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
Date: 2016-07-07
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Portugal, budget deficit, budgetary control, budgetary equilibrium, gross domestic product, public debt, public finance, stability pact

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   EN 

   EUROPEAN COMMISSION  Brussels, 7.7.2016  COM(2016) 293 final   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 {SWD(2016) 240 final}  
 
 
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 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(8) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

According  to  Article  126  of  the  Treaty,  Member  States  shall  avoid  excessive 
government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth  conducive  to  employment  creation.  The  Stability  and  Growth  Pact  includes 
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the 
implementation  of  the  excessive  deficit  procedure1,  which  was  adopted  in  order  to 
further the prompt correction of excessive general government deficits. 

The  Council,  acting  upon  a  recommendation  by  the  Commission,  decided  on  2 
December  2009,  in  accordance  with  Article  126(6)  of  the  Treaty,  that  an  excessive 
deficit existed in Portugal and issued a recommendation to correct the excessive deficit 
by 2013 at the latest, in accordance with Article 126(7) of the Treaty and Article 3 of 
Council  Regulation  (EC)  No  1467/972.  Following  the  request  by  the  Portuguese 
authorities  for  financial  assistance  from  the  European  Union,  the  Member  States 
whose  currency  is  the  euro  and  the  International  Monetary  Fund  (IMF),  the  Council 
granted Union financial assistance to Portugal3. The Memorandum of  Understanding 
on  Specific  Economic  Policy  Conditionality  (the  "Memorandum  of  Understanding") 
between the Commission and the Portuguese authorities was signed on 17 May 2011.  
Since  then,  the  Council  has  issued  two  new  recommendations  to  Portugal  (on  9 
October 2012 and 21 June 2013) on the basis of Article 126(7) of the Treaty, which 
extended  the  deadline  for  correcting  the  excessive  deficit  to  2014  and  2015 
respectively. In both recommendations, the Council considered that Portugal had taken 
effective  action,  but  unexpected  adverse  economic  events  with  major  unfavourable 
consequences for government finances had occurred. 

1 
2 

3 

EN 

OJ L 209, 2.8.1997, p. 6. 
All  documents  related 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/portugal_en.htm 
Council  Implementing  Decision  N°  2011/344/EU  of  30  May  2011  on  granting  Union  financial 
assistance to Portugal, OJ L 159, 17.6.2011, p. 88.  

the  excessive  deficit  procedure  of  Portugal  can  be  found  at: 

to 

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(4) 

(5) 

(6) 

(7) 

Specifically, in order to bring the headline government deficit below the 3% of GDP 
reference  value  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  services  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 Union funds; (c) building 
on  the  Public  Expenditure  Review  (PER),  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 and public-private partnerships. 

The  Commission  services  May  2013  update  of  the  economic  outlook  for  Portugal, 
which underpinned the Council Recommendation of 21 June 2013, projected that the 
Portuguese  economy  would  contract  by  2.3%  in  2013  before  growing  by  0.6%  and 
1.5%, respectively, in the two subsequent years. Nominal GDP growth was forecast at 
-0.6% and 1.8% in 2013 and 2014, respectively, and at 2.7% in the following year. 

In  its  Recommendation  of  21  June  2013,  the  Council  established  a  deadline  of  1 
October 2013 for effective action to be taken in line with the provisions of Article 3(4) 
of Regulation (EC) No 1467/97. In line with Article 10(2)(a) of Regulation (EU) No 
472/2013, Portugal was exempted from a separate reporting under the excessive deficit 
procedure  and  reported  in  the  framework  of  its  macroeconomic  adjustment 
programme. 

Risks  of  non-compliance  with  the  Council  Recommendation  of  21  June  2013  were 
highlighted  in  subsequent  assessments.  In  July  2015,  based  on  its  assessment  of  the 
2015  Stability  Programme,  the  first  after  the  exit  from  the  economic  adjustment 
programme,  the  Council  concluded  that  there  was  a  risk  that  Portugal  would  not 
comply  with  the  provisions  of  the  Stability  and  Growth  Pact.  Similarly,  the 
Commission's  Opinion  on  Portugal's  Draft  Budget  Plan  for  2015  concluded  that 
Portugal was at risk of not complying with the rules of the Stability and Growth Pact. 
In  particular,  the  Commission  pointed  to  a  risk  to  the  timely  correction  of  the 
excessive deficit by 2015. Moreover, the Commission also pointed to the shortfall in 
structural effort as compared to the recommendation, indicating the need for additional 
structural  consolidation  measures  for  2015  to  underpin  a  credible  and  sustainable 
correction of the excessive deficit. 

(8) 

A new assessment of the action taken by Portugal to correct the excessive  deficit by 
2015  in  response  to  the  Council  Recommendation  of  21  June  2013,  leads  to  the 
following conclusions: 

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– 

– 

– 

– 

– 

– 

Following  the  notification  of  the  2015  general  government  deficit  and  its 
validation by the Commission (Eurostat), the 2015 deficit came out at 4.4% of 
GDP, above the Treaty reference value of 3.0% of GDP. The gap vis-a-vis the 
reference  value  was  largely  due  to  a  financial  sector  support  measure  in  the 
context  of  the  resolution  of  Banif  at  the  end  of  2015,  which  had  a  negative 
impact  of  1.4%  of  GDP  on  the  government  deficit.  Taking  that  element 
together with one-off revenue items, the deficit net of one-off measures would 
still have been above the Treaty reference value. 

The cumulative improvement in the structural balance in the period from 2013 
to  2015  is  estimated  at  1.1%  of  GDP,  significantly  below  the  2.5%  of  GDP 
recommended  by  the  Council.  When  adjusted  for  the  effects  of  revised 
potential  output  growth  and  revenue  windfalls  or  shortfalls  compared  to  the 
baseline  scenario  underpinning 
the  cumulative 
the 
improvement is reduced markedly to -0.1% of GDP. 

recommendation, 

The  amount  of  measures  implemented  until  June  2014  was  in  line  with  the 
targets  under  the  macroeconomic  adjustment  programme.  Thereafter,  the 
amount  of  permanent  consolidation  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  around  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  GDP  of 
additional  measures  in  2014.  For  2015,  the  amount  of  permanent  fiscal 
consolidation  measures  was  further  reduced  to  around  0.6%  of  GDP  in  the 
2015 budget and the headline target was set at 2.7% of GDP. Thus, the planned 
structural  consolidation  measures  were 
the 
recommended  2015  deficit  target  of  2.5%  of  GDP.  The  2015  deficit  outturn 
confirmed that the planned measures were insufficient. 

to  achieve 

insufficient 

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.  

General  government  gross  debt  has  broadly  stabilised  since  the  Council 
Recommendation of 21 June 2013reaching 129.2% of GDP at the end of 2013, 
130.2%  of  GDP  in  2014  and  129.0%  of  GDP  in  2015  according  to  the 
Commission 2016 spring forecast. 

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. The 
long-term  sustainability  of  the  pension  system  has  been  improved  in  recent 
years,  while  short  and  medium  term  challenges  remain.  Reform  in  the  health 
care  system  with  a  view  to  ensure  the  sustainability  of  the  National  Health 
Service (NHS) are progressing at adequate pace.  Public administration reforms 
to  improve  fiscal  management  at  regional  and  local  levels  have  been 
implemented  over  the  past  years  as  well  as  reforms  to  the  public-private 
partnerships (PPPs) and state-owned enterprises (SOEs), particularly during the 
economic adjustment programme duration. 

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(9) 

This  leads  to  the  conclusion  that  the  response  of  Portugal  to  the  Council 
Recommendation of 21 June 2013 has been insufficient. Portugal did not put an end to 
its  excessive  deficit  by  2015.  The  fiscal  effort  falls  significantly  short  of  what  was 
recommended by the Council, 

HAS ADOPTED THIS DECISION:  

Portugal has not taken effective action in response to the Council Recommendation of 21 June 
2013. 

Article 1 

This Decision is addressed to the Portuguese Republic. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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