COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for PORTUGAL Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Portugal’s 2014 national reform programme and and delivering a Council opinion on Portugal’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Portugal, budget deficit, competitiveness, economic convergence, economic disparity, economic growth, economic recovery, economic stabilisation, financial control, job creation, macroeconomics, stability programme













EUR-Lex - 52014SC0423 - EN











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52014SC0423

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for PORTUGAL Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Portugal’s 2014 national reform programme and and delivering a Council opinion on Portugal’s 2014 stability programme /* SWD/2014/0423 final */









Contents
Executive summary. 3
1............ Introduction. 5
2............ Economic situation
and outlook. 7
3............ Challenges and
assessment of the policy agenda. 8
3.1......... Fiscal policy and
taxation. 8
3.2......... Financial sector 16
3.3......... Labour market, education
and social policies. 17
3.4......... Structural measures
promoting sustainable growth and competitiveness. 21
3.5......... Modernising of public
administration. 26
4............ Conclusions. 29
Overview table. 31
Annex... 33

Executive
summary 

Portugal's
economic recovery is firming, with output expanding since the spring of last
year, unemployment receding and the external balance improving. According
to the updated macroeconomic scenario of the Macroeconomic Adjustment
Programme, real GDP is forecast to grow by 1% in 2014 and 1.5% in 2015,
based on a gradual recovery of domestic demand and further positive
contributions from net exports. In line with output, employment started to grow
from early 2013 while unemployment showed a steady decline, falling from 17.6%
at the start of 2013 to 15.3% at the end of that
year.
Robust
export performance contributed decisively to the strong improvement in Portugal's external balance, which turned into a surplus of about 0.5% of GDP in
2013 after continuous high deficits for the last 20 years. The
2013 budget deficit came in at 4.9% of GDP (4.5% excluding bank
recapitalisations), significantly below the programme target of 5.5% of GDP.
The 2014 budget is in line with the deficit target of 4.0% of GDP and
predicated on predominantly expenditure-based measures totalling 2.1% of GDP. 
Portugal successfully
concluded its Macroeconomic Adjustment Programme on 17 May 2014, with the bulk
of the planned consolidation and reform measures being completed. Portugal had only one country-specific recommendation in 2013, namely to adhere to the
terms of the Memorandum of Understanding under the Programme. Significant
fiscal consolidation has been achieved over the three-year programme period, financial
stability risks have been carefully managed and the banking
system's ability to extend credit to viable enterprises has been safeguarded,
and major structural reforms have been implemented. 
Despite these
achievements, significant challenges remain in the area of budgetary, financial
and structural policies. 
·        
Fiscal policy. Portugal will need to engage in continuous fiscal
adjustment to ensure sustainability of its public finances. The carry-over from the budgetary overperformance in 2013 and an
improved economic outlook balance to some extent budgetary pressures in 2014. But
non-negligible implementation and legal risks remain as various consolidation
measures have been challenged on constitutional grounds. Furthermore, there are
risks related to the debt management of state-owned enterprises pending further
clarity on their statistical treatment under the revised rules of the new European
System of Accounts 2010. For 2015, measures of around 0.8% of GDP are necessary
to reach the deficit target of 2.5% of GDP, as required by the Excessive Deficit
Procedure recommendation. Sustained further consolidation will be required
after the correction of the excessive deficit to achieve the medium-term
objective of a structural deficit of 0.5% of GDP by 2017 in compliance with the
requirements of the EU fiscal governance framework; and public debt, which in European
System of Accounts 95 terms is expected to stabilise at around 130.5% of GDP in
2014, will have to be brought on a sufficiently decreasing downward path
towards the 60% of GDP threshold.     
·        
Fiscal-structural reforms. To ensure the effectiveness of the fiscal consolidation efforts, tight
expenditure restraint must be maintained at all levels of government. To this
effect, the reforms of the public financial management system must be completed,
in particular as regards the broader revision of the budgetary framework, the medium-term
orientation of budgetary planning and risk analysis, the defragmentation of budgetary
procedures and the improvement of the accounting and reporting framework. Strict
enforcement of the Commitment Control Law will have to be ensured, and accountability
relations strengthened. The accumulation of public-sector arrears must be
stopped, including by ensuring full financial sustainability of state-owned
enterprises. On the revenue side, there is still scope for making the
tax-system more growth-friendly and further strengthening tax compliance. 
·        
Financial sector.
Financial stability has been preserved. However, weak bank profitability, high non-performing-loans
ratios and elevated corporate-debt levels continue to pose challenges to bank
stability. Limited access to financing, particularly for small and medium-sized
enterprises remains a key impediment to growth, and work to widen the range of
financing alternatives, e.g. through better access to the capital market, need to
continue. A comprehensive strategy to reduce the large corporate-debt overhang
needs to be implemented swiftly, including through a more efficient use of
restructuring tools.
·        
Labour market: It
is necessary to ensure close monitoring of the reform of the Employment
Protection Legislation in tackling the high labour market segmentation.  Improvements
in the collective bargaining system are necessary to induce greater dynamism
and make wages more flexible and responsive to economic conditions. Efforts
need to continue to enhance the effectiveness of Active Labour Market Policies. 

·        
Poverty: While
the measures adopted in the context of the Programme have been designed with a
view to minimising the impact on the most disadvantaged, Portugal's economic and financial crisis has had negative implications for poverty and
inequality. The number of jobless households not covered by social benefits
remains one of the highest in the EU, notably as a result of the stricter
eligibility rules applied to the minimum income scheme after the reforms of
2010 and 2012.
·        
Education: Effective
monitoring of the expansion of the number of schools under autonomy agreement
and the measures put in place to increase the attractiveness and quality of
vocational training is necessary to ensure that these reforms successfully
address long-standing challenges. 
·        
Growth-enhancing structural reforms. There has been substantial progress in structural reforms in recent
years but there is still significant scope for additional reforms in key areas.
Also, the effective implementation of adopted measures requires careful
monitoring. Concerning research and innovation, cooperation between public research
and business needs to be enhanced and clear priorities need to be set, taking
into account the existing research strengths and the potential for the
development of competitive economic activities. In the transport sector,
implementation of the comprehensive long-term transport plan, integration of
ports into the overall logistics and transport system and strengthening of
competition in the railway and metropolitan transport sectors are required. In the
energy sector, action is needed to tackle the remaining excess rents so as to
reduce energy costs for the economy.  The transposition of the Service
Directive is yet to be completed and there is scope for further improvements in
the business environment, evaluation and monitoring of the housing market
reform, competition and the sectoral regulatory framework.
·        
Evaluation of structural reforms. The Portuguese government adopted a wide range of structural
reforms under the Macroeconomic Adjustment Programme, but more work is needed
to assess the reforms' impact on the functioning of the economy. Continued monitoring
of all implemented reforms will be essential to assess if they contribute to boosting
competitiveness, output and employment growth. 

1.        
Introduction 

In May 2013, the
Commission proposed only one country-specific recommendation (CSR) for economic
and structural reforms in Portugal. This was to
implement its commitment under the EU-IMF Macroeconomic Adjustment Programme.
On the basis of this recommendation, the Council of the European Union adopted
this CSR in the form of a Council Recommendation. Portugal successfully
completed its three-year EU-IMF-supported Programme on 17 May 2014 (Box 1).[1] 
This Staff
Working Document provides an assessment of the state of play regarding
Portugal's implementation of the EU2020 strategy and its Fiscal Strategy for
2014-18 and assesses policy measures against the background of its achievements
in the implementation of the Macroeconomic Adjustment Programme. In
view of the extensive reporting requirements under Macroeconomic Adjustment Programmes
and their strict monitoring and enforcement, programme countries are exempt
from the obligation to submit National Reform Programmes (NRP) and Stability or
Convergence Programmes (SCP) (Regulation (EU) No 472/2013, Article 10(1)).
Nevertheless, Portugal submitted an updated Fiscal Strategy Document on 30 April
2014 and a letter from the Government on the update of the NRP on 1 May 2014.   
In line with the
provisions of Regulation (EU) No 472/2013 of the European Parliament and the
Council, following the successful completion of the Programme Portugal will be fully subject to the procedures that had been suspended so far. Fiscal
surveillance under the Excessive Deficit Procedure, which was embedded in the Macroeconomic
Adjustment Programme, will continue. Portugal will have to submit draft
budgetary plans to the European Commission starting with the budget for 2015.  In
addition, Portugal will be subject to post-programme surveillance until at
least 75% of the financial assistance received under the Programme has been
repaid. 
 Box 1: Implementation of the EU/IMF Macroeconomic Adjustment Programme for Portugal The Macroeconomic Adjustment Programme for Portugal was agreed in the midst of a deep financial and fiscal crisis. Following a request by Portugal on 7 April 2011, the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) negotiated with the Portuguese authorities a Macroeconomic Adjustment Programme. The Programme's objective were to restore confidence, put public finances on a sustainable footing, safeguard financial stability and enable the economy to return to balanced growth. To this end, the Programme provided for comprehensive action on three fronts: (1) A credible and balanced fiscal consolidation strategy, supported by structural fiscal measures and better fiscal control over Public-Private-Partnerships and state-owned enterprises, designed to put the gross public debt-to-GDP ratio on a firm downward path in the medium term. (2) Efforts to stabilise the financial sector through market-based mechanisms supported by back-up facilities. Relevant measures should foster gradual and orderly deleveraging of the banking sector, provision of adequate liquidity, strengthened capitalisation of banks and reinforced banking supervision. (3) Deep and frontloaded structural reforms to boost potential growth, create jobs, and improve competitiveness. In particular, the Programme included reforms of the labour market, the services and network industries, the judicial system, the rental market,  licensing, the business environment and competition in order to strengthen the economy’s growth potential, improve competitiveness and facilitate economic adjustment. As for all Member States benefiting from a financial assistance, progress with the implementation of the accompanying policy programme was monitored in a dedicated, regular and specific manner, in line with the provisions of the Memorandum of Understanding.   The macroeconomic outlook has significantly improved over the Programme period. The labour market situation continues to improve, and the process of rebalancing from the non-tradable to the tradable sectors has started, generating a current account surplus in 2013. However, the restructuring of the economy towards an export-based growth model is not yet completed and still-elevated levels of private and public debt are likely to weigh on economic growth in the medium-term. The fiscal policies of the Programme aimed at putting public finances on a sustainable footing. The fiscal consolidation strategy was designed to reduce the government deficit below 3% of GDP by 2015 and put the gross public debt-to-GDP ratio on a firm downward path in the medium term. Significant headway has been made in the ongoing fiscal adjustment, with the headline deficit being halved in the space of three years. The budgetary adjustment has been flanked by a range of fiscal-structural reforms to improve revenue collection and enhance control over government expenditure, including public-private-partnerships and state-owned enterprises. The Programme envisaged substantial measures geared towards ensuring the stability of Portugal’s financial sector. Financial stability has been strengthened through recapitalisation, downsizing and reorganisation of the banking sector. Work on supporting the orderly deleveraging of banks' balance sheets continues, solvency ratios at system level have increased and liquidity conditions have further eased. Significant improvements have been made to the regulatory framework and to the supervision of the banking sector. Amidst improving market sentiment towards issuers in peripheral euro-area countries, several large Portuguese banks have regained access to the international debt market. Portugal carried out a number of actions to facilitate access to finance by viable companies, particularly for small and medium-sized enterprises (SMEs). The structural reform agenda aimed at boosting potential growth, creating jobs, and improving competitiveness. Substantial progress has been made in implementing  the structural reform agenda, particularly in adopting a comprehensive labour market reform that has increased flexibility and reduced segmentation while increasing incentives to work; improving the housing market through a new urban lease law; increasing the efficiency of the judicial system; modernising the educational system; advancing the implementation of the EU Services Directive; improving public contract award practices; streamlining the licensing regime and reducing the administrative burden on businesses in general; advancing transport reform; reducing cost in the energy sector; and bringing the overall regulatory and competition framework more in line with European best practices. These reforms have already improved Portugal's ranking in some structural reform effort comparisons, for instance those based on 'doing business indicators' calculated by the OECD or the World Bank, suggesting that Portugal has become a more flexible and attractive business location. 

2.        
Economic situation
and outlook

The economic recovery is expected to continue in 2014. According
to the latest update of the macroeconomic projections underlying the Macroeconomic
Adjustment Programme, the economic recovery is expected to be increasingly
domestic demand-driven, in particular by private consumption and fixed investment,
while net exports are forecast to continue contributing positively to growth. Real
GDP growth is expected to reach 1% in 2014 (upward revised from 0.6% at the
time of the 2013 Staff Working Document) and to accelerate to 1.5% in 2015, in
line with the latest authorities' forecast.
The gradual
rebalancing of the economy towards export-led growth is progressing steadily. Exports
continued to be buoyant in 2013 ensuring gains in market shares. The share of
exports of goods and services in GDP reached a new high of almost 41% in 2013,
up from 28% in 2009. This was an essential factor behind the rapid turn-around
of Portugal's current account from a deficit of over 12% of GDP in 2009 to a
surplus of about 0.5% of GDP in 2013. The robust growth in exports has been
supported by a diversification of Portugal's export markets towards
fast-growing emerging economies, with their share in Portuguese exports increasing
from 20% in 2001 to 25% in 2013. Going forward, exports are projected to
continue their robust growth trend. In 2014, exports are expected to grow by
close to 5% and then accelerate to around 6% in 2015, based on a pick-up in
export markets growth and some further gains in market shares. The projected
pick-up in investment will be instrumental in generating the higher capacity in
the export sector which is necessary to sustain the dynamism of export growth
over the medium-term.
The outlook in
the labour market has improved notably. Employment has
started to grow from early 2013 on and unemployment has fallen from 17.6% of
the labour force to 15.3% at the end of 2013. This improvement after a long
downturn in the labour market was partly driven by an increase in permanent job
contracts since the second half of 2013. A further gradual decline in the
unemployment rate is projected over the medium term, in line with ongoing employment
gains. Rapid progress in reducing unemployment, and particularly youth
unemployment, remains crucial. Youth unemployment has started to gradually come
down, but progress remains slow: it reached a level of around 35% at the end of
2013, down from slightly above 40% at the beginning of that year. The
percentage of young people aged 15-29 which were neither in employment nor in
education or training also remained high, at 16.7% in 2013 (compared to 15.9% a
year before).
Inflation fell
to 0.4% in 2013, from 2.8% in 2012, but is projected to accelerate moderately
over the coming years. Despite low inflation pressures at the
beginning of 2014, price expectations point to some acceleration by the end of
this year. This supports a forecast of a stable inflation rate around 0.4% in
2014 and a modest acceleration to 1.1% in 2015 in line with the further recovery
of economic activity. Nominal unit labour costs increased by 1.1% in 2013,
partly driven by the reinstatement of the 13th and 14th
salary in the public sector. However, unit labour costs are expected to resume
their falling trend in 2014, on the back of continued wage restraint, and to
stabilise in 2015, reflecting the projected acceleration in compensation of
employees. In cumulative terms, unit labour costs are estimated to have fallen
by more than 6% between 2009 and 2014, contributing importantly to the improvement
in Portugal's external competitiveness. Nevertheless, unit labour cost will have
to fall further to reduce both high unemployment and Portugal's large negative
Net International Investment Position.[2]  

3.        
Challenges and assessment of the policy agenda 
3.1.                
Fiscal policy and taxation
Budgetary
developments 

The fiscal
projections for 2014 and 2015 underlying the 2014 Fiscal Strategy Document
(hereunder 'strategy') have been agreed with Commission, ECB and IMF Staff
during the twelfth and final review of the Macroeconomic Adjustment Programme
for Portugal. Therefore, all projections in the document for
2014-2015 fully correspond to the Commission projections of the twelfth Review.[3] 
The strategy
targets a fiscal deficit of 2.5% of GDP in 2015, thereby correcting the
excessive deficit in line with the EDP recommendation of 21 June 2013. This
is underpinned by detailed consolidation measures for both 2014 and 2015. However,
the annual improvement of the (recalculated) structural balance planned in the
strategy falls short of the recommended effort for 2014. Beyond 2015, the
authorities plan to reach the medium-term budgetary objective of 0.5% of GDP by
2017, in line with the requirements of the Stability and Growth Pact. 
The 2013 general
government deficit reached 4.9% of GDP in ESA-95 terms (4.5% of GDP excluding the
costs of bank recapitalisations), which is significantly below the programme target.
This
mainly reflects an overperformance of State tax collection and tight expenditure
control, which more than offset the underperformance of non-tax revenue. The
headline deficit improved by about 1.5% of GDP in 2013, while the deficit net
of one-offs improved by about 0.5% of GDP (from 5.8% of GDP in 2012 to 5.3% in
2013). Consolidation was achieved on the back of State tax revenue and social
contributions growth (by 10% and 5%, respectively). Encouragingly, in spite of
continued pressure on nominal wages, personal income tax revenue rose by about
EUR 3.4 billion in 2013 (2% of GDP), crucially supporting the consolidation
effort. By contrast, non-tax revenue fell due to, inter alia, a
lower-than-projected absorption of EU funds. On the expenditure side, restraint
was achieved mainly through savings in intermediate consumption and
investments. A particular challenge was the reinstatement of the 13th
and 14th monthly salaries and pensions in 2013 as a result of a Constitutional Court judgment. Only a relatively small portion of the 2013 budget
overperformance is expected to carry over into 2014, since part of the revenue
overperformance is due to a special tax and social contributions debt-recovery
scheme and other one-off factors, and some of the savings from lower investment
expenditure in 2013 may have been achieved at the cost of backlogs that have to
be compensated in 2014.
 Box 2: Excessive deficit procedure for Portugal Portugal is currently subject to the corrective arm of the Stability and Growth Pact. The Council opened the Excessive Deficit Procedure for Portugal on 2 December 2009, and recommended to correct the excessive deficit by 2013 at the latest. The most recent Council Recommendation under Article 126(7) of the Treaty on the Functioning of the European Union was adopted on 21 June 2013. The Council acknowledged that the Portuguese authorities had taken effective action in compliance with the Council Recommendation of 2 December 2009 and that unexpected adverse economic events with major unfavourable consequences for government finances had occurred in the country. Consequently, it addressed a revised recommendation to Portugal with a view to bringing the excessive deficit situation to an end by 2015 at the latest. Specifically, to bring the general government deficit below 3% of GDP in a credible and sustainable way, the Council recommended that Portugal: (a) bring the headline deficit to 5.5 % of GDP in 2013, 4.0 % of GDP in 2014 and 2.5 % of GDP in 2015, 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; (b) implement measures amounting to 3½ % of GDP in 2013 to limit the deficit to 5.5 % of GDP based on the measures defined in the 2013 Budget Law and additional measures included in the Supplementary Budget. These include reductions in the wage bill, increased efficiency in the functioning of the public administration, lower public consumption and better use of EU funds; (c) building on the Public Expenditure Review, adopt permanent consolidation measures worth at least 2.0 % of GDP to attain a headline deficit of 4.0 % of GDP in 2014. This is to be accomplished by streamlining and modernising the public administration, addressing redundancies across public sector functions and entities, improving the sustainability of the pension system and achieving targeted cost savings in individual line ministries; (d) adopt the necessary permanent consolidation measures to achieve the 2015 deficit target of 2.5 % of GDP. In addition, the Council recommended that Portugal maintain its momentum in reforming its public financial management by revising the Budget Framework Law by the end of 2013;  further strengthen budgetary procedures and principles of budgetary management, accountability, transparency and simplification; continue its work to limit contingent liabilities stemming from state-owned enterprises and public-private partnerships. An overview of the current state of excessive deficit procedures is available at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm (please refer to country sections at the bottom of the page). 
According to the forecast
underlying the 2014 Fiscal Strategy Document, the government deficit is
projected to reach 4% of GDP in 2014. This
projection is in line with the forecast underlying the twelfth and final review
of the Macroeconomic Adjustment Programme as well as with the projection of the
2013 Fiscal Strategy Document. Fiscal adjustment in 2014 is underpinned
by permanent consolidation measures amounting to 2% of GDP, complemented by
one-offs with a net budgetary yield worth 0.1% of GDP; see Box 3 for a detailed
list. The fiscal adjustment is predominantly based on the saving
measures identified in the framework of the public expenditure review (PER),
which are complemented by smaller-scale revenue-increasing measures. The PER
package is estimated to encompass permanent consolidation measures worth EUR 2.8
billion (1.7% of GDP).  The PER measures act along three main axes: (1)
reduction of the public-sector wage bill by, inter alia, reducing over-employment
in specific sub-sectors and a temporary reduction of wages; (2) pension reform,
notably by increasing the retirement age to 66 years and introducing changes to
the conditions for granting survivors' pensions; and (3) sector-specific reforms,
mainly streamlining personnel costs, intermediate consumption and investment
across expenditure programmes and line ministries. In the education sector, the
rationalisation of the school network and a convergence of the teacher/pupil
ratio towards levels of other EU countries will support these goals. Hospital
reform and cost optimisation contributes to savings in the healthcare sector.
Among the revenue-increasing measures, the most significant items are a hike in
the corporate tax rate on expenses related to company cars, higher excises for
tobacco and alcohol and a special levy on energy operators. One-off revenues
complementing the PER package are expected among others from sales of
concessions and special dividends from the sale of excess oil reserves; the
yield of these measures is estimated to slightly exceed one-off expenditures
related to mutual agreement terminations of contracts. 
     || Box 3. Main budgetary measures Main budgetary measures 2014 Main measures underpinning the 2015 deficit target ||     
   || Note: The budgetary impact in the tables is the impact reported in the programme, i.e. by the national authorities. The budgetary impact also corresponds to the impact of the measures assessed by the EC/ECB/IMF staff during the twelfth review of the Economic Adjustment Programme for Portugal. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||   
In spite of the
substantial consolidation measures legislated for 2014, risks to the fiscal
target remain tilted to the downside mainly due to legal risks, as various
measures of the 2014 budget have been contested in front of the Constitutional Court. Furthermore, there are budgetary risks
related to the SOEs debt management strategy recently launched by the Portuguese
Government to restore the financial viability of companies with legacy-debt
burden, pending further clarity on the statistical treatment of the operations
under the revised rules of the European System of Accounts 2010. Should any
negative risks to the budgetary target materialise, the Portuguese authorities
are committed to offsetting these by high-quality measures. 
Portugal
remains committed to reducing the deficit to 2.5% of GDP by 2015, which, under
the current macro-fiscal scenario, will require consolidation measures of about
0.8% of GDP. The 2014
Fiscal Strategy Document presents the consolidation measures on which the
fiscal adjustment will advance in 2015 (for a full list of measures see Box 3). The measures
consist mainly of a further restructuring and rationalisation of public
services, notably across line ministries, at local level and in some transport
SOEs; further reductions in public employment which will be mainly achieved
through non-renewal of fixed-term contracts and a continuation of the
requalification programme for civil servants; savings in ICT spending and external studies and consultancy; and a claw-back tax on pharmaceutical
spending. Additional measures will be taken with a view to replacing some of the
temporary measures adopted during the crisis with structural ones. In
particular, in the area of pensions the temporary extraordinary solidarity
contribution that has been in place for a few years will be partly replaced by structural
measures aimed at improving the balance of the pension system in the
medium-term. These include a progressive sustainability contribution and an
equilibrium factor which links pension indexation to the economic and
demographic variables driving the expenditures and revenues of the public
pension system. Furthermore, the government foresees some increases in excise
duties as well as minor increases in VAT and social contributions which will be
fully allocated to finance public pension spending.
Looking further
ahead, Portugal aims to reach the Medium-Term Objective (MTO) of a structural
deficit of 0.5% of GDP by 2017. This will require
sustained further efforts in line with the requirement of the Stability and
Growth Pact in 2016 and 2017.
The
assessment of the EDP requirements for countries under Macroeconomic Adjustment
Programmes is replaced by the reviews of the Macroeconomic Adjustment Programme
in line with the regulations of the Two Pack. The twelfth review of the Macroeconomic Adjustment
Programme concluded that, while a number of risks remained to the achievement
of the 2014 deficit target, the Portuguese authorities were complying with the
Programme's objectives regarding fiscal consolidation, in particular by
standing ready to implement new measures to achieve the target should any of
the risks materialise in 2014 and by having defined measures of sufficient
quality and quantity to underpin the achievement of the 2015 deficit objective.

Debt
dynamics and fiscal sustainability

Gross
public debt is expected to stabilise at around 130.5% of GDP (ESA-95 terms) in 2014 and to gradually fall thereafter.
The main driving factor behind the upward revision of the public debt in 2014
compared with the eleventh review forecast is the SOE debt management operation
recently launched by the Government with the aim to restore the financial
viability of highly indebted SOEs. As the Treasury has accumulated substantial
cash buffers, net debt is projected to remain around 122% of GDP by end-2014. 
Public
debt is on a firmly decreasing path under the Commission's latest long-term projections
based on the 12th review macro-fiscal scenario with no policy-change
as from 2016.
Nevertheless, given the very high starting point, the debt-to-GDP ratio is
expected to remain above pre-crisis levels for a considerable time and to fall
below 100% only in the second half of the next decade. Assuming that the MTO of a structural deficit of 0.5%
of GDP will be reached by 2017, as under the medium-term projections of the
strategy, the public debt would be on a steeper downward path, implying that
the debt-to-GDP ratio would fall below 100% in the first half of the next
decade. Debt sustainability is found robust across various stress test
scenarios. Still, vulnerabilities remain, in particular in the case of
higher-than-projected interest rates and lower-than-projected growth. 
Portugal appears to face high fiscal sustainability
risks in the medium-term as measured by the medium-term sustainability gap[4].
The medium-term sustainability gap shows that reducing the debt ratio to 60% of
GDP by 2030 instead of the
close to 95% projected under the 12th
review scenario with no policy change as from 2016, would require an overall adjustment
effort of 3.0% of GDP until
2020. This high medium-term sustainability gap is primarily related to the current high
level of government debt which is partially offset by the positive structural
primary balances as from 2012. In the long-term, Portugal appears to face low
fiscal sustainability risks as measured by the long-term sustainability gap[5], which shows the adjustment effort
needed to ensure that the debt-to-GDP ratio is not on an ever-increasing path,
is at -0.6% of GDP. This is primarily related to the positive structural
primary balances as from 2012. 
Risks would be higher in the event of
the structural primary balance reverting to lower values observed in the past,
such as the average for the period 2005-2011. It is therefore appropriate for Portugal to continue to implement measures that reduce government debt.
The traditionally
low tax burden has been increasing over the last few years. At about 37.5% of GDP (as of 2013), the ratio of government revenue
to GDP is still below the EU-28 average of 40.5%, though it has increased over
recent years (e.g. the cyclically adjusted revenue-to-GDP ratio increased by
3.3 percentage points between 2010 and 2013). Furthermore, relative to its per
capita income, the tax burden in Portugal has moved slightly above the EU
average mainly as a result of the tax measures introduced in 2013. Overall,
increasing the total tax burden much above current levels could be difficult
and distortionary. However, there is scope for a more growth-friendly tax
structure. The implicit tax rate on capital is high compared to that of peer
countries whereas revenues could be raised from less distortionary taxes. For
example, despite the recent revaluation of urban properties, property taxes
relative to GDP are still below the EU average and revenues from environmental
taxes have actually decreased in Portugal during recent years. There is scope
for improvements in environmental taxation and the recent creation of the
Commission for Green Tax Reform is a positive initiative in this sense. 
Substantial progress towards a more efficient tax system has been achieved over
the last years, for example through a significant reduction in tax expenditures
(down from 9% of GDP in 2010 to about 5.5%, in 2014).  However, specific
elements of the tax system could be further reviewed. This includes the
temporary surcharges on personal and corporate income tax, VAT efficiency, and
the debt bias in corporate taxation. Regarding corporate taxation, there is a
relevant gap between the effective marginal tax rate on debt and on equity (the
4th highest in the EU in 2012). Private sector debt – which includes
debt of corporations – is high at 223.7% of GDP[6]. The reforms introduced
during the past few years to tackle the debt bias in corporate taxation will
require close monitoring. 
Table 1.
Medium-term and long-term sustainability gap
   || Programme 12th review scenario 
 S2* || -0.6 
 of which: ||   
 Initial budgetary position (IBP) || -0.6 
 Long-term cost of ageing (CoA) || 0 
 of which: ||   
 Pensions || -0.5 
 Healthcare || 1.2 
 long-term care || 0.2 
 Others || -0.9 
 S1** || 3 
 of which: ||   
 Initial budgetary position (IBP) || -1.5 
 Debt requirement (DR) || 4.7 
 Long-term cost of ageing (CoA) || -0.4 
The level of
public expenditure is still high relative to countries with similar income
levels. In
2013, Portugal's total public expenditure as a share of GDP (48.6%) was just
slightly below the EU-28 average (49.2%), hence remedying the situation at the
beginning of the Programme when public spending surpassed the EU-average by 4
percentage points. However, relative to its per capita income, public spending
in Portugal is still above the EU-average; and there is scope for further
reductions in expenditure in ways that will not compromise public service
delivery and jeopardise equity considerations. In particular, further
expenditure rationalisation could be achieved in the areas of wages and social
transfers which represented 77% of primary spending in 2013. In particular, further
reforms to curb the wage bill could focus on targeting permanent reductions in
the number of employees in areas with excess employment (e.g. security forces).
As regards social benefits, the level of social benefits other than in kind
remains high relative to GDP in comparison with the Euro Area and EU average. This
mainly reflects prevailing problems with the short-term affordability of the
pension system as well as poorly targeted social protection expenditure as
poverty and income inequality remain critical areas as also pointed out in a
recent OECD study[7].
Both these issues suggest further scope for improvement. Finally, budgetary
savings can still be made by further improving the organisational efficiency
and the quality of services in the public administration as well as by further
restructuring public-private partnerships and state-owned enterprises.
The budgetary
adjustment process is flanked by a range of fiscal-structural measures to
enhance control over government expenditure and improve revenue collection:
·        
In the area of public financial management, the commitment
control system is showing results by limiting the build-up of new arrears, but
implementation needs to be monitored closely to ensure that commitments are
covered by the available funding and no new arrears are accumulated. The
accumulation of new arrears is mostly due to structural imbalances in some
state-owned hospitals as well as in the railway company Combóios de Portugal.
Strategic plans to underpin the financial sustainability of these state owned
enterprises and to prevent the accumulation of new arrears in 2014 are being
developed. The Budgetary Framework Law is also being reformed. The first step
of the reform, ensuring the full transposition of the Fiscal Compact and the
six-pack, is expected to be approved by the Parliament in May 2014. Beyond
this, a broad-based reform is planned for 2014 which will include streamlining
the budget appropriation structure, reducing further budget fragmentation,
strengthening accountability relations and imparting a medium-term to long-term
focus to public finances. 
·        
Substantial cost-savings have been in achieved
in state-owned (SOEs) enterprises which in both 2012 and 2013 reached
operational balance on average. The restructuring process covers a number of areas
which include (i) the optimisation and rationalisation of services and limiting
operational cost through significant staff reductions; (ii) updating of tariffs;
(iii) addressing high debt levels by reducing financial costs; and (iv)
strengthening the balance sheet of SOEs' inside the general government
perimeter by means of State loans and partial conversion of those loans into
equity. In addition, a new legal framework was put in place to improve SOE's
financial planning and debt management.
·        
Good progress was made on privatisation with
proceeds exceeding the target of EUR 5 billion under the Programme and the
privatisation process set to continue. Several SOEs improved their financial
results ahead of the privatisation, thus reducing risks for the state budget.
Higher efficiency gains, more competition and better price-quality ratios of
the privatised companies induced positive spill-overs for the whole economy and
ensured a better protection of consumer interests. In the process, the
regulatory framework has been improved and the economic reform agenda
strengthened.  
·        
Savings from the renegotiations of
public-private partnerships already materialised in 2013 and will continue in
2014. More generally, the legal framework governing PPPs has been revised and
the administration's institutional capacity to manage the PPP sector increased
with a view to improving operational efficiency and financial stability, while
reducing the risk exposure of the public sector. 
·        
Significant progress in reforming the revenue
administration has been achieved in recent years. The agenda was ambitious and
included several reforms that were largely completed: integrating tax, customs
and IT services; reorganising the tax administration around taxpayers' segments
(e.g. setting up a large-taxpayer unit); a massive revaluation of properties to
support changes to the property tax regime; unified monthly returns on personal
income tax and social security contributions; the introduction of an innovative
VAT e-invoicing system that introduced mandatory invoicing and electronic
transfers of invoice data, as well as tax incentives for consumers to request
invoices in certain sectors. Available indicators point to a successful
implementation of the measures: around 4 billion invoices were submitted to the
tax administration in 2013 and notably from hard-to-tax sectors. Other reforms
are progressing, although with some delays, such as the rationalisation of the
tax office network, the increase in the number of auditors and the streamlining
of the taxpayer dispute resolution process. Portugal needs to improve further
the performance of its revenue authority, in particular tax debt collection[8], while
lowering compliance costs. Scope for further reforms includes, in particular, a
wider  use of information from third parties (in particular financial
institutions) and a strengthening of Portugal's anti-money-laundering framework.
Furthermore, there are indications of substantial underreporting of income,
particularly for certain categories of taxpayers, which may be the main
explanatory factor for tax evasion.
·        
Portugal has strengthened its regional and local
fiscal policy frameworks by adapting its regional and local finance laws to the
principles and rules of the revised Budgetary Framework Law; strengthening
fiscal accountability; limiting the possibilities for lower tax rates in autonomous
regions; strengthening the central tax administration's auditing and enforcement
powers; and introducing requirements for data provision to support revenue
projections. As a resolution mechanism to provide assistance to municipalities
in financial distress, a Municipality Support Fund is being set up and is expected
to become operational by mid-2014.
·        
Reforms carried out since the beginning of the
Programme have resulted in significant savings in the health sector, with the
consolidated deficit[9]
shrinking from about EUR 800 million in 2010 to EUR 126 million in 2013.
Overall operating costs in 2013 remained in line with the year before, despite
an increase in employee remuneration through the reinstatement of two bonus
salaries. A large portion of the payment arrears that had historically been
accumulated in the hospital sector have now been settled, with EUR 500 million
of overdue debt remaining out of the EUR 1.9 billion in arrears at the start of
the Programme. Further major efficiency measures, mostly centered on widening
the scope of centralised procurement, have been implemented over the past year and
should contribute to additional savings in the future. In addition, the
recently agreed three-year strategic plans of state-owned enterprise hospitals
are expected to deliver additional efficiency gains by further merging,
restructuring and closing or redistributing  hospital departments. On the
revenue side, work has continued to improve the process of billing and collecting
moderating fees (co-payments) and fees charged to cross-border patients. In
pharmaceuticals, measures to streamline spending have led to a cost reduction
of more than EUR 500 million in the outpatient sector since 2010. However, the
pace of identifying incremental savings has slowed down and the 2013 target of
aggregate savings in pharmaceuticals amounting to 1% of GDP has not been
reached. In primary care, progress has been made in reducing the number of
patients without a family doctor by creating new family care units and in
extending the system of electronic medical records. 

3.2.                
Financial sector 

Financial stability
risks remain controlled, but Portuguese banks suffer from weak profitability
and high NPL ratios. Under the Macroeconomic
Adjustment Programme, Portugal took steps to strengthen its banking sector
capital ratios and its supervision and resolution frameworks. Of the top eight
banks CGD, BCP, BPI and Banif continue to receive State aid and Eurosystem
financing stands at about 10% of the banking system's assets. Aggregate
deposits grew by about 2.5% in 2013 approaching their all-time high; deposit
remuneration also continued its gradual downward trend contributing to lower
funding costs for the banking system while net-interest rate income remains
under pressure. Key areas of concern are the profitability of the Portuguese
banks, which was extremely weak in 2013, with the top eight banks posting an
aggregate loss of about EUR 1.9 billion. Asset quality deterioration is still a
problem, with impairment levels remaining high at about 6% of total gross loans
and non-performing loans (NPLs) at elevated levels (10.6%), in particular in
the corporate segment (above 16%). However, the pace of increase in NPLs is
showing signs of a slowdown, and market sentiment towards Portuguese lenders
have improved notably as highlighted by the relatively strong performance of Portuguese
bank equities in 2013. 
Table 2: Soundness
indicators of Portugal's banking sector
(1) Income before minority interests
/Average shareholders' equity before MI
(2) Excluding the banks in resolution
(3) The Core Tier 1 ratio according to
Programme definition and excluding the banks in resolution
The Portuguese
authorities took a number of actions to facilitate lending to viable companies,
but financing conditions remain difficult, particularly for small and
medium-sized enterprises (SMEs). The efforts did
not substantially widen the range of financing alternatives to the corporate
sector other than bank-based finance. Freshly granted loans to SMEs fell by
4.8% in 2013 compared to 2012. The average interest rates on new loans to
Portuguese firms have come down by 25-50 basis points since early 2013, but
remain significantly above euro area average. Nevertheless, there is
significant variation by risk profile and geographical focus, with
export-oriented SMEs with a good credit risk assessment receiving substantially
better conditions. Against the backdrop of high corporate debt and the fact the
ongoing necessary process of bank deleveraging, banks' ability to extend credit
to viable firms at reasonable cost remains constrained. A comprehensive
medium-term strategy will be required in a post-programme environment to
resolve these constraints by ensuring that new finance will be provided to
distressed but viable companies undergoing restructuring, and by enhancing the
efficiency of debt restructuring tools for viable companies through the
introduction of incentives for banks and debtors to engage in restructuring
measures at an early stage when recovery is still possible. An enhanced role of
the BdP in the oversight of debt restructuring processes may be useful as well
as enforcement of legal measures to promote the recapitalisation of
non-financial companies. 
Payment delays by
public authorities aggravate the liquidity problems of enterprises. Portugal  remains one of the Member States with the longest payment
delays by public authorities (133 days in 2013), well-above the EU average (65
days). This feeds negatively through on businesses’ cash-flow and can cause
them to extend their overdraft facilities and borrowing.

3.3.                
Labour market[10], education and social policies

The employment rate
had been declining since the start of the crisis but recent indicators point to
a recovery in the labour market. The employment
rate among 20-64 years old, which had been traditionally high in Portugal, had declined markedly since the start of the economic crisis, from 73.1% in 2008
to 65.6 % in 2013. The unemployment rate among 15-64 years old stood at 17% and
the youth unemployment rate (among 15-24 years old) at 37.7% in 2013, which is 5.7
and 14.5 percentage points, respectively, higher than the EU-average. The
percentage of young people currently not in education, training and employment
(NEETs) under 30 years-old has been increasing since 2009 and reached 16.7% in
2013. However, the labour market situation has been improving since the first quarter
of 2013. 
Portugal has implemented a wide range of labour market reforms since the
beginning of its Macroeconomic Adjustment Programme.  With a view to fostering job creation in open-ended contracts and
addressing duality, severance payments for permanent contracts have been
reduced and the conditions of fair dismissals have been eased. Working time
flexibility has been increased. With the aim of facilitating wage adjustment, measures
have been implemented to widen the scope for bargaining at firm level. Unemployment
insurance benefits have been revised to increase incentives for a rapid return
to work, while guaranteeing a sufficient level of protection and enlarging its
coverage.  Active labour market policies have been streamlined with the aim of
increasing its effectiveness in supporting employment creation, strengthening
activation and offering more effective training opportunities. A reform of public
employment services, with a view to increasing its efficiency, is underway. 
From August 2012 until end-2013, a strategic plan to fight youth unemployment -
Impulso Jovem - was enacted and more than 100 000 young people were covered through
measures such as professional traineeships, hiring incentives and measures to
support entrepreneurship. In December 2013, the Portuguese Council of Ministers
adopted the Implementation Plan for a Youth Guarantee.
Box 4: The delivery of a Youth
Guarantee (YG) in Portugal[11]
The important challenges to deliver a
Youth Guarantee (YG)[12] in Portugal are:
-         
effective coordination and engagement of
different partners (across ministries, different levels of government, social
partners and youth organisations);
-         
lack of a YG one-stop shop, which would facilitate
outreach to young people and their access to the different services; 
-         
weak early intervention and outreach measures to
NEETs who are not registered with the PES; 
-         
need to better align education and training with
labour market needs through skills anticipation.
There are tentative signs
that the reforms and policies carried out under the Macroeconomic Adjustment
Programme are producing effects. Following the
marked deterioration of the labour market situation in 2011 and 2012,
employment stared increasing again in the second quarter of 2013. New
placements by the Public Employment Services in March this year grew by 58%
year-on-year and the number of vacancies increased by 44% in the same period.
Employment creation on permanent contracts is increasing. Nominal unit labour
costs have been decreasing since 2010, interrupted in 2013 by the reinstatement
of the 13th and 14th monthly salaries in the public sector. Unit labour costs
in the private sector in 2013 declined by 1.4%.
Looking
forward, ensuring a full implementation of current reforms, monitoring their
effects and taking further action where needed will be key. The impact
of the labour market reforms will have to be assessed against their objectives in
a number of key areas: (i) the unemployment insurance system, to reduce the
risk of long-term unemployment while strengthening social safety nets; (ii) employment
protection legislation, to tackle labour market segmentation, foster job
creation, and ease the transition of workers across occupations, firms, and
sectors; (iii) working time arrangements, to manage employment fluctuations
over the cycle, better accommodate differences in work patterns across sectors
and firms, and enhance firms’ competitiveness; (iv) the wage setting system, to
promote labour cost developments consistent with job creation and enhanced
competitiveness; (v) ALMPs, to ensure best practices and appropriate resources
to improve the employability of young and disadvantaged workers and to ease
labour market mismatches.
Further reforms
in the area of employment protection and collective
bargaining and further improvements to the activation system seem necessary. The
revision of the employment protection legislation has so far focused on the
framework governing dismissals based on redundancy and unsuitability. An
independent evaluation of the effects of this reform is necessary, in
particular with respect to its impact on labour market segmentation, the allocation
of labour and the number of dismissals appealed to court, including their
outcome.  In addition, measures to foster collective bargaining and promote a
more effective decentralisation of wage bargaining appear needed. Collective
bargaining declined sharply since 2011. Policy options to be considered in this
area include the introduction of a mutually agreed temporary opt-out from the collective
agreement, when a firm is facing economic difficulties[13]. In
addition, the revision of the survival of collective agreement expired but not
renewed could also contribute to increase the dynamism of collective bargaining[14].  Furthermore,
prudence needs to be exerted in setting the minimum wage, given the high
proportion of full-time workers covered by the minimum wage (about 12%) and the
relatively high minimum wage in proportion to the median wage (about 58%)[15]. It
is also crucial to continue with the implementation of the planned measures to
improve the job counselling/job search assistance and activation/sanction
systems and to monitor the effects of the current employment incentives,
training programmes as well as the implementation of the Youth Guarantee. This
would help achieve the national target of 75% by 2020 which, despite the recent
signs of a beginning recovery, will prove to be challenging.
The measures
adopted in the context of the Programme have been designed with a view to
protecting the most disadvantaged groups, but poverty and income inequality remain
a matter of concern.  Measures have been taken to fight
poverty and social exclusion and the fiscal consolidation process has been implemented
with a view to minimising the impact on the most disadvantaged. Salary and
pension cuts have been implemented in a progressive way, ensuring the
protection of lower income earners and lower pensions. Tax measures have also
been designed so as to ensure that taxpayers with higher capacity bear a higher
share of the burden. For example, Portugal introduced a solidarity surcharge on
the personal income tax of top-income earners, higher rates on capital income and
a tax on high-value properties.  However, the general tax increase has been
substantial[16]. In
January 2013, the minimum pension was adjusted by more than the inflation rate,
aiming to protect the purchasing power of those with lowest pensions. The
Solidarity Complement for the elderly with low pensions was maintained, as was
the minimum wage. Moreover, the temporary 10% increase in 2012 in unemployment
benefits for couples where both partners are unemployed and have dependent
children was maintained in 2013. The reform of ALMP under the Macroeconomic
Adjustment Programme takes into account the (re)integration of vulnerable
groups in the labour market. The Social Emergency Plan (adopted in August 2011)
is still running.  It includes several measures tackling poverty, such as the
adoption of a Microcredit National Programme, enlargement of the network of
social canteens, Passe Social+ supporting access to public transport for low
income families and the creation of a rental social market. Social tariffs for
electricity and gas as well as the Extraordinary Social Support to Energy
Consumer, created in 2010 and 2011 respectively, are still in place. However,
regular evaluations and reporting of the implementation of the Social Emergency
Plan are missing.
Notwithstanding the
efforts undertaken during the Programme to alleviate the negative social impact
of the economic and financial crisis, the increase in unemployment had negative
implications on poverty and inequality.  The number
of people at risk of poverty or social exclusion increased by 64,000 between
2011 and 2012.[17] In
2012, 25.3%
of the population was at-risk-of-poverty-or-social-exclusion (0.9pps more than
in 2011). The share of the population under "severe material
deprivation" has increased by 0.3pps from 2011 to 2012,
reaching 8.6% in 2012. In the same period, the number of people
living in "low work intensity"-households saw a sharp increase by
1.8pps  to 10.1%, while the inequality between the top and bottom
twenty percent of the income distribution increased further and household
real disposable income fell significantly (by 2.8 percent in 2012 mainly due to
a drop in labour market income which was only partially compensated by increasing
social transfers). Poverty is estimated to have further increased in
2013.[18] The
social protection system is characterised by a high non-coverage rate of jobless
poor, which at 42.3% is the 4th highest after Italy, Greece (which have no
national minimum income schemes) and Bulgaria. In particular, the income
threshold for eligibility of the Minimum Income Scheme (Rendimento Social de
Inserção) has been lowered in 2010 and again in 2012[19], effectively
reducing coverage especially for large families. In particular, since 2011. The
income threshold for eligibility for unemployment assistance (Subsídio Social
de Desemprego) has also decreased in 2010 as a consequence of a change in the
equivalent scale.[20]
These indicators highlight the need for sustained efforts in order to the
attain the Europe 2020-target of reducing the number of people in or at risk of
poverty and social exclusion by 200 000 persons by 2020. 
Portugal has put in
place the legal basis and a number of new monitoring tools to support an
integrated reform of its education system, but effective implementation is
still a challenge. The rate of early school leaving
(ESL) in Portugal has dropped drastically, from 31.2% in 2009 to 19.2% in 2013[21], but still remains far above the EU average of 12%. The OECD Programme
for International Student Assessment (PISA) 2012 study shows that Portuguese 15
year old pupils' performance worsened in reading, mathematics and science, and
national surveys show an increase in school failure. Portugal has set up an IT
based monitoring tool covering all public pre-university schools, providing
data on students, teachers, schools, and indicators related to the Education
and Training 2020 benchmarks, which will help to identify the early school
leaving risk and link it with students' social background and academic
performance. Portugal has successfully launched a new regime of school autonomy
based on trust agreements that provide schools with enhanced accountability and
better performance incentives. Likewise, the newly adopted schools funding
formula incorporates teaching efficiency and includes a performance variable
measuring quality improvements over time and assigning additional teaching
hours credits accordingly. Finally, the new inspection model has been totally
reformed and further professionalised with more involvement of the National
Statistical Office and provisions for school support and specific follow-up
action based on external evaluations. Such measures, if effectively exploited
and implemented, are expected to provide a more adequate operational and
institutional framework to allow a significant improvement of the quality of
teaching in primary and secondary education, which would better address school
failure and early school leaving. However, Portugal still needs a strategy to
tackle efficiently students' difficulties identified via the monitoring tool
and address recurrent social inequities related risks in this field. Stable and
sustained political commitment is therefore necessary to ultimately increase
the quality of education and overcome its historical deficiencies.
The vocational education
and training system is undergoing a substantial reform in an effort to address early
school leaving and improve labour market matching. The new
flexibility between the academic and vocational education and training paths
should increase vocational education attractiveness, and the new Centres for
Qualification and Vocational Education should provide guidance to young pupils for
their training choices. However, these measures will only serve their aim if
the actual quality of vocational education and training improves and its
employment perspectives are enhanced in order to avoid the identification of vocational
education and training with a second chance option and aggravate the skills and
social gap. Portugal has adopted a number of specific measures to enhance vocational
education and better link training to labour market needs, such as increasing
the amount of "on-the-job" training time, the creation of short-cycle
courses for people with a technical degree organised in collaboration with
local companies and focusing on concrete labour market needs, and the creation
of professional schools of reference, where some companies in "strategic"
sectors contribute to the training of specialised technicians.
Portugal's
tertiary attainment rate is improving.  It has increased
from 21.1% in 2009 to 29.2% in 2013[22],
although it remains far below the EU average of 36.6% and failed to
proportionally boost youth employment. There is so far no clear strategy to
address the skills-mismatch and lack of employability of higher education
graduates, except in relation to the reform of polytechnic institutes. The
academic offer is currently quite wide, yet enrolment data for 2013-2014 show
that students are little interested in pursuing the higher-education options
available to them. 
Going forward,
education will remain an area with significant scope for further progress. Better
educational
outcomes and higher average skill levels of the labour force are prerequisites for a
higher growth potential.[23]
Notwithstanding some progress, in particular in the area of vocational training,
there is still scope for improving the organisational effectiveness and the
performance of Portugal's educational system under the constraint of fiscal
consolidation. Portugal would benefit from a long term skills strategy to
provide stability to his education policies and better anticipate skills demands
and labour market needs particularly related to higher education. 

3.4.                
Structural measures
promoting sustainable growth and competitiveness

Portugal has made
substantial progress in enhancing its business environment, but the momentum
needs to be maintained. Inward FDI[24], the number of firms[25] and the share of exporting businesses[26] have increased in 2012 relative to 2010. Progress has been made in
transposing EU law into domestic law, in fostering better framework condition
and a more entrepreneurial culture as well as in insolvency proceedings for
firms in distress. A new voluntary VAT cash accounting regime was introduced in
the autumn 2013, which allows SME's with a turnover of up to EUR 500 000 to
pay/deduce the VAT when payments from their customers/to their providers
actually take place, rather than when the invoices are issued. Going forward,
full and effective implementation of the adopted measures will be critical to
achieving a positive impact. 
The broad set of
measures aimed at reducing excessive licensing procedures, regulations and
other administrative burdens for businesses is being completed. As part of the Macroeconomic Adjustment Programme, an ambitious reform agenda was developed in
relation to licensing procedures, based on the overall principle of moving from
an ex-ante approach, which requires prior verification and authorisation by the
administration, towards a Zero-Authorisation approach with only ex-post
compliance verification.  Comprehensive legislative reforms based on this new
principle have been completed in several key sectors, including industry,
commerce and tourism.  Similar reforms in the area of environmental and
territorial planning as well as for mining and geological exploration licensing
are expected to be adopted by June 2014.  These reforms should give more
management competencies to the municipal level and significantly reduce the
costs and time required to obtain construction permits. The Macroeconomic
Adjustment Programme also provided for various other measures aimed at
improving the business-friendliness of the regulatory environment, including introducing
a "one-in/one-out" rule for new regulations (adopted in late March
2014), which provides for the elimination of  existing regulations with  equivalent
cost when creating a new regulation. The authorities plan to approve, by
end-September 2014, the methodology for impact assessment of legislation which
includes the "one-in/one-out" rule. Efforts are also underway to
compile an inventory and cost analysis of burdensome regulations for businesses
and to create of a roadmap to address them. A list of 12 administrative burdens
has been identified and for six of them a total amount of nearly EUR 150
million a year has been estimated as their respective context cost of business.
 A further inventory will be completed by end-March 2015 covering sectors not
captured so far, notably tourism, construction and agriculture.  Conditional
upon strict implementation, the reduction of excessive licensing procedures and
burdensome regulations should facilitate business growth.
Various measures to
support the internationalisation of businesses have been put in place. A new exporter programme was launched in September 2013 with 20
SMEs provided with training to develop products and to enter the US market. Other measures include projects aimed at promoting diplomatic and business
visits with the view to facilitating business contacts.  The use of venture
capital to incentivise internationalisation is being promoted, but an
evaluation system to systematically assess the impact of these measures is not
yet in place. In addition, a streamlined online platform for requesting VAT
exemptions by exporters was introduced, which has already resulted in a
reduction in the average time to completion of a VAT reimbursement application
from 42 days initially to 8 days as of the end of December 2013.   
A more
innovation-friendly business environment would introduce more dynamism into the
economy. Portugal has
expanded its research and innovation system over the last decade. However, it is
still underperforming compared with the EU-average.[27] There
is a lack of cooperation between public research and the business sector[28], and knowledge
transfer and knowledge commercialisation are very weak. With the view to ensure
the efficiency of the research and innovation system and to foster a transition
to a more knowledge intensive economy, it is essential to set clear priorities,
which take into account the existing research strengths and the potential for
the development of competitive economic activities. Against this backdrop, the Portuguese
government put forward the national strategy for smart specialisation (included
also in the 2014-2020 Partnership Agreement), the operational competitiveness
programme COMPETE and incentive schemes in dialogue with stakeholders
(universities and technological centres). According to the National Reform
Programme, other measures involve the establishment of the National council for
entrepreneurship and science innovation (composed by members of the economy
ministry and the secretary of state for youth and social society), and the
SIFIDE II, a tax incentive scheme aimed at promoting R&D activities by
business firms[29].
  Portugal has carried out an evaluation on clustering strategy which
recognized the merits of launching a cluster policy, but pointed out that there
is a significant gap between the expectations and the achievements. Finally,
the "Coalition for Green Growth" was launched in February 2014 in
order to promote the Portuguese green economy and its internationalisation. 
The impact of the urban
lease law still needs to be fully assessed. A new urban
lease law is now being implemented with a view to making the housing market
more dynamic including by better balancing rights and obligations of landlords
and tenants, introducing more flexibility in the choice of contract duration
and incentivising renovation works. The impact of this reform is still limited
partly because of the short time elapsed since its full implementation. More
importantly, the lack of comprehensive and reliable monitoring procedures and
datasets hamper the evaluation of this reform.  Under the macroeconomic
adjustment programme, Portugal committed to present a comprehensive study aimed
at identifying any form of shadow economy in the Portuguese rental market.  The
information provided so far is limited and mainly relies on anecdotal evidence
not underpinned by a sound methodology, reliable data and sufficient coverage. Therefore,
more work is required to comprehensively evaluate the impact of the urban lease
reform as well as the effects of the shadow economy in the Portuguese rental
market.
Measures continue to
be adopted to ensure the sustainability of the energy system and to reduce the
electricity tariff debt, although these appear insufficient to eliminate the
tariff debt in full by 2020 in view of the objective of limiting energy price
increase. In 2013, Portugal recorded a new
electricity tariff deficit of EUR 1.3 billion (leading to a EUR4 billion tariff
debt), in spite of higher revenues from the increased electricity consumption
in the second semester of 2013. A levy on energy producers, introduced in 2014,
was targeted at closing an apparent budgetary gap rather than reducing cost inefficiencies
in the system. Measures directed at consumers have resulted in a considerable
increase in switching providers or tariffs between 2012 and 2013 (by over 10%
in both electricity and gas markets) as well as increased consumer satisfaction
with the ease of switching and the choice of providers available in both
markets.[30]
Another important measure is the introduction of a contribution by energy
generators to address consequences of new electricity taxes in Spain. Also, a new mechanism has been introduced in the system services market to correct
distortions identified by the Portuguese authorities.  As regards Sines and
Pego coal power plants, a new contribution applicable for seven years upon the
expiry of their current framework is foreseen. The remuneration regime for
public domain hydro terrains has also been modified and efforts to adjust the
tariff harmonisation mechanism applicable to Madeira and Azores Autonomous
Regions are underway. The authorities recently presented a third package of
measures aimed at tackling remaining excess rents of energy providers,
improving competitiveness as well as inclusiveness of the sector. They include,
among others, a) the extension of the 2014 special levy on the energy operators
to 2015 to the national electricity system, b) initiatives to increase the
transparency of fuel market prices, c) legal provisions to correct the balance
of the benefits under the existing long term natural gas sale and purchase
agreements[31],
d)  the establishment of a virtual point of transactions in the natural gas
network and e) amendments to widen the eligibility requirements and increase
the tariff  discount applicable to the most disadvantaged electricity consumers
in a budgetary neutral way and without additional burden on the electricity
consumers. The Portuguese electricity market has been increasingly integrated
into the Iberian market since 2007. The convergence of wholesale electricity
prices between Portugal and Spain, which is regarded as an indicator of market
integration, increased from 40% in 2008 to 90% in 2012. Regarding the
accomplishment of the pan-Iberian gas market, work needs to continue after the
public consultation on the harmonisation of cross-border network tariffs
between Portugal and Spain. Different models for an Iberian gas hub are being
analysed and discussed with stakeholders. On cogeneration, the remuneration
scheme was revised and the new reference tariffs were approved with savings
exceeding projections. Nevertheless the remuneration scheme for co-generation
will be further revised in line with the framework of the transposition of the
energy efficiency directive. In addition to elimination of the tariff debt,
further reduction of energy costs for the economy are outstanding issues in the
energy sector. 
Portugal
reported energy savings of 16.2% in 2012 compared with 2005 in its recent
update of the Europe 2020 targets. This places the country in a good position to meet the savings target
of 20% by 2020, but Portugal needs to maintain a high level of ambition in its
energy efficiency policy to ensure a structural decrease in energy consumption,
while respecting environment. The share of renewable energy in final energy
consumption has stabilised at 24½%.[32]

In the transport
sector, Portugal has made substantial progress in modernising its overall regulatory
framework, but its integrated long-term transport plan needs to be further
specified. Portugal has adopted the legal framework
for its new transport regulatory authority (AMT), which replaces three former transport
regulators (rail, ports and road). The implementation of the new framework
needs to be closely monitored in order to ensure autonomy, independence and
clout for the regulator. In addition, Portugal has published an integrated
long-term plan for its transport system, with a view to prioritising infrastructure
investments in a rationalised and cost-effective manner, coordinated across
different transport modes and based on a well-defined long-term vision. This plan
requires further improvement with respect to ensuring consistency between the
overall policy goals, objectives and indicators as well as robust focus and
prioritisation.  Moreover, a sound transport demand analysis by sector should
be included to underpin the planned investments, including traffic growth
forecasts, capacity provision, economic growth and evolution prospects. 
Portugal has
implemented some important reforms to enhance competition and
cost-effectiveness in its ports system, but there remains scope for further
progress. In
early 2013, a new law on port labour entered into force, which was intended to
tackle key bottlenecks and significantly enhance the competitive position of
Portuguese ports. This new law required re-negotiation of collective agreements
in force in Portuguese ports, and together with the gradual elimination of port
use fees (TUP-Carga) allowed a significant downward adjustment of port operating
costs in general.  In addition, Portugal started the preparation of a new
package of measures further reforming ports' governance model by reviewing the
distribution of responsibilities of regional authorities and reinforcing the
competencies of the regulatory body. Portugal is also in the process of renegotiating
port concession contracts that will prevail beyond 2020 in order to pass on a
greater portion of operating cost savings to port users, to align incentives,
to enhance competition and to encourage investments while achieving appropriate
risk-sharing between port authorities and private-sector operators. 
In railways and
urban public transport, implementation of the policy agenda continues to
proceed at a slow pace. Achieving operational
balance of the rail infrastructure manager (REFER) by 2015 is a major
medium-term railway policy objective. Some measures to this end have been effectively
implemented in 2013, such as rationalisation of costs, closure of loss making
lines and reduction of staff, but REFER's high debt of around EUR 7 billion
remains a problem absent any clear strategy to address it. Moreover, a multi-annual
contract between REFER and the Portuguese State (who actually owns the
infrastructure) is still missing. REFER and road infrastructure manager EP will
be merged. In addition, Portugal aims to launch the privatisation of CP Carga after
the unbundling of its freight rail terminals, which would contribute to
improving the governance of the company and attract more users; although a "despacho"
to start the terminal unbundling was signed in April 2014 (after significant
delays), the privatisation process itself is yet to start. Similarly, the
introduction of competition on the commercial sub-urban railway lines (Lisbon and  Porto) could create new business or investment opportunities for potential
entrants, but this measure has not yet materialised either. A pilot project for
the concession of the sub-urban Cascais railway line is being prepared and a public
consultation on the best format and scope for this concession will start before
the end of the Macroeconomic Adjustment Programme. Plans to launch new concessions
for the provision of public transport services in the metropolitan areas of
Lisbon and Porto have experienced long delays, but the negotiation process has
now started and it appears that a significant number of bidders have expressed
interest. The four concessions are now expected to be launched by end-June
2014.
Some further
progress has been made in advancing the liberalisation of services and the regulated
professions sector as well as in making the Point of Single Contact for
entrepreneurs fully functional. Significant
progress has been made in aligning sector-specific legislation with the Service
Directive, with 67 out of 70 diplomas already approved by the Council of
Ministers and the full set of decrees expected to be approved by the end-September
2014, including the decree on the fees for construction permits.  Some changes
to the higher education legislation are still required. In addition, progress
has been made towards ensuring a more open access to a number of highly
regulated professions. To this end, a horizontal framework law reforming
professional services governed by professional associations was adopted in
2012. This was to be followed by professional associations putting forward
proposals for amendment of their statutes and internal rules to bring them in
conformity with the principles laid down in the horizontal framework law. Following
the publication of the new legal framework, 18 professional bodies' statutes
are being amended. All the bylaws are now expected to be submitted to
Parliament for final approval by end-September 2014.  For the Point of Single
Contact (PSC), an e-government portal under the Service Directive, which allows
businesses to get information and complete administrative procedures on line, a
clear roadmap and work programme is in place and monthly updates on added
content and procedures have been provided. The "Zero Authorisation"
project, aimed at facilitating the establishment of small retail businesses by
replacing authorisations with a declaration on the PSC, was brought to a completion
by the fall of 2013. Work is ongoing in order to further adapt the content of
the PSC to the Professional Qualifications Directive and to complete the
operational deliverables needed to ensure conformity with the Services Directive.
There is also some scope for further improvements of the usability and
user-friendliness of the PSC platform which is under work with a roadmap
running until October 2014. The authorities are committed to ensure the point
of single contact is fully functional and regularly updated by end-October
2014.
Structural
reforms can lead to substantial gains in potential output and employment.
Structural reforms can lead to substantial gains in potential output and
employment in Portugal (see Box 5). The government has already adopted a range
of challenging structural reforms. The effective implementation of these
reforms is crucial to rebalance the economy and boost its growth potential. To
this end, the framework for implementation must be reinforced, while progress
in implementation must be continuously evaluated to ensure that reforms deliver
the desired results. Further reforms should focus on increasing competition and
flexibility in product and labour markets so as to facilitate the reallocation
of resources from the non-tradable to the tradable sector. 
Box 5:
Potential impact of structural reforms on growth – a benchmarking exercise 
Structural
reforms are crucial for boosting growth. It is therefore
important to know the potential benefits of these reforms. Benefits of
structural reforms can be assessed with the help of economic models. The
Commission uses its QUEST model to determine how structural reforms in a given Member State would affect growth if the Member State narrowed its gap vis-à-vis
the average of the three best EU performers on key indicators such as the
degree of competition in the economy or the tax burden on labour. Improvements
on these indicators could raise Portugal’s GDP by 4½% in a 10-year period. Some
of the reforms could have an effect even within a relatively short time
horizon. The model simulations corroborate the analysis in Sections 3.3 and
3.4, according to which the largest potential gains could likely
be reaped from reducing final goods markups (e.g. through increased competition
on product markets), measures shifting the tax burden away from labour towards
consumption and by reinforcing the resources and effectiveness of active labour
market policies. In the very long run, moreover, improving education
could also have a strong impact on GDP, yielding a potential benefit of 17.8%
over a 50-year horizon (see note).
Table:
Structural indicators, targets, and potential GDP effects[33]

Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the
impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States.[34]
*The long-run effect of increasing the share of high-skilled labour in the
population could be 3.3% of GDP and of decreasing the share of low-skilled labour
could be 14.5%. **EU average is set as the benchmark.

3.5.                
Modernising of public administration 

Portugal
is making substantial progress in rationalising and modernising central,
regional and local public administration. A comprehensive
database (Information System on the Organisation of the State - SIOE) was
created in 2011, which shows that at the end of 2013 employment in the public
administration was about 8% lower than at the end of 2011, exceeding the Macroeconomic
Adjustment Programme target of an employment reduction of 2% per annum. To
further address the size of workforce, programmes have been implemented for
mutually agreed termination of contracts for operation and technical
assistants, teachers and higher-qualified employees in targeted sectors. In
addition, a public sector employee requalification programme was launched to facilitate
a shift towards better-trained civil servants. Regarding remuneration policies,
promotions and wage increases in the public administration were suspended in
2011 and temporary wage cuts introduced in the budgets. The single wage scale,
to be prepared in 2014, will aim, inter alia, at correcting the misalignment of
public sector wages (especially at the bottom of the wage scale) as compared to
those in the private sector.[35]
A revision of wage supplements is underway, with a view to reducing their
number, establishing fixed amounts, and rationalising them along broader
categories. Steps have been taken to improve the self-financing of the public
sector health insurance sub-systems and to align the rules for public sector
pensions (CGA) with those in the general social security system. Less visibly,
fringe benefits in the different administrations and services were reduced.
Regarding working conditions, the new General Public Administration Labour Law,
expected to enter into force in mid-2014, simplifies and compiles the existing
rules of public sector employment along the lines of the private labour code.
Important subsets of this legislation are already in force (e.g. the 40 hours
working week and requalification scheme), but it includes other substantial
elements such as the reduction of the number of days of annual leave, compensation
for overtime work and the option of a bank of hours. To improve the
organisational efficiency and the quality of services, efforts were made to reduce
the number of management positions and administrative units. Furthermore, the
public financial support to foundations was reduced, strategies of shared
services in the areas of financial resources, human resources and ICT were
implemented, and a network of Citizen Rooms ('Espaços do Cidadão') is
being created within existing public services at local level and will help citizens
to use online public services through IT infrastructure and advice.
The
reform of public administration should be complemented by a comprehensive
national anti-corruption strategy. According the 2013 Eurobarometer
survey, corruption is perceived to be a widespread problem and an obstacle for
doing business in Portugal[36].
In general, public procurement, in particular public-private partnership and
urban developments are the sectors most vulnerable to corruption. The legal
framework for public procurement in Portugal provides for guarantees of
transparency, non-discrimination and fair competition. Amendments to the public
procurement code were adopted in July 2012 and aim to improve public contract
award practices and ensuring a more transparent and competitive business
environment, and in the same year the Court of Auditors' powers in this area
were strengthened. Regarding, public-private partnerships (PPP), in early 2012
a technical unit for project monitoring was set up in the Ministry of Finance and
rules were established to limit the financial impact of the decisions of contracting
authorities entering into a PPP or managing it. As regards urban planning, a
study coordinated by the Departamento Central de Investigação de Acção Penal
(DCIAP) found that out of 838 court cases on corruption analysed in the period 2004-2008
345 involved local government authorities and municipal enterprises and were
related to urban development, commercial licensing and public procurement. While
the number of investigations has increased, very few mayors or councillors have
been convicted through final court decisions. Overall, despite various
initiatives taken over the last decade to address corruption, including the
adoption of new legislation, there is no comprehensive national anti-corruption
strategy in place. According to the Commission's EU Anti-Corruption Report of
February 2014, attention should be given in particular to a further
strengthening of (i) law enforcement, prosecution and the judiciary in order to
set a track record of successful prosecution of corruption allegations; (ii) preventive
action on party funding; (iii) transparency and ex ante and ex post
verification of public procurement procedures; and (iv) control systems in
urban planning decisions. 
Portugal has continued to adopt legislation to strengthen the role of key regulators
and to foster competition but the Competition Authority's financing model and
advocacy capacity need to be strengthened. A new framework
law was submitted to Parliament and published in August 2013 setting out the
main principles of the functioning of the principal National Regulatory
Authorities (NRAs)[37]
and the Competition Authority. This is an important milestone in empowering the
different NRAs (regulators of insurance and pension institutions, securities
markets, energy, communications, aviation, transport, health and water and
waste services) as well as the Competition Authority with strong independence
and autonomy. This is a major prerequisite for the efficient functioning of the
sectors involved and an effective way to enforce competition rules in the
economy. Following the adoption of this new framework law, most of the relevant
bylaws have been revised and approved. Four bylaws concerning the Securities
Market Commission (CMVM), the Insurance Regulator (ISP), the Communications
Regulator (ANACOM) and the Civil Aviation Authority (ANAC) diploma, are
expected to be approved by June  2014.  Only the Competition Authority bylaws are
still pending on the definition of the Authority's financing model for 2015 and
beyond, including the respective contributions to be transferred from the
different sectorial regulators to the Authority. This will address the problem
of annual executive orders to provide funding for the Authority on a one-off
basis for each calendar year. However, in order to guarantee the exercise of
the Portuguese Competition Authority's duties, additional measures are
necessary to ensure the effective functioning of its financing model after 2015,
leaving room to accommodate medium-term growth needs. Beyond that, further
efforts are necessary to foster competition advocacy capacity to remove the regulatory
frameworks that have a negative impact on competition and to enhance innovation
and dynamic competition.   
Portugal's agenda
for reforming the judicial system under the Macroeconomic Adjustment Programme was
implemented ahead of schedule, but the 2014 EU Justice Scoreboard shows that
there is still significant scope for improvement.  The
new Code of Civil Procedure, which aims to expedite the court process in
commercial and civil litigation, became effective in September 2013. Among its
key provisions are a limit on the number of witnesses that each party can call
in civil cases and tight new restrictions that make it harder to delay hearing
dates. Implementation was supported by an extensive team of IT specialists and
a task force of legal experts who provided rapid answers and training on the
new procedures. The code has been well-received by stakeholders and has begun
to yield positive results. The new Judicial Organization Act, which aims to
enhance the efficiency and professionalism of court management, was approved in
June 2013 and is on course of full implementation by autumn 2014. This major
reform includes the closure of 54 courts, enlargement of courts' territorial
jurisdiction to align them with administrative districts, the creation of court
clusters to allow for greater economies of scale and professional specialisation,
more flexible allocation of staff resources to areas where bottlenecks emerge,
and the introduction of a national system of workload measurement and
performance targets. This constitutes a significant change in the organisation
and management of the judiciary, with a greater focus on performance
accountability and service delivery, bringing Portugal in line with best
practices elsewhere in Europe. Bi-annual central management plan and annual
management plans for each court should play a key role together with the
reports on meeting those targets.  The results of adding managerial functions to
the duties of court presidents and administrative directors should be closely
monitored. An audit of all pending debt-enforcement cases identified at start
of the programme was carried out, with all backlogged and inactive cases now
closed. Better management and the application of new legislation to close
dormant cases enabled Portuguese courts to secure a clearance rate above 100%
for enforcement cases in 2013. Enforcement proceedings have also been improved
by the adoption of legislation that enables a creditor to verify whether a
debtor has assets before taking them to the court. In addition, new legislation
has been adopted to further reinforce oversight, strengthen professional
requirements, and increase reporting duties of and competition between debt enforcement
agents. Together with a new fee structure that incentivises speedy enforcement,
this new legal regime should substantially improve the efficiency of the
enforcement profession and speed up resolution of long-pending cases. The promotion
of civil and commercial alternative dispute resolution ADR is in line with
out-of-court mechanisms envisaged in other areas, i.e. in the field of
companies’ and debts’ restructuring (PER and SIREVE). The outcome of the
implementation of these regimes should be monitored and evaluated on an annual basis.
Permanent cooperation between the Ministry of Justice, Ministry of Economy,
Ministry of Finance, Tax Office and Social Security Administration should be
ensured to increase the success ratio of the mechanisms set up to restructure companies.
The special task
forces of judges assigned to tribunals in Lisbon and Porto played a significant
role improving tax courts' efficiency in cases involving over EUR 1 million. While the number of filed cases decreased, the percentage of cases
won by the tax office increased.  The number of pending cases in the courts of first
instance decreased, although the number of appeals increased. Since the special
task forces are no longer in place, a permanent solution is needed to handle
this category of taxes in a systematic way. In this context, providing adequate
technical support to judges dealing with tax cases would prove beneficial. Modernising
Administrative and Tax Tribunals' IT system should become a priority to provide
the public with reliable set of statistics on the functioning of these courts. The
Tax and Administrative Tribunals' annual work programme and performance
targets, and their link to the CITIUS portal is key.  A system to monitor the
efficiency of insolvency courts should be set up and resources should be made
available if needed. 
Despite the
significant progress made under the Macroeconomic Adjustment Programme, further
efforts appear to be necessary to achieve predictable, timely and enforceable
justice decisions and consequently create an attractive business environment. According to the 2014 EU Justice Scoreboard, Portugal still shows significant scope for improvement. Measures should be put in place to
improve Portugal's performance in the main efficiency indicators (length of proceedings,
clearance rate, and number of pending cases) as well as to improve monitoring
and the evaluation process. The recruitment of a new insolvency administration
should be finalised and an assessment of the bottlenecks in the system should
be carried out, including on the workload of insolvency courts.
A comprehensive
system of evaluating structural reforms is missing.
Under the Programme, the Portuguese government has adopted a wide range of
structural reforms, but the evidence of their impact on the functioning of the
economy is still thin. Setting up a central evaluation unit at government level
or adding ex ante and ex post assessments to the legislative process would enable measuring the impact of adopted measures and could
provide invaluable inputs for designing forthcoming reforms. Furthermore, more
efforts could be placed on strengthening the dialogue and consultation with key
stakeholders at an early stage in the regulatory process, as well as on
carrying out comprehensive ex ante evaluations of proposed measures. In this
respect, Portugal is setting up an Inter-ministerial Network for Administrative
Modernization (RIMA) which is planned to be operational by Q3 2014. However,
the scope of this network remains limited and will focus on promoting regulatory
simplification and enhancing ex-ante assessment methodologies.

4.        
Conclusions

Portugal's economic performance continues to be negatively affected by high
levels of public and private debt.  Gross public
debt stood at 129% of GDP in 2013 and further fiscal consolidation is required beyond
the Programme horizon to bring the public debt-to-GDP ratio on a downward path
and ensure a reduction of the budget deficit to 2.5% of GDP by 2015. The
financial sector remains vulnerable with weak profitability and continued deterioration
of asset quality. SMEs' access to credit remains limited. Very high levels of
unemployment and of corporate indebtedness have a negative impact on
investments and continue to undermine the growth potential. Continued
structural reforms are needed to ensure the switch from the non-tradable sector
to the tradable sector. Existing bottlenecks, in particular in network
industries, services and regulated professions prevent Portuguese companies
from competing in international markets. Further work needs to be done to make
the Portuguese public administration more efficient and business-friendly with
a view to reducing the cost of doing business. 
Portugal has addressed its sole country specific recommendation for 2013,
namely to continue the implementation of the Macroeconomic Adjustment Programme. Portugal has made significant progress towards meeting the programme's
objectives of ensuring fiscal sustainability, safeguarding financial stability
and enhancing competitiveness and growth. Despite a strong track record in implementation,
challenges highlighted under the Programme and the National Reform Programme
still remain. 
A strong
commitment to continued fiscal consolidation and structural reform remains
necessary in the post-Programme period to ensure sustainable public finances
and long-term economic growth. Although a major structural
fiscal adjustment has been achieved over the past three years, compliance with
the new European Union fiscal governance framework will require further consolidation,
including through additional streamlining of public administration and a
continued commitment to fight tax evasion.  Addressing the sustainability of
public finances will also require strengthening the public financial
management, by further reforming the Budget Framework Law and stricter control
of the Commitment Control system; further work in the state-owned enterprise
sector, including a strategy for dealing with legacy debts; potential further privatisations;
and achievement of additional efficiency gains, particularly in the healtcare
sector. In Portugal's financial sector, bank profitability and deterioration of
asset quality remain areas of concern, and a comprehensive strategy appears
necessary to address the debt overhang of Portuguese enterprises and to help
ensure access to credit for viable companies. In addition, there is still significant
scope for further growth-enhancing structural reforms. Additional labour market
reforms remain critical to reducing  counterproductive employment protection,
to enhance the collective bargaining process, and to improve the impact of
active labour market policies. Additional efforts to fight poverty and social
exclusion are needed. In the energy sector, long-run sustainability,
elimination of the electricity tariff debt, and reduction of costs of services
and excess rents remain unresolved issues that will require continued attention
in the medium-term. In the transport sector, significant parts of the policy
agenda, especially in the railways and ports sector, remain to be implemented.
In relation to Portugal's new regulatory and competition framework, it will be
important to monitor implementation of the new legislation to ensure that the
new regulatory authorities are adequately funded and staffed and are able to
operate with the envisaged level of autonomy and independence. In education,
there is scope for further work to improve labour-market matching of training
programs and to increase tertiary attainment.  Monitoring the impact and
implementation of current reforms will also remain essential.

Overview table 
 
 Europe 2020 (national targets and progress) 
 Employment rate target (20-64 years old): 75% || The employment rate, which had been traditionally high in Portugal, has declined markedly since the start of the economic crisis, from 73.1% in 2008 to 65.6 % in 2013. Despite the recent labour market reforms aiming at fostering employment creation, the achievement of the national target of 75% by 2020 still proves challenging. 
 R&D target: 2.7-3.3% of GDP || Between 2000 and 2009, Portugal strongly expanded its research and innovation system: its R&D intensity more than doubled (from 0.73% to 1.64%). However, since 2009, R&D intensity decreased (down to 1.5% in 2012 and in 2013, although the latter is still based on provisional data), mainly due to a decline in business R&D expenditure. At 0.7%, business R&D intensity is only about half of EU average.  As a result Portugal remains also well below the EU average in terms of innovation performance. The structure of the economy, with a high share of low and medium tech production also results in a low contribution of medium/high-tech goods to the trade balance and a low share of employment in knowledge intensive activities.  Also Portugal performs low as regards the employment in fast-growing innovative firms as a % of total employment in fast-growing firms. With the view to ensure the efficiency of the research and innovation system and to foster a transition to a more knowledge-intensive economy, it is essential to setting clear priorities, which take into account the existing research strengths and the potential for the development of competitive economic activities New initiatives such as the System of Tax Incentives for Companies Investment in R&D (SIFIDE), the increasing  role of the Innovation Agency (AdI), the SWOT analysis of the country R&D system, the Program of Applied Research and Techno Transfer to Companies, or the reorientation of the cluster policy aim to support adequately the structural change needed by the country to improve its productivity and competitiveness. 
 Greenhouse gas (GHG) emissions target: || The percentage of greenhouse gases (% change compared to 2005 emissions in non-ETS) in 2013  was -12.0% (2012 data) 
 Renewable energy target: 31% of total energy use || The share of renewable energy in final energy consumption increased slightly from 24.5% in 2011 to 24.6 % in 2012 but stayed stable in 2013. Portugal has reached its interim 2011/2012 targets despite the lack of progress since 2010. However, considering the long lead times, Portugal should ensure urgently that further policies are put in place to incite new investments to reach the 2020 target. 
 Indicative national energy efficiency target for 2020: 25% reduction of primary energy consumption, which implies reaching a 2020 level of 22.5 million tonnes of oil equivalent primary energy consumption and 17.4 million tonnes of oil equivalent final energy consumption || The latest estimates show that Portugal is on track to meet its national energy efficiency target, but the 1% decrease in primary energy consumption compared to 2010 is mainly due to the economic downturn. Further efforts will be required to ensure structural changes and a sustainable reduction in energy consumption. 
 Early school leaving target: 10% || Early school leaving has been gradually declining over the last decade from a rate of 45% in 2002, to 20.8% in 2012 and 19.2% in 2013. However, the rate of early school leaving remains among the highest in the EU. 
 Tertiary education target: 40%   || Tertiary education attainment: 29.2% in 2013 There has been remarkable progress from rates of about 11% at beginning of last decade. However, tertiary education attainment remains significantly below the EU average. There is so far no clear strategy to address the skills mismatch and lack of employability of higher education graduates in Portugal, except for the reform of the VET system. The academic offer is currently quite wide, yet recent enrolment data show that students are little interested in pursuing the higher-education options available to them. 
 Risk of poverty or social exclusion target: The target envisages reducing the number of persons in or at risk of poverty and social exclusion by 200 000 persons in 2020. The target is phased in three cycles: i) 2010‐2013; ii) 2014‐2016; iii) 2017‐2020).  The first phase aims to reduce the number of people in poverty by around 50 thousand, and the other two cycles aim at reducing the number of persons in poverty by 75 thousand each. || The number of people at risk of poverty or social exclusion slightly decreased from 2 757 000 to 2 665 000 (by 92 000) in the period 2008 –2012 although it has increased both between 2009 and 2010 (by 45 000) as well as between 2011 and 2012 (by 64 000).    The number of people at risk of monetary poverty, after social transfers, has decreased from 18.5% in 2008 to 17.9% in 2012, remaining stable between 2009 and 2012, although this might be due to a reduction in the poverty threshold. Material deprivation has decreased from 9.7% to 8.6% between 2008 and 2012 even though it has increased 0.3 p.p. from 2011 to 2012. Lastly, the number of people living in low work intensity households has increased from 6.3% in 2008 to 10.1% in 2012.    Sustained efforts will be needed in the future, specially taking into account the latest data and the expected demographic tendency.   

Annex

Table I. 
Macro-economic indicators
Table
II. Comparison of macroeconomic developments and forecasts 
Table III. Composition of the budgetary
adjustment 
Table IV. Debt dynamics
Table
V. Sustainability indicators
Table VI. Taxation indicators
Table VII. Financial market indicators
Table VIII. Labour market and social
indicators
Table IX. Product market performance and
policy indicators
Table
X. Green Growth
List of indicators used in Box 5 on the potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but excluding
real estate and renting of machinery and equipment and other business
activities[38]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org. 2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation
rates: Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate:  Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] More details can be found in the reports on the state of Programme implementation
which the European Commission published following each Programme review mission.
These reports, along with other information related to the Financial Assistance
Programme, can be found on: http://ec.europa.eu/economy_finance/assistance_eu_ms/portugal/index_en.htm

[2] See Box 2.5 in the Tenth Review Report of the Economic Adjustment
Programme for Portugal: http://ec.europa.eu/economy_finance/publications/occasional_paper/2014/op171_en.htm
[3] Note that the Commission 2014 spring forecast does not reflect the
latest Commission fiscal forecast of the twelfth review. The assessment of the
SWD is therefore based on the Commission forecast of the twelfth review.
[4] See Table 1. The medium-term
sustainability gap (S1) indicator shows the upfront adjustment effort required,
in terms of a steady improvement in the structural primary balance to be
introduced until 2020, and then sustained for a decade, to bring debt ratios
back to 60% of GDP in 2030, including financing for any additional expenditure
until the target date, arising from an ageing population. The following
thresholds were used to assess the scale of the sustainability challenge: (i)
if the S1 value is less than zero, the country is assigned low risk; (ii) if a
structural adjustment in the primary balance of up to 0.5 p.p. of GDP per year
until 2020 after the last year covered by the autumn 2013 forecast (year 2015)
is required (indicating an cumulated adjustment of 2.5 pp.), it is assigned
medium risk; and, (iii) if it is greater than 2.5 (meaning a structural
adjustment of more than 0.5 p.p. of GDP per year is necessary), it is assigned
high risk.
[5] See Table 1. The long-term sustainability gap (S2) indicator shows
the immediate and permanent adjustment required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. The S2 indicator has two
components: i) the initial budgetary position (IBP) which gives the gap to the
debt stabilising primary balance; and ii) the additional adjustment required
due to the costs of ageing. The main assumption used in the derivation of S2 is
that in an infinite horizon, the growth in the debt ratio is bounded by the
interest rate differential (i.e. the difference between the nominal interest
and the real growth rates); thereby not necessarily implying that the debt
ratio will fall below the EU Treaty 60% debt threshold. The following
thresholds for the S2 indicator were used: (i) if the value of S2 is lower than
2, the country is assigned low risk; (ii) if it is between 2 and 6, it is
assigned medium risk; and, (iii) if it is greater than 6, it is assigned high
risk.
[6] http://ec.europa.eu/economy_finance/indicators/economic_reforms/eip/sbh/index.cfm

[7] Society at a glance 2014, OECD Social Indicators, Chapter 1, http://www.oecd.org/els/soc/OECD2014-SocietyAtAGlance2014.pdf
[8] The ratio of undisputed tax debt as share of net revenue
collections, despite major improvements over the period 2005-2010, was still
higher than 20% in 2011. OECD (2013), Tax Administration 2013: Comparative
Information on OECD and Other Advanced and Emerging Economies. OECD
Publishing, page 222. 
[9] By "consolidated deficit", we refer to the balance for state-owned
hospitals and Central Government healthcare spending (including transfers to
these state-owned hospitals) in aggregate.
[10] For further details, see the 2014 Joint Employment Report,
COM(2013)801, which includes a scoreboard of key employment and social
indicators.
[11] Portugal presented a Youth Guarantee Implementation Plan " in
December 2013.
[12] Pursuant to the Council Recommendation of
22 April 2013 on establishing a Youth Guarantee (2013/C 120/01): "ensure
that all young people under the age of 25 years receive a good-quality offer of
employment, continued education, an apprenticeship or a traineeship within a
period of four months of becoming unemployed or leaving formal education".
[13] The Labour Code already foresees that sectoral collective
agreements may define the conditions under which a firm could deviate from a
collective agreement on matters regarding remuneration, working time and
functional and geographical mobility. However, sectoral collective agreements
have so far not made use of that possibility. As a result, firms have limited
possibility of exploiting elements that would enhance their internal margin of
adjustment when facing idiosyncratic shocks.
[14] The survival of collective agreements expired but not renewed is
relatively long. The total survival can be longer that six years for collective
agreements that contain a clause that make their expiry depend on the existence
of a new collective agreement. This relatively long survival may create
difficulties in the renewal of the agreements and limit the introduction of
innovations in collective agreements.
[15] Data on the proportion of workers covered by the minimum wage was
collected from "Boletim Estatístico, April 2014, Portugal's Ministry of Economy" and refer to April 2013. Data on the proportion of the
minimum wage on the median wage were extracted from the OECD and refer to 2012.
[16] For instance the increase of the Imposto sobre o Rendimento de
Pessoas Singulares (IRS) in 2013 raised the income tax paid by
single persons by 35% (in relation to 2012).
[17] 2013 EU-SILC (EU Statistics on Income and Living Conditions) survey
on 2012 income data.
[18] 2013 INE, Survey on Living Conditions and Income.
[19] Decree-Law 70/2010 and Decree-Law 133/2012.
[20] Decree-Law 70/2010.
[21] See National Reform Programme, p. 8
[22] See National Reform Programme, p. 8
[23] See Box 2.6 " Programme Reforms in the education sector are
expected to yield positive results", The Financial Assistance Programme
for Portugal, Tenth Review, p. 45
[24] FDI inflows amounted to 8.998 USD million in 2012 (4.2% of GDP) in
2012, in contrast with 2.646 USD million in 2010 (1.2% of GDP). Source: OECD.
[25] There were 379,600 businesses in Portugal in 2012, including
367,100 SMEs, up from 368.300 in 2010, including 363,800 SMEs. Source: Banco do
  Portugal.
[26] The share of exporting firms has increased from 16.1 per cent in 2010
to 17.9 per cent in 2012. Source: Banco do Portugal.
[27] Cf. Innovation Union Scoreboard 2014, European Commission.
[28] Public R&D financed by business enterprise represents only
0.012% of GDP (EU: 0.052)
[29] See 2014 National Reform Programme, p. 12
[30] 10th Consumer Markets Scoreboard (to be published in
mid-June), http://ec.europa.eu/consumers/consumer_research

[31] The contract provides exclusivity rights to Transgas, an  affiliated
company of Galp Energia Group which then  re-sales the natural gas
[32] See National Reform Programme, p. 8
[33] Final goods sector
mark-ups is the difference between the selling price of a good/service and its
cost. Entry cost refers to the cost of starting a business in the intermediate
sector. The implicit consumption tax rate is a proxy for shifting taxation away
from labour to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is
paid out by the unemployment scheme. For a detailed explanation of indicators
see Annex.
[34] For a detailed
explanation of the transmission mechanisms of the reform scenarios see:
European Commission (2013), "The growth impact of structural
reforms", Chapter 2 in QREA No. 4. December 2013. Brussels;
http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[35] Mercer: Análise comparativa das remunerações praticadas no sector
público e no sector privado – relatório final, February 2013.
[36] In that survey, 90% of Portuguese respondents stated that
corruption is a widespread problem in their country (EU average: 76%), while
72% believed it had become worse over the past three years. 36% of Portuguese
respondents say that they are personally affected by corruption in their daily
life (EU average: 26%). Around 68% of businesses in Portugal (the second
highest percentage in the EU) see corruption as an obstacle for doing business
in their country (EU average: 43%). 87% of respondents to the same survey
said that favouritism and corruption hamper business competition (EU average:
73%), while 79% stated that bribery and the use of connections is often the
easiest way to obtain certain public services (EU average: 69%) and 76%
(highest percentage in the EU) that the only way to succeed in business is
through political connections (EU average: 47%). 
[37] With the notable exception of Banco de Portugal, the banking sector
supervisor. 
[38] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.