuguese economy.  

Achieving  these  targets  will  require  the  full  implementation  of  the  fiscal  consolidation 
measures announced by the government. For 2013, this implies going beyond the 2013 budget 
by applying additional consolidation measures to compensate for the strongly negative carry-
over  from  2012  and  the  Constitutional  Court  ruling.  While  the  envisaged  expenditure 
compression  appears  feasible  it  will  require  sustained  budgetary  discipline  at  all  levels  of 
government. Moreover, as some of the compensating measures are of temporary nature there 
is a need for their replacement by permanent measures in 2014. 

In 2014, the savings generated by the PER and other measures appear sufficient to meet the 
fiscal target. Moreover, the quality of the adjustment is higher than in 2013 as all measures 
are  of  a  permanent  nature.  In  addition,  due  to  the  upfront  costs  related  to  the  voluntary 
redundancy scheme, one-off expenditure amounting to 0.3% of GDP will drop out after 2014, 
leading to a mechanical improvement in the 2015 budget balance. However, implementation 
risks of the measures are large. More importantly, there are also process-related risks as the 
measures are being discussed with social and political partners and the details are still to be 
defined. 

It  is  therefore  important  to  maintain  reform  momentum  to  strenghten  the  institutional 
framework  as  well  as  improving  budgetary  procedures  at  all  stages  which  should  ensure  a 
smooth  implementation  of  the  proposed  consolidation  measures.  Continued  efforts  to  limit 
contingent liabilities stemming from SOEs and PPPs will also be necessary.  

Table 6:  Forecast of key macroeconomic and budgetary variables (Commission 
services' updated forecast) 

% of GDP 
Revenues  
Current revenues 
Discretionary measures with impact on 
current revenue (EUR bn)8 
Expenditure 
Real GDP growth (%)  
Nominal GDP growth (%)  
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m CAB methodology revenue 
elasticity9  
p.m Apparent revenue elasticity 
p.m Output gap (% of pot. Output) 

2011 
45 
40.5 

4.2 

49.4 
-1.6 
-1.0 
-0.5 
-6.6 
-4.4 

0.9 

3.2 
-1.9 

2012 
41 
39.7 

2.3 

47.4 
-3.2 
-3.3 
-1.5 
-4.2 
-6.4 

0.9 

2.3 
-3.5 

2013 
42.6 
41.4 

4.9 

48 
-2.3 
-0.6 
-1.3 
-3.6 
-5.5 

0.9 

7.0 
-4.6 

2014 
42.1 
41.2 

0.6 

46.1 
0.6 
1.8 
-0.5 
-2.2 
-4.0 

0.9 

0.2 
-3.5 

2015 
41.6 
40.7 

- 

44.1 
1.5 
2.7 
-0.1 
-1.7 
-2.5 

0.9 

0.6 
-1.9 

Note: The projections reflect the authorities’ commitments for 2013–14 under the EU/IMF-supported programme. 

8 
9 

Measures clearly specified and committed to by government ahead of the recommendation. 
The standard revenue elasticity has been revised in line with the recently endorsed by EPC 
methodology for computing cyclically-adjusted balances. 

12 

 
 
                                                 
5. 

CONCLUSIONS  

On  current  information,  it  appears  that  Portugal  has  taken  effective  action  which  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  of  nearly  6%  of  GDP  in  2012  and  3½%  of  GDP  in  2013,  based  on 
bottom-up  calculations.  Correcting  for  revisions  in  potential  output  growth  and  for  revenue 
shortfalls due to tax-poor growth, the estimated annual improvement in the structural balance 
is  in  line  with  the  effort  required  by  the  Council  in  2012.  In  2013,  the  structural  effort  is 
expected  to  fall  short  of  the  required  effort,  primarily  due  to  the  unexpectedly  adverse 
economic  outlook  as  well  as  the  implications  of  the  Constitutional  Court  ruling  well  within 
the  budgetary  year.  For  2014,  the  government  has  proposed  a  consolidation  package  that 
delivers  a  structural  effort  beyond  the  required  one  and  compensates  for  one-off  and 
temporary  measures  in  the  previous  year.  The  specific  measures  are  currently  under 
negotiation  with  social  and  political  partners  and  the  necessary  legislative  changes  are 
expected to be finalised well in time for the 2014 budget.   

Progress to enhance fiscal governance has also been remarkable at all government levels and 
further improvements are still foreseen for this year.  

The deterioration in the economic oulook which occurred since the last recommendation was 
issued,  as  well  as  the  urgent  need  to  offset  the  adverse  budgetary  impact  of  the  recent 
Consitutional  Court  ruling  well  within  the  budgetary  year,  suggest  that  an  extension  of  the 
deadline  for  correcting  the  excessive  deficit  is  appropriate,  in  order  to  bring  the  headline 
government  deficit  below  the  3%  of  GDP  reference  value  by  2015.  Granting  an  additional 
year  for  the  correction  of  the  excessive  deficit  would  translate  into  intermediate  headline 
deficit targets of 5.5% of GDP for 2013, 4.0% of GDP for 2014, 2.5% of GDP for 2015. The 
underlying improvement in the structural budget balance implied by these targets is 0.6% of 
GDP in 2013, 1.4% in 2014, 0.5% in 2015.  

13 

 
 
 
 
Annex 

Table A1: Detailed calculations for the parameter α 

Pot. growth 
underlying Council 
recommendation 
(COM October 2012) 
(%)  
 (1) 

Pot. growth  
(COM May 
2013) 
(%) 
(2) 

Forecast 
error 
(%) 
(3)=(2)-(1) 

Structural 
expenditure 
(% of pot. GDP) 
(COM May 2013)
(4) 

Correction coefficient 
α 
(% of nominal pot. 
GDP) 
(5)=[(3) x (4)]/100 

2012 
2013 
2014 

-1.2 
-0.8 
-0.4 

-1.5 
-1.3 
-0.5 

0.3 
0.5 
0.1 

45.8 
42.8 
43.9 

0.2 
0.2 
0.1 

14 

 
 
 
 
Table A2: Detailed calculations for the parameter β 

Change in current revenues (yoy) 
(billions of national currency)

Discretionary current revenue 
measures (billions of national 
currency)

Nominal GDP grow th assumptions 
(%)

Current revenues  in year t-1 
(billions of national currency)

Revenue gap (billion 
of national currency)*

Correction 
coefficient β (% 
of nominal 
potential GDP)

Oct-12

May-13

Oct-12

May-13

Oct-12

May-13

Oct-12

May-13

2012

2013

2014

(1)

-2.4
2.9
1.0

(1')

-3.7
2.5
0.9

(2)

2.4
3.8
0.0

(2')

2.3
4.9
0.6

(3)

-2.7
0.3
2.2

(3')

-3.3
-0.6
1.8

(4)

69.3
66.8
69.7

(4')

69.3
65.6
68.1

(5)=[(1')-(2')-ε*(3')*(4')]-
[(1)-(2)-ε*(3)*(4)]
-0.8
-0.9
-0.5

-0.4
-0.5
-0.3

15