COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Portugal following the adoption of the COUNCIL RECOMMENDATION to Portugal on 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL DECISION estalishing that no effective action has been taken by Portugal in response to the Council Recommendation of 21 June 2013
Date: 2016-07-07
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Portugal, budget deficit, budgetary control, budgetary equilibrium, economic forecasting, gross domestic product, macroeconomics, public finance, stability pact, structural adjustment

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   EUROPEAN COMMISSION  Brussels, 7.7.2016  SWD(2016) 240 final   COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Portugal following the adoption of the COUNCIL RECOMMENDATION to Portugal on 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL DECISION estalishing that no effective action has been taken by Portugal in response to the Council Recommendation of 21 June 2013 {COM(2016) 293 final}  
 
 
 
 
 
COMMISSION STAFF WORKING DOCUMENT 

Analysis of the budgetary situation in Portugal 

following the adoption of the COUNCIL RECOMMENDATION to Portugal of 21 June 
2013 with a view to bringing an end to the situation of an excessive government deficit 

Accompanying the document 

Recommendation for a 

COUNCIL DECISION 

establishing that no effective action has been taken by Portugal in response to the 

Council Recommendation of 21 June 2013

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1.  INTRODUCTION  

the  Council 

the  Commission, 

Portugal  has  been  under  the  excessive  deficit  procedure  since  2  December  2009.  On  9 
October  2012,  the  Council  concluded  that  unexpected  adverse  economic  events  with  major 
unfavourable consequences for government finances could be considered to have occurred in 
Portugal and adopted a revised recommendation to correct the excessive deficit by 2014 at the 
latest. On 21 June 2013, the Council decided, in accordance with Article 126(7) of the Treaty 
on  the  Functioning  of  the  European  Union  (TFEU)  that  although  effective  action  had  been 
taken by the Portuguese authorities in response to the Council recommendation  of 9 October 
2012,  unexpected  adverse  economic  events  with  major  unfavourable  consequences  for 
government  finances  could  be  considered  to  have  occurred  in  Portugal 1 .  Following  a 
recommendation  from 
therefore  adopted  a  revised 
recommendation under Article 126(7) TFEU and set a 2015 deadline to correct the excessive 
deficit.  Specifically,  in  order  to  bring  the  general  government  deficit  below  the  Treaty 
reference  value  of  3%  of  GDP  by  2015  in  a  credible  and  sustainable  manner,  Portugal  was 
recommended to: (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,  which  was  deemed  consistent  with  an  improvement  in  the 
structural balance of 0.6% of GDP in 2013, 1.4% of GDP in 2014 and 0.5% of GDP in 2015, 
based  on  the  Commission  May  2013  update  of  the  economic  outlook  for  Portugal;  (b) 
implement measures amounting to 3.5% of GDP to confine the 2013 deficit to 5.5% of GDP, 
including the measures defined in the 2013 Budget Law and additional measures included in 
the  Supplementary  Budget,  namely,  reductions  in  the  wage  bill,  increased  efficiency  in  the 
functioning of 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 in view of attaining a headline deficit of 4.0% of GDP in 2014 and aim 
at streamlining and modernising the public administration, addressing redundancies across the 
public  sector  functions  and  entities,  improving  the  sustainability  of  the  pension  system  and 
achieving  targeted  cost  savings  in  individual  line  ministries;  (d)  adopt  the  necessary 
permanent  consolidation  measures  to  achieve  the  2015  deficit  target  of  2.5%  of  GDP. 
Furthermore,  Portugal  was  recommended  to  maintain  reform  momentum  in  public  financial 
management by revising the Budget Framework Law by the end of 2013 to further enhance 
budgetary  procedures and principles of budgetary  management, accountability, transparency 
and simplification, and to continue efforts to limit contingent liabilities stemming from state-
owned enterprises (SOEs) and public-private partnerships (PPPs). 

In  its  recommendation,  the  Council  established  a  deadline  of  1  October  2013  for  effective 
action to be taken and, in accordance with Article 10(2)(a) of Regulation (EU) No 472/2013 
of  the  European  Parliament  and  of  the  Council  of  21  May  2013  on  the  strengthening  of 
economic  and  budgetary  surveillance  of  Member  States  in  the  euro  area  experiencing  or 
threatened with serious difficulties with respect to their financial stability, to report in detail 
the consolidation strategy envisaged to achieve the targets set out in the recommendation. 

1   The excessive deficit procedure had been opened by the Council decision of 2 December 2009 in accordance 

with Article 126(6) TFEU that an excessive deficit existed in Portugal. 

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Portugal reported on its EDP obligations in the framework of its macroeconomic adjustment 
programme. In line with Article 10(2)(a) of Regulation (EU) No 472/2013, it was exempted 
from a separate reporting under the excessive deficit procedure until the end of the economic 
adjustment programme (June 2014). No additional step in the excessive deficit procedure was 
necessary at that stage and thereafter. 

According to the budgetary data notified by Portugal and validated by Eurostat on 21 April 
2016, the general government deficit reached 4.4% of GDP in 2015. As a result, Portugal did 
not correct its excessive deficit by the recommended 2015 deadline.  

This  document  examines  the  budgetary  developments  in  Portugal  since  2013.  In  addition, 
based  on  the  Commission  2016  spring  forecast,  this  document  provides  the  basis  for  an 
assessment  of  whether  Portugal  has  taken  effective  action  towards  correcting  its  excessive 
deficit over the 2013-2015 period. Section 2 discusses recent macro-economic and budgetary 
developments, section 3  provides a detailed analysis of budgetary developments over 2013-
2015, section 4 assesses effective action and section 5 provides conclusions. 

2.  RECENT MACRO-ECONOMIC DEVELOPMENTS  

After  a  deep  recession  in  the  period  from  2011  to  2013,  the  Portuguese  economy  has 
returned  to  modest  positive  growth  since  the  last  quarter  of  2013.  Portugal's  real  GDP 
declined by 1.1% y-o-y in 2013, and resumed to positive annual growth in 2014. Real GDP 
increased  moderately  by  0.9%  y-o-y  in  2014  and  then  accelerated  to  1.5%  y-o-y  in  2015, 
mainly  driven  by  robust  domestic  demand  growth.  Since  2013,  net  external  demand 
contributed  negatively  to  annual  real  GDP  growth,  but  to  a  gradually  diminishing  extent. 
Conditions in the labour market have significantly improved since the second quarter of 2013. 
Total employment declined by 2.9% in 2013, due to substantial drops at the beginning of the 
year,  and  then  grew  strongly  by  1.4  %  y-o-y  in  both  2014  and  2015.  Consequently,  the 
unemployment  rate  progressively  decreased  to  14.1%  in  2014  and  12.6%  in  2015.  The 
reduction in unemployment over the past years has been much stronger than what could have 
been  expected  on  the  basis  of  the  historical  relationship  between  unemployment  and  GDP. 
This suggests that specific factors have played a role, such as the adjustment in real wages, 
negative  migration  flows  and  the  reinforcement  of  active  labour  market  policies.  HICP 
inflation  increased  to  0.4%  in  2013  and  then  turned  negative  to  -0.2%  in  2014,  reflecting  a 
negative contribution from energy prices. Despite the continuation of feeble energy prices in 
2015,  the  demand-driven  economic  recovery,  tax-increasing  fiscal  measures  and  the 
weakening of the euro exerted upward pressures on consumer price inflation which stood at 
0.5%.  

Real  GDP  growth  came  in  higher  in  2013  and  2014  than  projected  in  the  macro-
economic  scenario  underpinning  the  Council  recommendation  of  21  June  2013  (-1.1% 
vs. -2.3% in 2013 and 0.9% vs. 0.6% in 2014). The difference was mainly due to stronger 
than expected domestic demand contribution (-2.0 pps. vs. -4.2 pps. in 2013 and 1.8 pps. vs. 
0.0  pps.  in  2014)  and  more  actual  employment  growth  of  1.4%  vs.  -0.5%  in  2014.  Both 
economic  activity  and  employment  fell  particularly  strongly  in  the  last  quarter  of  2012, 
leading to a projected negative carry-over effect which did not fully materialise. In addition, 
stronger  domestic  demand  outturn  was  partly  related  to  the  successful  active  labour  market 
policies which contributed to higher consumer confidence and private consumption growth.    

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According  to  the  Commission  2016  spring  forecast,  the  economic  recovery  is  set  to 
continue moderately in 2016 and real GDP is projected to grow by 1.5% y-o-y. Private 
consumption  is  expected  to  lose  momentum  due  to  higher  indirect  taxes  and  the  slight 
recovery  in  energy  price  inflation.  The  strong  rebound  in  durables  consumption  in  the  first 
half of 2015 is not forecast to be maintained as still high unemployment and high debt levels 
are  projected  to  keep  upward  pressures  on  household  savings.  Most  of  the  soft  investment 
indicators  point  to  a  weaker  investment  performance  in  2016  as  well.  Business  investment 
already decelerated significantly over the second half of 2015 and is not expected to resume 
its  buoyant  growth  soon  despite  the  relatively  high  capacity  utilisation  rate.  Exports  are 
forecast  to  grow  in  line  with  foreign  demand,  but  imports  are  still  expected  to  outbalance 
exports over the forecast horizon. As a result, the contribution of net trade to GDP growth is 
forecast  to  remain  slightly  negative.  Employment  creation  is  set  to  slow  down  in  2016, 
thereby  becoming  more  aligned  with  GDP  growth.  Therefore,  the  unemployment  rate  is 
estimated  to  decrease  to  11.6%.  HICP  inflation  is  projected  to  increase  only  marginally  to 
0.7% in 2016, mainly driven by higher taxes.   

The  macroeconomic  scenario  underlying  the  2016  Budget  is  more  optimistic  than  the 
Commission  2016  spring  forecast.  The  Commission  expects  a  slower  economic  recovery 
than  the  Portuguese  authorities  (1.5%  vs.  1.8%  real  GDP  growth).  The  more  pessimistic 
scenario is mainly related to the contribution of domestic demand to GDP growth (1.5 pps. in 
the  spring  forecast  against  2.4  pps.  in  the  2016  Budget).  The  spring  forecast  projects 
investment  to  grow  by  1.6%  rather  than  3.9%  according  to  the  2016  Budget,  mostly  due  to 
persistent  deleveraging  pressures,  the  feeble  external  environment  and  high  volatility  in  the 
financial markets. The Commission is also less optimistic with respect to private consumption 
growth  in  2016  (1.8%  compared  to  2.4%).  The  development  of  private  consumption  over 
2016  is  expected  to  broadly  reflect  trends  in  real  household  disposable  income  and  a 
stabilisation of the historically-low household saving rate. The projections also differ  on the 
nominal side of the economy, as the Commission estimates a significantly lower increase of 
the  GDP  deflator  in  2016  (1.4%  compared  to  2.1%  in  the  2016  Budget).  Nonetheless,  the 
expectations with  regard to  labour market developments in  2016 are broadly  in  line in  both 
projections.  

Table 1 – Comparison of macroeconomic developments and forecasts 

Source: COM May 2013 – Commission services May 2013 update of the economic outlook for Portugal, underlying the Council 
recommendation of 21 June 2013.COM spring forecast 2016; Ministry of Finance Portugal Budget 2016; COM SWD(2013) 394 final 

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2015OutturnCOM May 2013OutturnCOM May 2013OutturnBudget 2016COM SF2016Real GDP (% change)-1.1-2.30.90.61.51.81.5Contributions to real GDP growth (pps)Domestic demand-2.0-4.21.80.02.52.41.5Changes in inventories0.00.00.30.0-0.10.00.0Net exports0.91.9-1.20.6-0.9-0.6-0.1Employment (% change)-2.9-3.91.4-0.51.40.80.9GDP deflator (% change)2.31.71.01.31.92.11.4Output gap (% of potential GDP)-5.1-4.6-3.8-3.5-2.3-1.3-1.1Potential output growth (% change)-1.0-1.3-0.5-0.5-0.10.60.3201320142016 
 
 
 
3.  BUDGETARY IMPLEMENTATION OVER 2013-2015 AND OUTLOOK FOR 2016  

This  section  provides  a  detailed  yearly  analysis  of  budgetary  developments  over  2013-
2015.  It notably discusses the main fiscal policy measures adopted on both the revenue and 
the expenditure sides. The last subsection addresses the budgetary outlook for 2016. 

3.1. Budgetary implementation in 2013 

The general government deficit in 2013 turned out at 4.8% of GDP, significantly below 
the  target  recommended  by  the  Council.  That  overachievement  was  in  spite  of  a  deficit-
increasing  one-off  measure  amounting  to  0.4%  of  GDP,  which  resulted  from  a  capital 
injection into Banif. However, on the other hand, the 2013 budgetary deficit also integrates a 
large  deficit-improving  one-off  measure  concerning  a  tax  and  social  contributions  debt 
recovery scheme worth 0.7% of GDP, resulting in a deficit net of one-offs of 5.1% of GDP.  

Overall, fiscal consolidation in 2013 mainly reflected strong tax revenue growth (notably of 
State tax revenue and social contributions), coupled with an effective expenditure control. The 
most  significant  contribution  on  the  revenue  side  came  from  the  personal  income  tax  (PIT) 
structure review that was estimated to yield around 1.2% of GDP in additional tax revenue. 
Indirect  taxes,  notably  VAT,  also  contributed  strongly  to  higher  State  tax  revenue.  Other 
policy actions whose budgetary impact was not quantified ex-ante, such as reforms to tackle 
tax fraud and evasion, are supposed to have contributed significantly to that outcome. Thus, 
the yields of actions to fight tax fraud and evasion are likely to have underpinned improved 
tax collection, especially on the back of the e-invoicing reform successfully implemented as 
from  2013.  The  authorities  estimate  that  the  fight  against  tax  fraud  and  evasion  may  have 
accounted for a deficit-decreasing impact of around 0.4% of GDP in 2013, with the caveats of 
limitations of empirical methods to accurately measure this effect. 

On the expenditure side, a series of consolidation measures was taken in particular regarding 
compensation  of  employees 
(extraordinary 
contribution  on  pensions),  intermediate  consumption  (PPPs,  health  etc.)  and  investment  to 
offset  the  reinstatement  of  the  13th  and  14th  monthly  payments  for  public  sector  wages  and 
pensions following a ruling by the Constitutional Court. 

restraint),  social 

(employment 

transfers 

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Table 2 – Composition of budgetary adjustment  

 COM May 2013 – Commission services May 2013 update of the economic outlook for Portugal, underlying the Council recommendation of 
21 June 2013. 

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2015OutturnOutturnOutturn(% of GDP)(% of GDP)(% of GDP)Revenue45,144,543,9of which:- Taxes on production and imports13,714,214,5- Current taxes on income, wealth, etc.11,410,910,8- Social contributions12,011,711,5- Other (residual)8,07,76,9Expenditure49,951,748,3of which:- Primary expenditure45,146,843,7of which:        Compensation of employees12,511,811,3        Intermediate consumption5,65,85,9Social payments20,419,719,2Subsidies0,60,70,7Gross fixed capital formation2,22,02,2Other (residual)3,76,84,4- Interest expenditure4,94,94,6General government balance (GGB)-4,8-7,2-4,4Primary balance0,0-2,30,2One-off and other temporary measures0,3-3,8-1,2Structural balance-2,5-1,4-2,0Change in structural balance0,61,1-0,6Real GDP growth-1,10,91,5GDP deflator2,31,01,9Nominal GDP growth1,11,93,420132014 
 
 
 
Table 3 – Main structural fiscal policy measures over 2013-2015 (i.e. excluding one-offs)  

Revenue 

2013 

PIT structure review (+1.2 % of GDP) 
CIT base broadening  (+0.1% of GDP) 
Larger use of EU funds (+0.2% of GDP) 

2014 

Increased contributions to special health systems 
(+0.1% of GDP) 
Optimised  use  of  EU  social  and  employment 
funds  (+0.1% of GDP) 
Increased  taxation  of  company  and  diesel  cars 
(+0.1% of GDP) 
Increased  taxation  of  alcoholic  beverages  and 
tobacco (+0.1% of GDP) 
Extraordinary  contribution  from 
sector (+0.1 % of GDP) 

the  energy 

2015 

Modification of motorway levy (+0.1% of GDP) 
Other  revenue  measures  (excise  duties  etc.) 
(+0.1% of GDP) 

Expenditure 

Lower wage bill - employment restraint and 
remuneration  (-0.4% of GDP) 
Reduction in other social benefits (-0.3% of 
GDP) 
Savings in intermediate consumption across 
line ministries (-0.2% of GDP) 
Savings in PPPs (-0.1% of GDP) 
Savings in health sector (-0.1% of GDP) 
Reinstatement of the 13th and 14th salary and pension 
(+1.5% of GDP) 
Extraordinary solidarity contribution on pensions (-0.3% of 
GDP) 

Savings  in  intermediate  consumption  based  on  public 
expenditure review (PER) (-0.2% of GDP) 
Savings  in  compensation  of  employees  in  line  ministries 
(PER) (-0.1% of GDP) 
Changes to the sustainability factor  / Increase in retirement 
age (-0.1% of GDP) 
Lower other current expenditure (PER) (-0.1% of GDP) 
Lower social benefits (PER) (-0.1% of GDP) 
Lower investments (PER) (-0.2% of GDP) 
Lower other current expendiure in line ministries (-0.1% of 
GDP) 

Extinction of extraordinary contribution on pensions (3.5%-
10%) (+0.3% of GDP) 
Reversal  of  20%  of  temporary  public  sector  wage  cuts 
(+0.1% of GDP) 
Public employment reduction (attrition) (-0.1% of GDP) 
Other measures related to personnel costs (-0.1% of GDP) 
Savings in pharmaceuticals spending (-0.1% of GDP) 
Savings in ICT costs (-0.1% of GDP) 
Savings in studies/consultancy etc. (-0.1% of GDP) 
Other measures related to intermediate consumption (-0.1% 
of GDP) 
Reduction of subsidies (-0.1% of GDP) 

Note: A positive sign implies that revenue / expenditure increases as a consequence of this measure. Annual 
budgetary impacts are estimated by the Commission services. Measures with a budget impact of at least 0.1% 
of GDP are listed.  

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3.2. Budgetary developments in 2014 

The general government deficit reached 7.2% of GDP in 2014, thus falling considerably 
short of the target of 4.0% of GDP recommended by the Council. The negative deviation 
was,  however,  mostly  the  result  of  the  capitalisation  of  Novo  Banco  by  the  Portuguese 
Resolution  Fund,  a  one-off  financial  sector  support  operation  accounting  for  2.8%  of  GDP. 
Further major deficit-increasing one-off measures concerned the recapitalisation of Carris and 
STCP  (worth  0.7%  of  GDP)  and  a  write-off  of  a  loan  to  BPN  Crédito  (0.1%  of  GDP). 
Without  the  impact  of  those  one-off  measures,  the  deficit  target  would  have  been 
overachieved in 2014. 

However, the consolidation effort in structural terms slackened after the end of the economic 
adjustment  programme.  Following  the  end  of  the  programme  and  successive  Constitutional 
Court  rulings  on  several  2014  Budget  measures  and  2015  budgetary  plans,  the  government 
changed  its  budgetary  strategy.  Of  the  expenditure  measures  ruled  unconstitutional,  an 
amount of 0.3% of GDP in measures was not compensated for in 2014. Instead, the second 
Supplementary Budget 2014, that entered into force in October 2014, planned to compensate 
the  remaining  fiscal  gap  resulting  from  the  Constitutional  Court  rulings  and  from  higher 
pressures  on  various  expenditure 
impact  of 
macroeconomic  revisions,  the  upward  revision  of  tax  collection  resulting  from  a  more 
efficient fight against tax fraud and the use of budgetary reserves. 

the  expected  higher  fiscal 

items  by 

Thus,  the  fiscal  adjustment  was  progressively  reduced  after  the  programme  exit,  with  less 
effort  on  durable  expenditure  compression  but,  instead,  relying  on  enhanced  revenue 
performance stemming from the economic recovery. Furthermore, increased revenue from the 
fight against tax fraud and evasion (estimated by the authorities at 0.4% of GDP) was used to 
support  higher  public  expenditure,  rather  than  to  make  further  progress  in  reducing  both 
deficit and debt. 

Finally, the amount of fiscal policy measures underpinning the budgetary targets for 2014 was 
significantly reduced over time from 2.3% of GDP planned at the time of the 2014 Budget to 
about  1.5%  of  GDP  in  the  projection  underlying  the  2015  Budget.  Thus,  the  amount  of 
measures taken falls clearly short of the recommendation to take at least 2.0% of additional 
measures in 2014. 

3.3. Budgetary developments in 2015 

The  general  government  deficit  in  2015  as  notified  by  Portugal  and  validated  by 
Eurostat  on  21  April  2016  reached  4.4%  of  GDP,  considerably  above  the  Treaty 
reference value of 3 % of GDP and above the target of 2.5% of GDP set by the Council 
in its Recommendation of 21 June 2013. The deficit-increasing one-off fiscal impact of the 
Banif  resolution  operation  amounted  to  1.4%  of  GDP.  However,  excluding  also  all  other 
deficit-reducing  one-off  operations  the  deficit  would  still  have  been  above  the  Treaty 
reference value. Since the deficit reduction (excluding the impact of one-offs) was based on 
cyclical  factors  rather  than  on  additional  structural  measures,  the  structural  balance  is 
estimated to have deteriorated by about 0.6% of GDP in 2015.  

Thus,  the  impact  of  structural  measures  foreseen  in  the  2015  Budget  was  considerably 
reduced to around 0.6% of GDP in structural measures. In particular, the budgetary impacts 
stemming  from  a  series  of  low-yielding  measures    notably,  to  reduce  intermediate 
consumption and personnel costs, as well as increase some narrow-based indirect taxes  was 

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somewhat  offset  by  the  effect  of  the  partial  extinction  of  the  extraordinary  solidarity 
contribution on pensions and the reversal of 20% of the temporary public sector wage cuts.  

In national accounts, leaving aside the budgetary impact of the Banif resolution amounting to 
1.4% of GDP, the 2015 Budget's own target of 2.7% of GDP was missed by 0.3% of GDP. 
While overall revenue fell short of the 2015 Budget's target by 1.0% of GDP (-0.3% of GDP 
for  tax  revenue  and  -0.7%  for  non-tax  revenue)  that  shortfall  was  mostly  offset  by  lower 
interest payments (-0.4% of GDP) and lower public investment (-0.4% of GDP). Slippages in 
compensation of employees and intermediate consumption were mostly covered by budgetary 
contingency reserves.  

3.4. Projected budgetary developments in 2016 

Taking  into  account  an  assessment  of  the  fiscal  policy  measures  specified  in  the  2016 
Budget  that  entered  into  force  on  31  March,  the  Commission  2016  spring  forecast 
projects  the  general  government  deficit  to  fall  to  2.7%  of  GDP  in  2016.  The  structural 
balance is expected to slightly deteriorate further by about 0.25% of GDP in 2016.  

The  2016  Budget  itself  targets  a  general  government  deficit  of  2.2%  of  GDP  and  an 
improvement  of  the  structural  balance  by  0.3%  of  GDP.  The  2016  Budget  intends  to  more 
than  compensate  revenue-decreasing  measures  of  around  0.3%  of  GDP  (notably  the  partial 
reversal  of  the  PIT  surcharge  and  the  reduction  of  the  VAT  rate  for  restaurants)  through 
revenue-increasing  measures  of  around  0.5%  of  GDP,  of  which  about  two  thirds  relate  to 
increases  in  indirect  taxes  (on  petroleum  products,  tobacco,  vehicles  and  the  stamp  duty), 
complemented  by  a  series  of  smaller  measures  concerning  direct  taxes  and  enhanced 
compliance  in  both  tax  collection  and  Social  Security.  Expenditure-increasing  measures 
amounting  to  0.4%  of  GDP  (mostly  the  gradual  reversal  of  the  public  sector  wage  cuts, 
increases in a series of social benefits and the unfreezing of pension indexation) are planned 
to be more than compensated by expenditure-decreasing measures of close to 0.5% of GDP 
(most  of  which relate to the nominal  freeze of intermediate consumption (except for  PPPs), 
efficiency gains in other current expenditure, expenditure control in social transfers and a new 
civil servants rotation policy (2:1 replacement rule)). The tax revenue in the 2016 Budget is 
however  also  affected  by  negative  carry-over  effects  of  tax  measures  of  previous  years 
amounting to around 0.25%  of GDP. 

The  Commission  2016  spring  forecast  incorporates  more  conservative  yield  estimates  for 
some of the 2016 Budget measures, in particular as regards the nominal freeze of intermediate 
consumption  and  other  current  expenditure.  The  Commission  forecast's  less  optimistic 
macroeconomic  scenario  also  leads  to  lower  projected  revenue  from  taxes  and  social 
contributions, as well as higher social transfers. 

The general government gross debt-to-GDP ratio that had increased from 68% in 2007 
to 126.2% in 2012 has broadly stabilised thereafter, reaching 129.2% in 2013, 130.2% in 
2014 and 129.0% in 2015. Taking into account the planned sales of financial assets in 2016, 
including  Novo  Banco,  and  continued  primary  surpluses,  the  Commission  spring  forecast 
projects the debt ratio to decrease to 126% at the end of 2016 and 124.5% at the end of 2017.  

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3.5. Progress in fiscal structural reforms 

Fiscal-structural  reforms  have  progressed  in  most  areas  albeit  at  differentiated  pace. 
The Budget Framework Law was revised and strengthened but it is set to fully enter into force 
only in September 2018. Considerable efforts have been made to curb tax fraud and evasion 
and  to  reform  the  tax  administration.  Despite  the  progress  made,  there  is  still  scope  for 
strengthening  tax  compliance  and  enhancing  the  efficiency  of  the  tax  administration.  The 
long-term sustainability of the pension system has been improved in recent years. At the same 
time,  the  proposal  to  undertake  a  comprehensive  pension  reform  to  address  the  system’s 
short- to medium-term sustainability challenges announced in the 2015 Stability Programme 
has not been initiated.  

Reform  in  the  health  care  system  with  a  view  to  ensure  the  sustainability  of  the  National 
Health  Service  (NHS)  is  progressing  at  an  adequate  pace  even  if  arrears  in  state-owned 
hospitals  remain  elevated.  Public  administration  reforms  to  improve  fiscal  management  at 
regional and local levels have been implemented over the past years.  

The  management  framework  of  public-private  partnerships  (PPPs)  has  been  substantially 
strengthened and the renegotiations of several  PPPs were  formally  concluded in  2015.  The 
operating balance of state-owned enterprises (SOEs) has improved considerably since 2011, 
although measures taken at the end of 2015 in the transport sector may entail fiscal risks.  

4.  EFFECTIVE ACTION in 2013-2015  

4.1. Background information 

The  current  assessment  of  effective  action  is  based  on  the  data  notified  by  the  Portuguese 
authorities  in  March  2016  and  validated  by  Eurostat  in  April,  and  the  Commission  2016 
spring  forecast.  It  takes  into  account  the  economic  and  budgetary  developments  since  the 
Council recommendation of 21 June 2013. The methodology for assessing effective action is 
the  one  endorsed  by  the  Council  in  June  2014.  The  assessment  starts  by  comparing  the 
headline  deficit  target  and  the  recommended  improvement  in  the  structural  balance  in  the 
Council recommendation with the headline deficit and the apparent fiscal effort, measured by 
the  change  in  the  structural  budget  balance.  If  the  headline  deficit  and/or  the  required 
improvement in the structural balance are not achieved, a careful analysis is carried out. In the 
present case, that analysis is only based on the "top-down" approach, i.e. the adjusted change 
in  the  structural  balance,  as  the  Council  recommendation  issued  during  the  economic 
adjustment  programme  only  set  targets  for  2013  and  2014  that  corresponded  to  full 
programme measures as opposed to the standard additional measures approach and did not fix 
any quantified target in terms of additional measures for 2015 necessary to reach the headline 
deficit  target.  A  bottom-up  assessment  of  the  consolidation  measures  undertaken  by  the 
Portuguese authorities over the 2013-2015 period is therefore not feasible. 

The adjusted change in the structural balance takes into account (i) the impact of revisions in 
potential  output  growth,  and  (ii)  the  impact  of  revenue  windfalls/shortfalls  compared  to  the 
baseline scenario underpinning the Council recommendation.   

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11 

 
 
 
 
4.2. Headline targets and adjustment in the structural balance  

The  general  government  deficit  remained  above  the  recommended  level  both  in  2014 
and  2015,  as  well  as  above  the  Treaty  reference  value  of  3%  of  GDP.  In  its 
recommendation  of  21  June  2013,  the  Council  recommended  Portugal  to  achieve  headline 
deficit targets  of 5.5 % of GDP in  2013, 4.0 % in  2014 and 2.5%  in  2015.  While the target 
was  overachieved  in  2013,  when  the  general  government  deficit  reached  4.8%  of  GDP,  the 
2014 headline deficit of 7.2% of GDP and the 2015 headline deficit of 4.4% of GDP exceeded 
the EDP targets by 3.2% and 1.9% of GDP respectively. As the 2015 headline deficit of 4.4% 
of  GDP  also  remained  above  the  Treaty  reference  value,  the  excessive  deficit  has  not  been 
corrected by the recommended 2015 deadline.  

Table 4: Comparison between recommended targets and outturn for headline balance and 
change of structural balance 

In  its  recommendation  of  21  June  2013,  the  Council  recommended  Portugal  to  improve  its 
structural  balance  by 0.6%  of GDP in 2013, 1.4%  in  2014 and 0.5%  in 2015. Based on the 
Commission  2016  spring  forecast,  the  structural  deficit  fell  from  3.1%  of  GDP  in  2012  to 
2.5% in 2013 and further decreased to 1.4% in 2014 but then increased to 2.0% in 2015. This 
implies  an  annual  fiscal  effort  of  0.5%  of  GDP  in  2013,  1.1%  in  2014  and  -0.6%  in  2015, 
below the targets for each year. Thus, the structural balance over 2013-2015 only improved 
by 1.1% of GDP in cumulative terms, 1.4 pps. below the  recommended 2.5% of GDP . 

Altogether, the fact that both the headline targets in 2014 and 2015 and the structural deficit 
targets in all three years have been missed warrants a careful analysis. 

4.3. Careful analysis  

The correction for revisions in potential growth since June 2013 have a marginal impact 
on the estimated improvement in the structural balance from 2013 to 2015. At the time of 
the Council recommendation of 21 June 2013, potential output growth was estimated to stand 
at  -1.3%  in  2013,  -0.5%  in  2014  and  -0.1%  in  2015.  Based  on  its  2016  spring  forecast,  the 
Commission estimates that potential growth reached -1.0 % in 2013, -0.5% in 2014 and -0.1% 
in  2015.  Correcting  for  that  development  has  only  a  minor  impact  in  2013,  reducing  the 
change  in  the  structural  balance  by  0.1%  of  GDP  as  compared  to  the  unadjusted  structural 
balance. 

Compared to the baseline, the 2016 spring forecast shows revenue windfalls of 1.1% of 
GDP in 2013 and 0.6% of GDP in 2014 followed by a revenue shortfall of 0.6% of GDP 
in 2015.  

In 2013 and 2014 revenue developments, net of discretionary measures, evolved significantly 
more favourably than implied by standard elasticities. By comparison to the baseline scenario, 
the  correction  for  revenue  windfalls  therefore  leads  to  a  significant  decrease  in  current 
revenues  both  in  2013  and  2014  and  thus  to  a  corresponding  significantly  lower  adjusted 
12 

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% of GDP201320142015201320142015Cumulative 2013-2015EDP targets-5,5-4,0-2,50,61,40,52,5Outturn-4,8-7,2-4,40,51,1-0,61,1Deviation0,7-3,2-1,9-0,1-0,3-1,1-1,4Headline balanceChange in the structural balance 
 
 
 
change  in  the  structural  balance  as  compared  to  the  unadjusted  change  in  the  structural 
balance.  In  2015,  however,  revenues  fell  short  of  what  would  be  implied  by  standard 
elasticities,  leading  to  a  small  improvement  by  0.1%  of  GDP  in  the  adjusted  change  in  the 
structural  balance,  but  still  falling  short  by  0.4%  of  GDP  from  the  recommended 
improvement.  Owing  to  the  strong  windfalls  in  2013  and  2014,  the  adjusted  change  of  the 
structural balance reaches  -0.1% of GDP in cumulative terms, thus falling short by 2.6% of 
GDP from the Council recommendation of an improvement of the structural balance by 2.5% 
of GDP. 

At the same time, the overall picture reflected by the structural effort indicator is negatively 
affected  by:  (i)  the  changeover  to  ESA2010,  in  particular  by  the  reclassification  of  some 
institutional  units  inside  general  government,  as  well  as  other  methodological  revisions 
regarding  potential  GDP  growth  and  cyclical  adjustment  calculations  (the  estimated  total 
impact on the cumulative structural effort amounts to about  -0.8% of GDP over 2013-2015, 
mostly arising in 2013), and (ii) the fact that estimated yields from fight against tax fraud and 
evasion  were  not  recorded  as  discretionary  fiscal  measures.  However,  even  if  both  factors 
were fully considered2, the adjusted change in the structural balance would still fall short by 
around 1 pp. of GDP from the recommended cumulative target of 2.5% of GDP.   

Table 5 – Adjusted change in the structural balance (top-down)  

While the fiscal adjustment was deemed on track with the commitments under the economic 
adjustment programme  until April 2014, Portugal has not delivered the recommended  fiscal 
effort thereafter. 

5.  CONCLUSIONS 

Following  the  notification  of  the  2015  general  government  deficit  and  its  validation  by 
Eurostat,  the  2015  deficit  came  out  at  4.4%  of  GDP.  Hence,  Portugal  did  not  correct  its 
excessive  deficit  by  the  deadline  recommended  by  the  Council  in  June  2013  The  headline 
deficit  included  the  deficit-increasing  one-off  impact  of  1.4%  of  GDP  stemming  from  the 
financial  sector  support  measure  in  the  context  of  the  Banif  resolution  at  the  end  of  2015. 
Taking  into  account  also  the  deficit-reducing  one-off  measures,  the  headline  deficit  net  of 
one-offs would still have been above the Treaty reference value.  

2   Assuming e.g. the Portuguese authorities' own ex-post estimates of the yields of the fight against tax fraud 
and evasion of around 0.4% of GDP both in 2013 and 2014. For 2015 no estimates have been published yet 
but the yields are expected to be lower than in the two preceding years. 

13 

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Adjusted change in the structural balance201320142015Cumulative 2013-2015EDP targets0,61,40,52,5Outturn-0,70,50,1-0,1Deviation-1,3-0,9-0,4-2,6% of GDP 
 
 
 
                                                            
The cumulative fiscal effort over 2013-2015 is estimated at 1.1% of GDP, significantly below 
the  2.5%  of  GDP  recommended  by  the  Council.  After  correction  for  the  effects  of  revised 
potential output growth and revenue windfalls/shortfalls, the adjusted cumulative fiscal effort 
is estimated at -0.1% of GDP, thus further below the 2.5% recommended structural effort.  

Overall,  since  June  2014  the  improvement  of  the  headline  deficit  has  been  driven  by  the 
economic  recovery  and  reduced  interest  expenditure  in  a  low-interest  rate  environment. 
Windfall gains were not used to accelerate the deficit reduction and the volume of structural 
consolidation measures was not sufficient to reach the targets. 

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14 

 
 
 
 
 
ANNEX – STANDARD TABLES  

Table 1 – Adjustment of apparent structural effort for the revision in potential growth - details 
of calculations 

Table 2 – Adjustment of apparent structural effort for the expected revenue windfalls/shortfalls 
- details of calculations 

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Potential GDP growth underlying the Council Recommendation (%)Potential GDP growth at the time of assessment (%)Forecast error (%)Structural expenditure                     (% of potential GDP)Correction coefficient α                (% of nominal potential GDP)(1)(2)(3)=(1)-(2)(4)(5)=(3)*(4)/1002013-1,3-1,0-0,345,6-0,12014-0,5-0,5-0,146,80,02015-0,1-0,10,145,90,0Revenue gap (billion of national currency)*Correction coefficient β (% of nominal potential GDP)(1)(1')(2)(2')(3)(3')(4)(4')(5)=[(1')-(2')-ε*(3')*(4')]-[(1)-(2)-ε*(3)*(4)]20132,55,64,95,0-0,61,165,669,21,81,120140,90,90,8-0,31,81,968,174,81,00,620151,01,60,00,82,73,469,075,8-1,1-0,6Change in current revenues (yoy) (billions of national currency)Discretionary current revenue measures (billions of national currency)Nominal GDP growth assumptions (%)Current revenues  in year t-1 (billions of national currency)