Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Portugal and delivering a Council opinion on the 2016 stability programme of Portugal
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Portugal, budget deficit, credit policy, economic policy, economic reform, employment policy, health care system, invitation to tender, pension scheme, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 342 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Portugal  and delivering a Council opinion on the 2016 stability programme of Portugal  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Portugal 

and delivering a Council opinion on the 2016 stability programme of Portugal 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Portugal as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 342 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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a  Council  recommendation  on  the  economic  policy  of  the  euro  area7.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  Portugal  should  ensure  the  full  and  timely  implementation  of  the 
recommendation. 
The  2016  country  report  for  Portugal8  was  published  on  26  February  2016.  It 
assessed  Portugal’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 14 July 2015 and Portugal’s progress towards its national 
Europe  2020  targets.  It  also  included  the  in-depth  review  under  Article  5  of 
Regulation  (EU)  No  1176/2011.  On  8  March  2016,  the  Commissionpresented  the 
results of the in-depth review. 9 The Commission’s analysis leads it to conclude that 
Portugal  is  experiencing  excessive  macroeconomic  imbalances.  In  particular,  the 
large  stocks  of  net  external  liabilities,  private  and  public  debt  and  a  high  share  of 
non-performing 
in  a  context  of  elevated 
unemployment. Policy gaps persist regarding product and services markets, corporate 
debt restructuring, fiscal issues and selected areas of the labour market. 

loans  constitute  vulnerabilities 

On  29  April  2016,  Portugal  submitted  its  2016  national  reform  programme  and  its 
2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes  have  been  assessed  at  the  same  time.  Portugal's  National  Reform 
Programme  shows  sufficient  ambition  to  tackle  the  excessive  imbalances,  outlines 
relevant measures to foster competitiveness and reduction of private debt and refers 
to  the  challenges  in  the  2016  Country  Report  and  the  euro  area  recommendations 
focusing on the need to re-launch investment and ensure the sustainability of public 
finances.  If  fully  and  swiftly  implemented,  these  measures  would  help  address 
Portugal's macroeconomic imbalances. Based on the assessment of Portugal's policy 
commitments, there is no need at this stage for a stepping-up of the macro-economic 
imbalances procedure. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance.10 

in 

Portugal is currently in the corrective arm of the Stability and Growth Pact. It did not 
correct the excessive deficit by the 2015 deadline and did not deliver the fiscal effort 
recommended by the Council. In its 2016 stability programme, the government plans 
to correct the excessive deficit and reach a headline deficit of 2.2% of GDP in 2016. 
Once  a  durable  correction  of  the  excessive  deficit  has  been  achieved,  Portugal  will 
become  subject  to  the  preventive  arm  and  to  the  transitional  debt  rule..  The 

(2) 

(3) 

(4) 

(5) 

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COM(2015) 692 final. 
SWD(2016) 90 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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(recalculated11)  structural  balance  is  set  to  improve  only  by  around  0.35%  of  GDP 
per year, below the required 0.6% of GDP, between 2016 and 2020, and the medium-
term budgetary objective – a structural surplus of 0.25 % of GDP – is not expected to 
be  achieved  within  the  time  horizon  of  the  programme.  According  to  the  stability 
programme, the government debt-to-GDP ratio is expected to fall to 124.8% in 2016 
and  to  continue  declining  to  110.3%  in  2020.  The  macroeconomic  scenario 
underpinning  these  budgetary  projections  is  rather  optimistic.  Moreover,  the 
measures needed to support the planned deficit targets from 2017 onwards have not 
been  sufficiently  specified.  Based  on  the  Commission  2016  spring  forecast,  the 
general  government  deficit  is  projected  to  reach  2.7%  of  GDP  in  2016,  below  the 
Treaty reference value of 3% of GDP, and 2.3% of GDP in 2017. As the structural 
deficit  is  projected  to  slightly  increase  in  2016  and  2017,  the  fiscal  effort  is  not  in 
line  with  the  requirements  of  the  Stability  and  Growth  Pact.  Moreover,  Portugal  is 
not  forecast  to  comply  with  the  transitional  debt  rule  in  2017.  Based  on  its 
assessment of the stability programme and taking into account the Commission 2016 
spring forecast, the Council is of the opinion that there is a risk that Portugal will not 
comply  with  the  provisions  of  the  Stability  and  Growth  Pact.  Therefore  further 
measures will be needed to ensure compliance in 2016 and 2017. 

Pursuant  to  Article  10(1)  of  Regulation  (EC)  N°  1467/97,  the  Commission  will 
regularly monitor the implementation of action taken by Portugal in response to the 
last  recommendation  made  by  the  Council  under  Article  126(7)  TFEU:  the 
Commission  will  therefore  recommend  to  the  Council  the  appropriate  steps  to  be 
taken in the framework of the excessive deficit procedure. 

Timely  and  stringent  implementation  of  the  reformed  budget  framework  law,  the 
commitment  control  law  and  further  improvements  in  revenue  collection  and 
expenditure  control  may  significantly  contribute  to  achieving  the  required  fiscal 
adjustment.  Portugal  faces  the  double  challenge  of  achieving  the  long-term  fiscal 
sustainability of the healthcare system while at the same time maintaining the level 
of  access  to  healthcare  by  improving  efficiency  in  the  system.  Although  Portugal 
currently has one of the lowest shares of public expenditure in total health spending 
in the EU, the projected increase in public healthcare expenditure by 2.5 % of GDP 
by 2060 is the highest. In view of addressing the long-term sustainability challenges 
in the health sector, comprehensive measures aimed at promoting disease prevention 
and  public  health  policies  as  well  as  ensuring  primary  healthcare  provision  at  an 
early and less costly stage have not yet been taken. In the short term, accurate budget 
planning  and  implementation  in  hospitals to  ensure  clearance  of  arrears  remains  an 
important  challenge.  While  the  long-term  sustainability  of  the  pension  system  was 
addressed in the recent reforms, its short to medium sustainability challenges remain 
unaddressed. The public pension system is characterised by a high reliance on budget 
transfers and intergenerational inequalities. Execution delays and policy gaps are still 
hampering  the  fiscal  sustainability  of  state-owned  enterprises,  in  particular  in  the 
transport  sector.  Strengthening  efficiency  enhancing  measures  in  their  restructuring 
plans remains crucial to achieve fiscal savings.  

Considerable  efforts  have  been  made  to  curb  tax  evasion  by  further  improving  the 
efficiency of the tax administration. Measures are being taken to combat tax fraud, to 
improve  information-sharing  with  financial  institutions,  and  to  strengthen  the  anti-

The  structural  balance  as  recalculated  by  the  Commission  based  on  the  information  in  the  stability 
programme, following the commonly agreed methodology. 

(6) 

(7) 

(8) 

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(9) 

(10) 

(11) 

money-laundering  framework.  Despite  the  progress  made,  there  is  still  scope  for 
strengthening  tax  compliance.  Reforming  the  tax  administration  to  make  it  more 
efficient would also help encourage investment.  

Overall wage developments have been moderate, consistent with high unemployment 
and  the  need  to  promote  external  rebalancing, and  in  line with  productivity  growth 
over the medium term. Collective bargaining at sectoral level has been supportive of 
this trend, though the characteristics of the collective bargaining system still limit the 
scope of firm-level adjustment. In a context of low inflation and high unemployment, 
the minimum wage was increased in January 2016 from EUR 505 to EUR 530 per 
month  and  is  planned  to  be  further  gradually  increased  to  EUR  600  per  month  in 
2019  (paid  14  times  per  year).  Portugal  is  in  the  middle  of  the  EU  ranking  for 
minimum wages as a percentage of average wages, but among the countries with the 
highest minimum wage as a percentage of the median wage. This suggests that wage 
distribution  in  Portugal  is  very  biased  towards  lower  wages,  and  that  further 
increases  in  the  minimum  wage  might  rapidly  expand  the  proportion  of  workers 
covered,  which  in  2016  has  reached  almost  a  quarter  of  all  employees.  While  this 
could  help  reduce  the  intensity  of  in-work  poverty,  it  also  results  in  an  increased 
compression of the wage structure, putting upward pressure on overall wages. If not 
matched  by  productivity  increases,  this  risks  harming  the  employment  and 
competitiveness  outlook,  especially  for  labour-intensive  industries.  It  also  risks 
reducing the incentive to invest in skills.  

The Portuguese labour market continued to recover in 2014 and 2015 and substantial 
efforts  have  been  made  to  reform  activation  policies,  modernise  the  public 
employment service and increase the outreach towards non-registered young people, 
though some implementation challenges persist. In view of the recent deterioration of 
the  social  situation,  especially  as  regards  the  increasing  level  of  child  poverty, 
important measures have also been taken to reinforce social assistance, namely in the 
areas of the minimum income scheme, child benefits and low pensions. The impact 
of  these  measures  in  reducing  the  intensity  of  poverty  needs  to  be  assessed. 
Nevertheless,  absorbing  the  large  pool  of  long-term  unemployed  remains  a 
challenge,  negatively  affecting  economic  growth  and  the  social  situation.  There  is 
room  for  further  activation  of  the  long-term  unemployed,  through  targeted  labour 
market policies and enhanced coordination  among employment and  social services. 
Although  the  recovery  brought  about  many  new  jobs  on  permanent  contracts, 
segmentation in the labour market remains significant. The proportion of fixed-term 
employees  remains  one  of  the  highest  in  Europe,  and  the  rate  of  transition  from 
temporary to permanent contracts is low.  

High  private-sector  indebtedness  remains  a  major  area  of  vulnerability  for  the 
Portuguese  economy  and  financing  conditions  for  small  and  medium-sized 
businesses remain difficult. Some progress has been made on reducing the corporate 
debt  overhang  and  allowing  the  private  sector  to  deleverage,  but  Portugal’s  private 
sector is still one of the most highly indebted in the EU. This is a major impediment 
to investment and potential output growth.  Non-financial corporations are adjusting 
their balance sheets, but to a lesser extent than households. High and rising levels of 
non-performing  loans  in  the  business  sector  are  weighing  on  the  balance  sheets  of 
both  the  non-financial  and  the  financial  sector  and  are  a  major  obstacle  to 
investment.  Action  has  been  taken  at  various  levels  to  address  corporate 
indebtedness, but results have been slow to come. The debt bias of corporate taxation 
remains high. In the past few years, the government has tried to tackle this problem 

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(12) 

(13) 

(14) 

by  introducing  thin  capitalisation  rules  and  an  allowance  for  corporate  equity. 
However,  in  2015,  the  difference  in  the  cost  of  capital  (before  and  after  taxation) 
between debt and equity-funded investments remained one of the highest in the EU. 
Access  to  credit  remains  costly  and  difficult  for  businesses,  in  particular  small  and 
medium-sized  enterprises  and  start-ups.  Alternative  sources  of  funding,  such  as 
private  equity,  venture  capital,  crowdfunding  and  business  angels,  remain  marginal 
and seriously under-developed. 

Despite  progress,  regulatory  barriers  and  weak  institutional  capacity  are  still 
hampering  business  growth,  competitiveness  and  investment.  The  efficiency  of 
Portugal’s  justice  system  remains  low,  particularly  in  dealing  with  tax  litigation. 
Public procurement is largely transparent in Portugal. However, according to data of 
the dedicated online platform "BASE", contracting authorities in Portugal often use 
the direct award procedure, which over the 2013-2015 period constituted on average 
87.3%  of  all  public  contracts,  representing  47%  of  total  amounts  contracted. 
Transparency  remains  a  challenge  for  concession  contracts  and  public-private 
partnerships,  particularly  at  local  and  regional  level.  The  Ministry  of  Finance’s 
taskforce  for  public-private  partnerships  (UTAP)  oversees  some  public-private 
partnerships  managed  by  the  central  administration,  but  concessions,  regional  and 
local  public-private  partnerships  are  not  subject  to  its  monitoring.  The  port  sector 
reforms still suffer from delays in implementation and obstacles to the entry of new 
players.  Registering  a  business  has  become  easier,  but 
licensing  remains 
cumbersome  and  complex  and  unpredictable  administrative  procedures  are 
detrimental  to  investor  confidence.  Challenges  still  exist  concerning  procedures  for 
access  to  the  construction  market,  obtaining  a  construction  permit  and  on  effective 
implementation of streamlined environmental licensing rules. Regulatory barriers in 
some  business  services  sectors  prevent  resources  from  being  allocated  efficiently, 
particularly regarding legal services. The by-laws governing professional bodies, in 
particular  those  concerning  their  statutes  and  internal  rules,  are  restrictive  and  may 
hinder both natural and legal persons from gaining access to the relevant professions. 
This affects particularly legal professions, where, among other things, restrictions on 
advertising and multidisciplinary activities are prevalent.  

is  underperforming 

in  science-business  cooperation  and 

Portugal 
the 
commercialisation  of  knowledge.  The  barriers  to  cooperation  between  universities 
and  the  business  sector  are  high,  due  to  both  regulatory  and  bureaucratic  obstacles 
and the lack of incentives for cooperation in the academic system. This is detrimental 
to  the  employability  of  graduates  and  to  innovation.  The  launch  of  the  new  short-
cycle  higher  technical  courses  (TeSPs)  has  provided  new  opportunities  for 
cooperation  between  the  polytechnics  and  regional  economic  actors,  but  university 
programmes remain outside the modernisation process. 

in 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of  Portugal’s economic policy and published it in the 2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to Portugal in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socioeconomic policy in Portugal but also their compliance with EU rules 
and guidance, given the need to strengthen the EU's overall economic governance by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 to 5 below. 

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(15) 

(16) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and its opinion12 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1 to 5 below.  

HEREBY RECOMMENDS that Portugal take action in 2016 and 2017 to: 

1. 

2. 

3. 

4. 

5. 

Ensure  a  durable  correction  of  the  excessive  deficit  by  2016,  reducing  the  general 
government  deficit  to  2.3%  of  GDP  in  2016,  by  taking  the  necessary  structural 
measures  and  by  using  all  windfall  gains  for  deficit  and  debt  reduction.  This  is 
consistent with an improvement in the structural balance of 0.25% of GDP in 2016. 
Thereafter,  achieve  an  annual  fiscal  adjustment  of  at  least  0.6%  of  GDP  in  2017. 
Conduct,  by  February  2017,  a  comprehensive  expenditure  review  at  all  levels  of 
public  administration  and  strengthen  expenditure  control,  cost  effectiveness  and 
adequate budgeting. Ensure the long-term sustainability of the health sector, without 
compromising  access  to  primary  healthcare.  Reduce  the  reliance  of  the  pension 
system  on  budgetary  transfers.  By  the  end  of  2016,  refocus  ongoing  restructuring 
plans of state-owned enterprises. 

In consultation with social partners, ensure that minimum wages are consistent with 
the objectives of promoting employment and competitiveness across industries.  

Ensure  the  effective  activation  of  the  long  term  unemployed  and  improve  the 
coordination  between  employment  and  social  services.  Strengthen  incentives  for 
firms to hire through permanent contracts.  

Take measures, by October 2016, to facilitate the cleaning up of the balance sheets of 
credit  institutions  and  address  the  high  level  of  non-performing  loans.  Reduce  the 
debt  bias  in  corporate  taxation  and  improve  the  access  to  finance  for  start-ups  and 
small and medium-sized enterprises via the capital market. 

Increase transparency and efficiency in public procurement as regards public-private 
partnerships  and  concessions.  By  the  end  of  2016,  improve  and  accelerate 
administrative  and  licensing  procedures,  accelerate  tax  litigations  and  reduce 
regulatory barriers, especially in  business services. Incentivise cooperation between 
universities and the business sector. 

Done at Brussels, 

For the Council 
The President 

12 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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