Recommendation for a COUNCIL DECISION giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit
Date: 2016-07-27
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Portugal, budget deficit, budgetary control, budgetary equilibrium, gross domestic product, public debt, public expenditure, public finance, stability pact

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   EUROPEAN COMMISSION  Brussels, 27.7.2016  COM(2016) 520 final   Recommendation for a COUNCIL DECISION giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit {SWD(2016) 264 final}  
 
Recommendation for a 

COUNCIL DECISION 

giving notice to Portugal to take measures for the deficit reduction judged necessary in 
order to remedy the situation of excessive deficit 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(9) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union, 
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. 

On 2 December 2009, the Council decided, in accordance with Article  104(6) of the 
Treaty establishing the European Community (TEC), that an excessive deficit existed 
in  Portugal  and  issued  a  recommendation  to  correct  it  by  2013  at  the  latest,  in 
accordance with Article 104(7) of the TEC and Article 3 of Council Regulation (EC) 
No  1467/97.  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 financial assistance to 
Portugal2.  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 
addressed  two  new  recommendations  to  Portugal  (on  9  October  2012  and  21  June 
2013) on the basis of Article 126(7) of the Treaty on the Functioning of the European 
Union,  which  extended  the  deadline  for  correcting  the  excessive  deficit  to  2014  and 
2015 respectively. In both recommendations, the Council considered that Portugal had 

1  OJ L 209, 2.8.1997, p. 6. 
2  Council  Implementing  Decision  2011/344/EU  of  30  May  2011  on  granting  Union  financial  assistance  to 

Portugal, OJ L 159, 17.6.2011, p. 88.  

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(4) 

(5) 

(6) 

(7) 

taken  effective  action,  but  unexpected  adverse  economic  events  with  major 
unfavourable consequences for government finances had occurred.3 

According to the provisions of Article 126(8) of the Treaty, the Council decided on 12 
July  2016  that  Portugal  did  not  take  effective  action  in  response  to  the  Council 
Recommendation of 21 June 2013.  

If  actual  data  pursuant  to  Regulation  (EC)  No  479/2009  indicate  that  an  excessive 
deficit has not been corrected by a participating Member State within the time limits 
specified in a recommendation issued under Article 126(7) of the Treaty, the Council 
should immediately take a decision under Article 126(9) of the Treaty. 

The Commission 2016 spring forecast projects a moderate recovery of the Portuguese 
economy.  In  2016,  real  GDP  is  projected  to  grow  by  1.5%,  at  the  same  pace  as  in 
2015, mainly driven by domestic demand amid still high macroeconomic imbalances. 
Private  consumption  is  expected  to  lose  momentum  in  2016  due  to  higher  indirect 
taxes  and  a  slight  recovery  in  energy  price  inflation.  The  strong  rebound  in  the 
consumption of durable goods in the first half of 2015 is not forecast to be maintained 
over the medium term as still high unemployment and debt levels are projected to keep 
upward  pressures  on  household  savings.  Business  investment  already  decelerated 
significantly over the second half of 2015 and is not expected to resume its  previous 
growth rate soon, despite a relatively high capacity utilisation rate. Total investment is 
anticipated  to  gain  some  pace  in  2017,  supported  by  EU  structural  funds  and  the 
improvement in financing conditions. Exports are forecast to grow in line with foreign 
demand,  but  imports  are  still  expected  to  outbalance  exports.  As  a  result,  the 
contribution  of  net  trade  to  GDP  growth  is  forecast  to  remain  slightly  negative 
although significantly less so than in 2015.  HICP inflation is expected to increase to 
0.7%  in  2016,  mainly  driven  by  higher  indirect  taxes.  While  downward  risks  to  the 
outlook  have  increased  since  the  publication  of  the  spring  forecast,  data  on  the  first 
quarter of 2016 and preliminary information on the second quarter overall confirm the 
outlook of the forecast for the rest of the year. 

According to the Commission 2016 spring forecast, the general government deficit is 
expected to decrease to 2.7% of GDP in 2016. The 2016 Budget, which entered into 
force on 31 March 2016, targets a deficit of 2.2% of GDP, which was confirmed in the 
2016  Stability  Programme.  The  difference  between  the  government's  target  and  the 
Commission  forecast  is  due  to  the  Commission's  less  optimistic  macroeconomic 
scenario, leading  to  lower tax revenues  and  higher  social  expenditure, as  well  as  the 
Commission's  more  conservative  assessment  of  the  yields  of  some  consolidation 
measures,  in  particular  as  regards  planned  savings  in  intermediate  consumption  and 
other current expenditure. The Commission 2016 spring forecast projects the general 
government  deficit  to  decline  further  to  2.3%  of  GDP  in  2017.  The  projected 
improvement  is  largely  linked  to  a  deficit  improving  one-off  operation  linked  to  the 
expected recovery of the Banco Privado Português (BPP) bank guarantee worth about 
¼%  of  GDP.  Adjusted  for  this  one-off  budgetary  impact,  the  deficit  would  be 
projected  to  reach  2.6%  of  GDP  in  2017.  Based  on  the  Commission's  assessment  of 
the  yields  of  the  measures  indicated  in  the  2016  Budget  and  in  the  2016  Stability 
Programme, the structural deficit is expected to deteriorate by ¼% of GDP each year 
in 2016 and 2017 according to the Commission 2016 spring forecast. 

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

the  excessive  deficit  procedure  of  Portugal  can  be  found  at: 

to 

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(9) 

The  general  government  gross  debt-to-GDP  ratio  has  broadly  stabilised  during  the 
period  2013-2015,  reaching  129.2%  in  2013,  130.2%  in  2014  and  129.0%  in  2015. 
Taking  into  account  significant  debt-reducing  stock-flow  adjustments  in  2016  and 
continued  primary  surpluses,  the  Commission  2016  spring  forecast  projects  the  debt 
ratio  to  decrease  to  126%  of  GDP  in  2016,  and  subsequently  to  124.5%  of  GDP  in 
2017. Portugal does not appear to face considerable risks of fiscal stress in the short 
term, while short-term challenges are nevertheless not excluded (stemming from gross 
and net public debt, gross financing needs, the net international investment position, as 
well as the level and the change in the share of non-performing loans or general capital 
needs  in  the  banking  system).  In  the  medium  term,  however,  risks  appear  to  be 
significant  due  to  the  high  stock  of  debt  and  the  high  sensitivity  of  the  debt  ratio  to 
possible interest rate increases and negative nominal growth shocks. In the long term, 
provided  that  adequate  structural  primary  balances  are  consistently  preserved, 
sustainability risks appear low owing to the pension reforms implemented in the past.4 

Under  the  fiscal  policy  measures  taken  in  the  2016  Budget,  the  general  government 
deficit would be below 3% of GDP in 2016. However, according to the Commission 
2016 spring forecast, the safety margin against breaching the Treaty reference value is 
narrow.  Against  the  background  of  high  uncertainties  regarding  economic  and 
budgetary  developments,  the  budgetary  targets  recommended  for  the  correction  year 
should  be  set  at  a  level  clearly  below  the  Treaty  reference  value  of  3%  of  GDP,  in 
order  to  guarantee  a  durable  correction  of  the  excessive  deficit  situation  within  the 
requested deadline. 

(10)  According to Article 5 of Regulation (EC) No 1467/97, in the Council decision to give 
notice to take measures for the deficit reduction in accordance with Article 126(9) of 
the Treaty, the Council shall request that the Member State achieve annual budgetary 
targets which, on the basis of the forecast underpinning the notice, are consistent with 
a  minimum  annual  improvement  of  at  least  0.5%  of  GDP  as  a  benchmark,  in  its 
cyclically  adjusted  balance  net  of  one-off  and  temporary  measures.  As  this  Council 
decision  to  give  notice  is  adopted  in  the  second  half  of  the  year,  and  taking  into 
consideration the current Commission estimates of the spring forecast, an unchanged 
structural balance would be warranted for 2016 to provide a sufficient safety margin 
towards a durable correction of the excessive deficit. 

(11)  Therefore, a credible and sustainable adjustment path would require Portugal to reach 
a  general  government  deficit  of  2.5%  of  GDP  in  2016,  which  is  consistent  with  an 
unchanged structural balance with respect to 2015. Those budgetary targets take into 
account  the  need  to  compensate  for  second-round  effects  of  fiscal  consolidation  on 
public finances, through its impact on the wider economy.  

(12)  The  deficit  target  implied  by  the  proposed  adjustment  path  does  not  incorporate  the 
possible  direct  fiscal  effect  of  potential  bank  support  measures  in  the  second  half  of 
2016. This is because there is high uncertainty regarding the effective implementation 
and statistical recording of these measures, and hence their possible impact on deficit 
and debt. Any possible bank sector support measures should aim at limiting the fiscal 
impact to the minimum possible to ensure debt sustainability. 

(13)  To  attain  the  budgetary  targets  implied  by  the  proposed  adjustment  path,  additional 
consolidation  measures  with  an  estimated  impact  of  0.25%  of  GDP  in  2016  are 

4  European Commission (2016), "Fiscal Sustainability Report 2015", European Economy, Institutional Paper 

No. 018. 

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considered  necessary,  also  in  view  of  the  structural  deterioration  identified  in  the 
Commission  2016  spring  forecast.  In  particular,  Portugal  shall  implement  the 
measures included in the 2016 Budget as well as the expenditure control mechanism in 
the  procurement  of  goods  and  services,  which  is  currently  highlighted  in  the  2016 
Stability  Programme.  These  savings  would  need  to  be  complemented  with  other 
measures  of  a  structural  nature  which  could  focus  on  the  revenue  side  aiming  at 
increasing the yields of indirect taxation by broadening the tax base and reducing tax 
expenditures.  One  way  to  achieve  this  could  be  by  adjusting  the  still  broad  use  of 
reduced VAT rates. 

In  addition,  Portugal  should  reinforce  structural  reforms  to  enhance  competitiveness 
and  long-term  sustainable  growth  in  line  with  the  Council  Recommendations 
addressed to Portugal in the context of the European Semester and in particular those 
related  to  the  correction  of  its  excessive  macroeconomic  imbalances.  In  particular, 
further  fiscal-structural  measures  are  necessary  to  strengthen  the  resilience  of 
Portugal’s public finances. The timely and strict implementation of the revised Budget 
Framework Law and the Commitment Control Law as well as further improvements in 
revenue  collection  and  expenditure  control  may  significantly  contribute  to  achieving 
and maintaining a healthy fiscal position. Portugal should present a clear schedule and 
implement steps to clear arrears fully and improve efficiency in the health care system, 
to  reduce the  reliance  of the pension system on budget  transfers  and to ensure fiscal 
savings in the restructuring of State-owned enterprises.  

(15)  According to Article 126(9) of the Treaty, the Council may, as part of its decision to 
give notice under this Article, request the Member State concerned to submit reports 
on the adjustment effort in accordance with a specific timetable. According to Article 
5(1a)  of  Regulation  EC  (No)  1467/97,  the  Member  State  report  should  include  the 
targets for government expenditure and revenue and specify the fiscal policy measures 
on  both  the  expenditure  and  the  revenue  side,  as  well  as  information  on  the  policy 
actions being taken in response to the specific Council decisions. In order to facilitate 
the monitoring of the deadline for compliance with the recommendations contained in 
this notice, as well as the deadline for correction of the excessive deficit, Portugal  is 
requested  to  submit  such  a  report  before  15  October  2016,  in  parallel  with  its  2017 
Draft Budgetary Plan. 

(16)  By  the  same  deadline,  Portugal  should  also  present  an  economic  partnership 
programme  in  accordance  with  Articles  9(1)  and  17(2)  of  Regulation  (EU)  No 
473/2013  of  the  European  Parliament  and  of  the  Council  of  21  May  2013.  The 
economic  partnership  programme  should  describe  policy  measures  and  structural 
reforms that are needed to ensure an effective and lasting correction of the excessive 
deficit,  as  a  development  of  the  national  reform  programme  and  the  stability 
programme,  and  fully  taking  into  account  the  Council  recommendations  on  the 
implementation  of  the  integrated  guidelines  for  the  economic  and  employment 
policies. 

(17)  Portugal  should  also  report  to  the  Commission  and  the  Economic  and  Financial 
Committee  as  required  under  Article  10  of  Regulation  (EU)  No  473/2013  in 
accordance  with  the  specifications  laid  down  in  Commission  Delegated  Regulation 
(EU)  No  877/2013.  The  report  should  be  submitted  for  the  first  time  by  15  January 
2017 and on a three-monthly basis thereafter.  

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HAS ADOPTED THIS DECISION:  

1. 

2. 

3. 

4. 

5. 

6. 

Article 1 

Portugal shall put an end to the present excessive deficit situation by 2016.  

Portugal shall reduce the general government deficit to 2.5% of GDP in 2016. This 
target does not include the impact of the direct effect of potential bank support. This 
improvement  in  the  general  government  deficit  is  consistent  with  an  unchanged 
structural  balance  with  respect  to  2015,  based  on  the  Commission  2016  spring 
forecast. Portugal  shall also use all windfall gains to accelerate the deficit and debt 
reduction.  

In addition to the savings already included in the Commission 2016 spring forecast, 
Portugal shall adopt and fully implement consolidation measures  for the amount  of 
0.25%  of  GDP  in  2016.  In  particular,  Portugal  shall  implement  fully  the 
consolidation  measures  incorporated  in  the  2016  Budget,  including  the  additional 
expenditure  control  in  the  procurement  of  goods  and  services  highlighted  in  the 
Stability Programme. Portugal shall complement those savings with further measures 
of a structural nature to achieve the recommended structural effort.  

Portugal  shall  stand  ready  to  adopt  further  measures  should  risks  to  the  budgetary 
plans  materialise.  Fiscal consolidation measures  shall secure a lasting improvement 
in the general government balance in a growth-friendly manner. 

To  ensure  a  durable  improvement  of  public  finances,  Portugal  shall  strictly 
implement  the  Budget  Framework  Law  and  the  Commitment  Control  Law  and 
further improve revenue collection and expenditure control. Portugal shall present a 
clear schedule and implement steps to  fully clear arrears  and improve  efficiency in 
the  health  care  system,  to  reduce  the  reliance  of  the  pension  system  on  budget 
transfers and to ensure fiscal savings in the restructuring of State-owned enterprises.  

Article 2 

The  Council  establishes  the  deadline  of  15  October  2016  for  Portugal  to  take 
effective action and to submit a report to the Council and the Commission on action 
taken  in  response  to  the Council notice.  The report shall include the targets for the 
government expenditure and revenue and specify the discretionary measures on both 
the  expenditure  and  the  revenue  side,  as  well  as  information  on  the  actions  being 
taken in accordance with Article 1(5).  

This Decision is addressed to the Portuguese Republic. 

Done at Brussels,  

Article 3 

For the Council 
The President 

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