COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2019 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Portugal, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1021 final  COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2019    Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Summary of the main findings from the MIP in-depth review 

4.  Reform priorities 

4.1.  Public finances and taxation 

4.2.  Financial sector 

4.3.  Labour market, education and social policies 

4.4.   Competitiveness reforms and investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

3 

7 

14 

18 

23 

23 

32 

37 

48 

62 

68 

69 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Portugal 

75 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Portugal 

Table 2.1: 

Assessment of 2018 CSR implementation 

Table 3.1: 

Sensitivity analysis: current account balance and net international investment position 

Table 3.2: 

MIP assessment matrix 

Table 4.2.1: 

Financial stability indicators 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

81 

13 

16 

19 

21 

34 

69 

70 

71 

72 

73 

74 

1 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Contributions to real GDP growth 

Graph 1.2: 

Contributions to potential growth 

Graph 1.3:  GDP per capita in PPP 

Graph 1.4: 

Regional Convergence in Portugal 

Graph 1.5: 

Nominal compensation growth: actual and predicted based on economic 

fundamentals 

Graph 1.6: 

Current Account and Net International Investment Position 

Graph 1.7: 

Return on equity (%), domestic banks 

Graph 2.1:  Overall multiannual implementation of 2011-2018 CSRs to date 

Graph 4.1.1:  General government gross debt projections under baseline and alternative nominal 

GDP growth and interest rate scenarios 

Graph 4.1.2:  General government gross debt projections under baseline and alternative fiscal 

consolidation scenarios 

Graph 4.1.3:  Government expenditure by function in 2016 

Graph 4.1.4: 

Tax revenue by economic function in 2017 

Graph 4.2.1:  New loans granted 

Graph 4.2.2:  Saving with domestic banks 

Graph 4.2.3:  Valuation gap on price/income, price/rent and fundamental model valuation 

Graph 4.2.4:  Private sector indebtedness 

Graph 4.2.5:  Sectoral breakdown of domestic loans to non financial corporations (NFCs) 

Graph 4.3.1:  Annual change in the employment rate of low and medium-skilled workers (age 20-

64) since Q1-2009 

Graph 4.3.2:  At-risk-of-poverty in Portugal and European Union (current composition), 2010 vs 2016 

Graph 4.4.1:  Labour productivity 

Graph 4.4.2:  Net capital stock per person employed 

Graph 4.4.3:  Regions in Portugal and factor endowments 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and fostering 

growth and competitiveness development in Portugal 

Box 4.3.1: Monitoring performance in light of the European pillar of social rights in Portugal 

Box 4.3.2: The 2018 Tripartite Agreement 

Box 4.4.1: Investment challenges and reforms in Portugal 

7 

8 

8 

9 

10 

11 

11 

15 

24 

24 

27 

29 

32 

33 

35 

35 

36 

39 

41 

48 

49 

57 

17 
38 
42 
50 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

A  positive  economic  performance  combined 
with  past  reforms  is  enabling  Portugal  to 
address its structural challenges (1). The current 
economic  expansion  has  facilitated  strong  job 
creation,  contributing  to  a  sizeable  reduction  in 
unemployment.  Public  and  private  debt  has  also 
been reduced. However, they remain too high, and 
in  correcting 
there  has  been 
imbalances,  including  low  productivity  and  high 
liabilities  with 
foreign  creditors.  Portugal’s 
policies 
in  areas  such  as  education,  skills, 
innovation, the business environment and access to 
finance are helping to address these challenges, but 
a sustained commitment to reform is required.  

little  progress 

Economic  performance 
is  moderating  with 
growth  expected  to  slacken.  GDP  growth  is 
expected to slacken as the impact from the volatile 
international  environment  dampens  exports  and 
private investments. However, domestic demand is 
projected to remain strong in the short term helped 
by  further  improvement  on  the  labour  market  and 
an  accelerated  use  of  EU  funds.  Robust  job 
creation  continues,  although  it  was  slowing  down 
in 2018, amid moderate wage growth. 

to 

correct 

continues 

Portugal 
its 
macroeconomic  imbalances.  Although  all  main 
indicators are moving in the right direction, public 
and  private  sector  debt  and  foreign  debt  are  still 
significantly  above  the  benchmarks  set.  This 
continues  to  have  a  negative  impact  on  the 
country’s  external  position,  where  the  pace  of 
adjustment is expected to slow down. The decline 
in  non-performing  loans  (or  ‘bad’  loans)  along 
with  the  improved  profitability  is  reducing  the 
balance of risks in the banking sector. Imbalances 
in  the  labour  market  have  been  corrected  and  the 
main  risks  are  now  insufficient  skills  and  low 
productivity. 

(1)  This  report  assesses  Portugal’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
resilient  and 
European  economy  more  productive, 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms and ensuring responsible fiscal policies. 
At  the  same  time,  the  Commission  published  the  Alert 
Mechanism  Report  (AMR)  that  initiated  the  eighth  round 
of  the  macroeconomic  imbalance  procedure.  The  AMR 
found that Portugal warranted an in-depth review, which is 
presented in this report. 

3 

Public  finances  have  continued 
improving, 
while  strongly  relying  on  higher  revenue, 
declining  interest  expenditure  and  relatively 
low  public  investment.  Higher  revenue,  lower 
interest  expenditure  and  relatively  low  levels  of 
public  investment  have  contributed  to  further 
improvements in the headline and structural public 
deficits,  while  the  structural  balance  excluding 
interest  expenditure  has  remained  broadly  stable. 
The  current  economic  expansion  and  favourable 
financing conditions allow for further reductions in 
the  structural  deficit  to  ensure  a  sustainable 
budgetary  position  over  the  medium  term.  This 
strengthens the case for the government to contain 
overall  expenditure  growth  and  use  gains  from 
windfall revenue and lower interest expenditure to 
reduce public debt faster. 

innovation 

investment 

infrastructure 

research 
in 

Higher  public  and  private 
in 
innovation,  upskilling,  resource  efficiency, 
and  modern 
transport 
employment policies would strengthen the long-
term  sustainable  growth  potential  of  Portugal. 
The country has one of the lowest investment rates 
in  the  EU.  Insufficient  maritime  and  railway 
connections  make  it  difficult  for  export-oriented 
businesses to fully benefit from the potential of the 
single  market.  Research 
and  development 
investment  has  recently  regained  strength  but 
remains  insufficient  to  upgrade  the  Portuguese 
and 
national 
system. 
efficiency  would 
Investments 
resource 
long-term  sustainable 
contribute 
growth.  The  low  qualification  level  of  workers  is 
an obstacle to investment and productivity growth. 
Using  the  full  potential  of  the  labour  force  also 
requires  reinforcement  of  public  employment 
labour  market 
services  and  effective  active 
policies. People’s lack of digital skills hinders their 
inclusion  in  society  and  their  employability  and 
reduces  the  potential  for  higher  productivity. 
Annex D identifies key priorities for support by the 
European  Regional  Development  Fund, 
the 
European Social Fund Plus and the Cohesion Fund 
over  2021-2027,  building  on  the  analysis  of 
investment  needs  and  challenges  outlined  in  this 
report. 

to  achieving 

 
 
                                                           
Executive summary 

in lowering the school drop-out rate (“early school 
leaving”)  but  is  still  above  the  target  of  10 %. 
Significant  challenges  remain 
the 
targets  for  research  and  development  investment, 
higher education attainment and poverty reduction. 

to  achieve 

The  Social  Scoreboard  accompanying 
the 
European  Pillar  of  Social  Rights  highlights 
some  challenges  for  Portugal.  While  the  recent 
labour  market  performance  marked  a  significant 
improvement  in  employment  and  unemployment 
rates,  income  inequality  remains  high  and  the 
than 
effectiveness  of  social 
pensions)  in  reducing  poverty  remains  limited. 
Moreover, despite a recent improvement,  the  high 
proportion  of  early  leavers  from  education  and 
training  points  to  challenges  in  education.  On  the 
positive side, Portugal continues to have one of the 
highest  rates  of  participation  in  formal  childcare 
for  children  under  3  years  old,  although  with  a 
decrease  in  2017,  and  it  is  still  difficult  to  find 
childcare in some areas of the country. 

transfers 

(other 

findings  of 

The  main 
review 
contained  in  this  report  and  the  related  policy 
challenges are as follows: 

in-depth 

the 

  External  adjustment  remains  insufficient. 
The  correction  of  flow  imbalances  has  been 
partially  based  on  cyclical  factors.  The  recent 
reversal  in  the  current  account  points  to  a 
slowdown  in  external  adjustment.  A  more 
substantial  adjustment  could  be  achieved 
through  gains  in  competitiveness,  benefitting 
both  the  current  account  balance  and  GDP 
growth.  

in  2017  and 

  The  country’s  high  public  debt  has  started 
to  decrease,  and  further  growth-friendly 
fiscal  consolidation  would  help  to  keep  it 
steadily  declining.  The  ratio  of  public  debt  to 
is 
GDP  started  decreasing 
projected  to  decline  further  between  2018  and 
2020, albeit at a slower pace. Continued  fiscal 
consolidation  and  progress  with  growth-
to 
enhancing  structural 
strengthening Portugal’s fiscal sustainability. It 
therefore  remains  essential  to  ensure  adequate 
budgeting and effective spending control across 
all  government  sectors,  in  combination  with 
decisive  measures  to  tackle  the  persistently 
high hospital arrears and improve the financial 

reforms  are  key 

Portugal  has  made 
addressing 
specific- recommendations. 

the 

2018 

some (2)  progress 

in 
country 

There  has  been  some  progress  in  the  following 
areas.   

  Promoting an environment conducive to hiring 
on permanent contracts, including by reviewing 
the 
in  consultation  with 
legal  framework 
employers and trade unions.  

 

 

the  skills 

the  adult 
Increasing 
population, as well as the number of people in 
higher education. 

level  of 

Increasing  the  efficiency  of  insolvency  and 
recovery proceedings, reducing impediments to 
the  secondary  market  for  the  resale  of  non-
performing  loans,  and  improving  access  to 
finance for businesses. 

 

Improving  the  efficiency  of  administrative 
courts and reducing administrative burden. 

There  has  been  limited  progress  in  the  following 
areas. 

  Strengthening 

control, 

cost 
expenditure 
effectiveness  and  adequate  budgeting  in  the 
health 
financial 
Improving 
sustainability  of  state-owned  enterprises,  in 
their  overall  net 
particular  by 
income and reducing their debt. 

increasing 

sector. 

the 

There has been no progress in the following area. 

  Removing  persistent  regulatory  restrictions  by 
the 
regulated 

implementation  of 
highly 
for 

ensuring  a  proper 
framework 
professions. 

law 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Portugal  is 
making  good  progress  in  reaching  its  targets  for 
renewable  energy  and  greenhouse  gas  reduction. 
There  has  been  significant  progress  in  raising  the 
employment rate, which currently stands above the 
target of 75 %. Further progress was made in 2017 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex A. 

4 

 
 
                                                           
Executive summary 

labour  market, 
pronounced population ageing.   

especially 

in  view  of 

insufficient 

  Low  worker  productivity  is  a  key  challenge 
for improving competitiveness and potential 
growth.  Worker  productivity  is  still  restrained 
by 
investment  and  structural 
rigidities  in  the  product  and  labour  markets, 
including  a  high  share  of  low-skill  employees 
and  labour  market  segmentation.  A  significant 
proportion  of  small  businesses 
is  having 
difficulties  growing,  in  part  due  to  the  heavy 
and 
taxation 
regulatory 
difficulties in accessing finance and capital. On 
the positive side, there are signs that credit and 
investment are increasingly being channelled to 
specific  sectors,  especially  tradable  sectors 
where  there  is  a  greater  potential  for  growth 
and higher productivity. 

footprint 

and 

Other key structural issues analysed in this report, 
which point to particular challenges for Portugal’s 
economy, are the following: 

  Amidst  a 

economic 

favourable 

cycle, 
increases in the minimum wage do not seem 
to  have  hampered  job  creation  among  low-
skill  individuals  so  far.  The  minimum  wage 
was  raised  to  EUR 580  in  2018  and  again  to 
EUR 600  in  2019.  During  2018,  employment 
creation  has  been  strong  also  among  low-
skilled  workers,  although  overall  job  creation 
has  decelerated.  The  minimum  wage  is  now 
among  the  highest  in  the  EU  relative  to  the 
national median wage. The resulting narrowing 
in  wages  deserves 
in 
monitoring,  as 
the  education 
it  decreases 
in  earnings 
the  difference 
i.e. 
premium, 
between the more and the less highly educated, 
and  therefore  potentially  reduces  the  incentive 
to upgrade lower skill levels.  

the  differences 

  An  improved  labour  market  has  not  helped 
to  tackle  the  high  share  of  temporary 
contracts, although new measures are on the 
table  to  reduce  it.  A  tripartite  agreement  was 
reached  in  June  2018  to  reduce  labour  market 
segmentation  through  an  action  plan  to  tackle 
precariousness 
collective 
bargaining.  However,  measures  have  not  been 
legislated  yet.  While  strictly  limiting  fixed-
terms  contracts  can  help  to  reduce  labour 

promote 

and 

could 

pension 

system.  This 

sustainability  of  state-owned  enterprises  and 
the 
be 
complemented  by  a  clear  top-down  focus  on 
containing  overall  spending  and  deploying  a 
comprehensive 
for  medium-term 
public administration reform, while making the 
tax  system  and  public  expenditure  more 
growth-friendly. 

strategy 

  Private  debt  is  steadily  going  down  but  still 
remains  too  high.  Household  and  corporate 
debt ratios are declining but are still beyond the 
prudential 
country-specific 
estimated 
thresholds  and  are  weighing  on  investments 
and potential growth. However, the exposure to 
risk  is  mainly  in  the  corporate  sector,  which 
still  accounts  for  the  largest  share  of  non-
performing loans. 

  Portuguese  banks  have  steadily  reduced 
their  stock  of  non-performing  loans  while 
keeping  their  capital  broadly  stable.  Banks’ 
profitability  has  also  improved,  which  mainly 
reflects lower impairments. All  major banks in 
the  system  have  now  accessed  the  secondary 
market  for  non-performing 
loans  and  are 
managing  their  stock  of  bad  assets  actively. 
However,  the  quality  of  assets  is  still  low 
compared  to  those  of  banks  in  other  Member 
States of the euro area. Therefore, it is essential 
Portugal  continues  its  efforts  to  reform  the 
insolvency framework and tackle various other 
legal  bottlenecks  to  deal  with  non-performing 
loans. 

  Strong  job  creation  has  led  to  a  significant 
improvement in employment indicators. The 
labour  market  continued  to  improve  during 
2018,  though  at  a  decelerating  pace.  The 
unemployment  rate  dropped  below  7 %  in  the 
fourth  quarter  of  2018,  well  below  the  euro 
area average, and in line with pre-crisis levels. 
Long-term  unemployment  decreased  to  3 % 
and it is now close to the EU average (2.9 %). 
Youth  unemployment  is  also  declining,  but  is 
still  sizeable  compared  to  the  EU  average.  On 
the back of these trends, the number of people 
looking  for  work  has  shrunk,  while  remaining 
sizeable,  and  there  are  indications  of  labour 
supply  shortages  in  certain  market  segments. 
Yet, there  is room to  get  more  people into the 

5 

 
 
market  segmentation,  there  is  a  risk  that  such 
contracts  negatively  affect  investment  and  job 
creation,  particularly  in  seasonal  sectors,  such 
the 
tourism-related  services.  Boosting 
as 
capacity of the labour inspectorate may help to 
tackle  the  misuse  of  temporary  contracts  by 
employers.  

  Poverty  and  inequality  continue  to  improve 
on the back of an improving labour market. 
With  improved  labour  conditions,  the  share  of 
people  at  risk  of  poverty  or  social  exclusion 
decreased in 2017 and is now below pre-crisis 
levels.  However,  the  rate  of  poverty  among 
those  who  are  in  work  remains  above  the  EU 
average. With the exception of pensions, social 
transfers  are  not  effective  in  lifting  people  out 
of  poverty.  The  improved  labour  market  also 
seems  to  be  behind  the  mild  improvement  in 
income inequality, which remains significantly 
above the EU average.  

  Various programmes are aiming to upgrade 
education  and 
skills.  The  Portuguese 
workforce has low qualifications. Digital skills 
are  a  particular  challenge,  with  50 %  of  the 
Portuguese  population  lacking  basic  digital 
skills  compared  to  an  EU  average  of  43 % 
(European  Commission,  Digital  Scoreboard). 
Early  school  leaving  decreased  in  2017,  but  is 
still  above  the  EU  average.  Progress  in  these 
areas follows from policies that have improved 
the vocational, educational and training system, 
launched programmes to enhance digital skills, 
and  introduced  measures  to  increase  higher 
education enrolment. While the share of higher 
education graduates is increasing overall (from 
a  low  level),  the  number  of  graduates  in 
information  and  communication  technologies 
remains low. 

are 

holding 

improving 

efficiency  are 

  Less  administrative  burden  and  greater 
judicial 
the 
business  environment,  while  regulatory 
restrictions 
back 
still 
competition.  The  SIMPLEX+  programme  is 
Portugal’s  main  policy  tool  to  help  reduce 
administrative burden, but is not as efficient in 
sectors, 
addressing  barriers 
licensing. 
particularly  when 
Regulations  are  restricting  some  professional 
business  services  more  than  the  EU  average 

in 
it  comes 

specific 

to 

Executive summary 

and  are  a  significant  barrier  to  competition. 
Various  measures  are  in  place  to  improve 
judicial  efficiency.  Overall,  the  justice  system 
is becoming more efficient but is facing critical 
challenges with disposition time (i.e. the time it 
takes to hand down a decision) and the backlog 
of 
too  high. 
Shortcomings  in  planning  and  monitoring  of 
public procurement hinder competition.   

cases,  which 

are  both 

  Bottlenecks  in  the  innovation  system  are 
affecting 
productive 
Portugal’s 
structural 
specialisation  and  hindering 
change.  After  various  years  of  decline,  the 
share of research and development expenditure 
over GDP increased recently. In parallel, some 
export  sectors  have  been  able  to  increase  their 
technology  intensity  and  policy  support  to 
start-ups  is  improving.  Nonetheless,  Portugal 
remains  specialised  in  low  and  medium-low 
technology  sectors,  with  multiple  challenges 
constraining  its  ability  to  tap  into  knowledge-
intensive  sectors.  Insufficient  links  between 
academia and business hinder the effectiveness 
of  the  innovation  system.  Policies  are  being 
deployed  to  improve  the  working  conditions 
and  employability  of  scientific  professionals, 
promote  investment  in  intangible  assets,  and 
raise digital skills. 

  Energy prices in Portugal are above the EU 
average  and  there  is  room  for  greater 
investment  and  better  internal  and  external 
connectivity of the Iberian Peninsula. Energy 
prices  in  Portugal  are  above  the  EU  average, 
mainly  due  to  the  relatively  high  level  of 
taxation.  Further  cooperation  with  Spain  and 
France  is  fundamental  for  developing  key 
energy  infrastructure  projects.  The  transport 
infrastructure’s  development  would  benefit 
from  higher 
in  maritime  port 
infrastructure,  and  greater  integration  of  the 
railway system with Spain.   

investment 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

GDP  growth  slowed  to  2.1 %  in  the  third 
quarter  of  2018  mainly  due  to weaker  external 
demand.  Household  consumption  growth  in  the 
third  quarter  of  2018  eased  to  2.3 %  year-on-year 
in  line  with  some  moderation  in  job  creation  and 
consumer credit growth. A significant deceleration 
indicates  a 
in  durable  goods  consumption 
consumption 
in  private 
normalization  path 
developments.  Gross 
formation 
fixed  capital 
growth  accelerated  slightly  to  4.3 %  year-on-year 
in  the  third  quarter  of  2018,  driven  by  stronger 
equipment 
construction 
purchases,  while 
investment  remains  weak.  As  broadly  expected, 
lose 
external 
momentum,  particularly  in  terms  of  services, 
trade 
to  a  negative  net  external 
leading 
contribution 
the 
to  growth.  According 
Commission  latest  forecast,  economic  growth  is 
estimated to moderate further in the fourth quarter 
of  2018,  mainly  reflecting  the  slowdown  in 
external demand and full-year growth is projected 
at 2.1 %.  

continues 

growth 

trade 

to 

to 

Graph 1.1:  Contributions to real GDP growth 

Source: Eurostat 

The  moderate slowdown is forecast to continue 
over the medium term driven by lower external 
trade  and  higher  uncertainty.  The  slowdown  in 
job creation points to some further deceleration in 
household  spending,  which  would  be  only  partly 
offset  by  moderate  increase  in  wage  growth.  The 

7 

household  savings  rate,  which  deteriorated  in  the 
second quarter of 2018 reflecting improvements in 
the  financial  situation  and  still  very  low  interest 
rates,  is  expected  to  stabilise  in  2019  and  2020. 
Private consumption growth is therefore forecast to 
weaken  to  2.0 %  and  1.8 %  in  2019  and  2020. 
Investment is set to rebound somewhat in 2019, as 
the  implementation  of  certain  projects  supported 
by  EU  structural  funds  scheduled  for  2018  was 
postponed.  Net  external  trade  is  expected  to 
increase  its  negative  contribution  to  growth  in 
2019,  reflecting  weaker  export  demand  and  solid 
import  growth  in  line  with  still  robust  domestic 
demand  evolution.  GDP  growth  is  expected  to 
stabilise at 1.7 % in both 2019 and 2020. The trend 
reflects  a  move  towards  the  estimated  potential 
growth  and  negative 
less 
dynamic external environment on exports. Risks to 
growth  appear  on  the  downside,  as  the  increased 
global uncertainty could have a negative spill-over 
effect on business investment decisions. 

impacts  from 

the 

the  automotive 

Export  growth  slows  but  its  share  in  GDP 
continues  rising.  The  positive  cycle  in  tourism 
and 
industry  expansion  kept 
exports  growing  above  global  trade  volumes, 
leading  to  an  increase  in  Portugal's  global  market 
share between 2015 and 2017, forecast to continue 
also in 2018. However, export growth is expected 
to  weaken  with  the  maturing  of  the  cycle  and  the 
deterioration  in  the  global  outlook.  The  growth 
pattern  in  tourism  is  also  expected  to  change 
somewhat  as  the  number  of  overnight  stays  is 
stabilising while travel revenues remain dynamic.  

Potential growth 

Potential  growth  converges  towards  the  euro 
area  average.  The  strong  economic  performance 
in  the  country  over  the  past  years  has  been  partly 
driven by the economic cycle but potential growth 
has  also  improved  significantly.  According  to  the 
Commission  2018  autumn  forecast,  potential 
growth  is  already  identical  to  the  EU  average  at 
1.6 % in 2018 and 1.7 % in 2019. This indicates a 
significant improvement from the trough of -1.3 % 
in 2012. The positive economic development over 
the  past  years  has  stabilised  the  country's  per 
capita  income  relative  to  the  EU  average  in  the 
range of 77-78 % but is still insufficient to bring a 
noticeable 
convergence.  The  medium-term 
outlook,  based  on  potential  growth  estimates, 

-12-10-8-6-4-20246810Q3-2009Q1-2010Q3-2010Q1-2011Q3-2011Q1-2012Q3-2012Q1-2013Q3-2013Q1-2014Q3-2014Q1-2015Q3-2015Q1-2016Q3-2016Q1-2017Q3-2017Q1-2018Q3-2018Real final government consumptionReal final private consumptionReal gross fixed capital formationReal inventoriesReal net exportsReal GDP growth (y-o-y)pps,% 
 
 
1. Economic situation and outlook 

Regional disparities 

Portugal  has  diverged  from  the  EU  average  in 
terms of GDP per capita over the last 10 years. 
During  the  years  before  the  crisis,  the  GDP  per 
head in Purchasing Power Standards has fluctuated 
slightly  above  80 %  of  the  EU  average  but 
declined  after  bottoming  down  at  75 %  in  2012. 
Since  2013,  data  show  a  slight  rebound,  however 
insufficient to recover the ground lost, as Portugal 
was  at  76.7 %  of  the  EU  average  in  2017,  nearly 
five  percentage  points  lower  than  the  pre-crisis 
period  of  82 %  in  average.  Thus,  in  terms  of  per-
capita-income Portugal is still a long way off (see 
Graph 1.3) and has not improved over the last two 
decades,  in  particular  compared  to  the  Baltics  or 
the Visegrád countries. 

Graph 1.3:  GDP per capita in PPP 

Source: Eurostat 

GDP  per  capita  ranges  from  102 %  of  the  EU 
average in Lisbon to 65 % in the Norte region. 
At  a  lower  level  of  disaggregation  (Nomenclature 
of  Territorial  Units  for  Statistics  III),  differences 
are higher, ranging from 109 % of Alentejo Litoral 
to  48.5 %  of  Tamega  and  Sousa.  Overall,  the 
regional  differentiation 
is  more  pronounced 
between  the  capital  region  and  the  rest  of  the 
country, and between the coast and the interior of 
the  country.  Despite  a  slow  recovery  since  2013, 
investment  levels  in  Portugal  remain  low  in  all 
regions.  When  considering  the  period  2009-2016, 
the  highest  decline  was 
the 
Autonomous Region of Madeira (-58 %) while the 
region Norte, standing out in terms of the openness 
of  its  economy,  and  the  capital  region,  have 

registered 

in 

shows  that  the  income  gap  is  likely  to  remain 
broadly 
structural 
stable  unless 
improvement is achieved. 

further 

a 

Job  creation  turns  into  a  major  contributor  to 
potential  growth.  Since  2014,  employment 
growth  has  generated  the  largest  contribution  to 
output  and  its  importance  has  been  particularly 
strong  since  2016  (see  Graph  1.2).  Total  factor 
productivity has also contributed substantially, but 
less so in 2017 and 2018. High public and private 
debt,  including  a  large  share  of  non-performing 
loans, have constrained the contribution of capital 
accumulation,  which  has  moved  from  negative 
values by 2017 to neutral in 2018 and is estimated 
to  be  only  slightly  positive  over  the  forecast 
period.  The  extent  of  further  deleveraging  is  thus 
set  to  remain  an  important  limiting  factor  to 
growth  in  the  medium  term  along  with  the  more 
negative demographic situation in Portugal relative 
to the EU average. While employment growth has 
been  quite  strong  recently,  the  deterioration  in 
demographic  trends  is  already  weakening  the 
prospects  of  improving  potential  growth  through 
job creation. This is further raising the importance 
of increasing labour productivity in order to bridge 
the income gaps vis-à-vis more advanced Member 
States.  

Graph 1.2:  Contributions to potential growth 

Source: European Commission 

8 

-2,0-1,5-1,0-0,50,00,51,01,52,02005200620072008200920102011201220132014201520162017201820192020Capital accumulation contributionTotal factor productivity contributionTotal labour (hours) contributionPotential growthy-o-y % changeforecast30405060708090100110200020012002200320042005200620072008200920102011201220132014201520162017PTCZEELVLTSKPLEU28 = 100 Index 
 
 
1. Economic situation and outlook 

Labour market  

to 

in 

the 

fall 

the  year 

significant 

Strong  job  creation  continues,  accompanied  by 
a 
unemployment. 
Unemployment  rate  level  kept  declining  to  an 
annual average of 7 % in 2018, a rate not observed 
since  2003.  Employment  growth  has  been  rapid, 
with  an  annual  rate  of  more  than  3 %  in  2017 
the  average  growth  rate  observed 
(doubling 
between 2014 and 2016) and decelerated to 2.1 % 
in 
third  quarter  of  2018. 
Unemployment  has  consistently  fallen  faster  than 
expected  based  on  observed  economic  growth 
(European  Commission,  2018a),  pointing  to  a 
particularly  job  rich  recovery,  while  regional 
disparities are limited. Meanwhile, the activity rate 
has been inching up since the start of the recovery 
reaching  81 %  in  the  third  quarter  of  2018.  As  a 
reflection  of 
improvements, 
labour  market 
migration  inflows  surpassed  outflows  for  the  first 
time  since  2010.  Nonetheless  ageing  population 
and  low  birth  rates  represent  a  challenge  for  the 
labour  market  in  the  medium  to  long  term  (see 
Section 4.3.1).  

Many  permanent  jobs  were  created,  but  the 
share  of  temporary  contracts  held  steady.  Job 
creation  continued  both 
for  permanent  and 
temporary contracts in 2017 and 2018. Despite the 
creation of about 78 000 permanent jobs during the 
year  to  the  third  quarter  of  2018  (age  20-64),  the 
share  of  workers  with 
temporary  contracts 
decreased only by 0.1 percentage points from 2016 
to  reach  21.6 %  in  Q3-2018,  still  among  the 
highest  in  the  EU.  Meanwhile,  the  share  of  self-
employed  workers  (without  employees)  in  total 
employment  continued  decreasing  (to  10.7 %  in 
2017, against 14.9 % in 2012).        

Wages  are  expected  to  grow  at  a  rate  of  about 
2 % in 2018 and 2019. After years of moderation, 
nominal  compensation  growth  returned  to  a  pace 
close  to  2 %  in  2016  and  kept  steady  since. 
According to the European Commission's Autumn 
Forecast, the growth rate of nominal compensation 
per employee is expected to be 1.8 % in 2018 and 
2.1 %  in  2019.  This  wage  growth  is  still  slower 
the 
than  what  could  be  expected  based  on 
historical 
nominal 
compensation  growth  and  inflation,  productivity 
and  unemployment  in  the  EU  (see  Graph  1.5).  At 
the  same  time,  it  implies  a  slight  appreciation  of 
the  real  effective  exchange  rate  (based  on  unit 

relationship 

between 

witnessed  a  decline  of  investment  more  limited 
than the rest of the country. 

Graph 1.4: 

Regional Convergence in Portugal 

GDP per head in PPS (2016); change in GDP per head (2011-
2016); Investment as % of GDP (average 2010-2015); 
population growth (2010-2016); Productivity as GVA per 
person employed (2016). 
Source: Eurostat, European Commission 

Inflation 

Despite  the  increase  in  energy  prices,  inflation 
remains  low.  Inflation  experienced  significant 
volatility  on  monthly  basis  in  2018  driven  by 
accommodation prices and a significant rebound in 
the  year-average 
energy  prices.  Nevertheless, 
inflation remained low at 1.2 % and is projected to 
increase only marginally to 1.6 % by 2020.   Core 
inflation stood below the headline rate in 2018 but 
is expected to increase at a slightly faster pace over 
the  forecast  period,  as  service  prices  are  expected 
to  pick  up  in  line  with  more  dynamic  wage 
developments.  Following  a  two-year  period  of 
acceleration,  house  prices  moderated  somewhat 
from  an  annualised  growth  rate  of  12.2 %  in 
Q1-2018  to  11.2 %  in  Q2-2018  and  8.5 %  in 
Q3-2018.  This  follows  an  annual  average  growth 
of  9.2 % 
in  2017.  The  recent  statistics  on 
construction volumes, along with the slowdown in 
tourism, 
that  supply  of  real  estate 
properties  is  likely  to  gradually  catch  up  with 
demand.  

indicate 

9 

 
 
1. Economic situation and outlook 

labour  costs),  an 
indicator  of  external  cost 
competitiveness.  There  are  many  reasons  behind 
the  appreciation, 
low  productivity 
including 
growth,  wage  moderation  in  other  euro  area 
Member States, as well as a relatively strong euro.  

to  10.8 %  in  2017  (against  an  EU  average  of 
9.6 %;  more  details 
in  Section  4.3.2).  The 
effectiveness  of  social  transfers  (except  pensions) 
in  lifting  people  out  of  monetary  poverty  remains 
low (see Section 4.3.2).  

Graph 1.5:  Nominal compensation growth: actual and 

predicted based on economic fundamentals 

Source: Eurostat, European Commission 

Social developments   

at-risk-of-poverty  or 

Poverty and social exclusion indicators continue 
to  improve  on  the  back  of  the  employment 
recovery.  The 
social 
exclusion rate  has decreased from 25.1 % in 2016 
to  23.3 %  in  2017,  more  than  4  percentage  points 
below  the  peak  reached  in  2014  and  below  pre-
crisis  levels. This is related to a  drop in the  share 
of  severely  materially  deprived  people  and  in  the 
percentage  of  people  living  in  low  work  intensity 
households  (now  below  the  EU  average).  The  at-
risk-of poverty rate (a measure of relative poverty) 
is also decreasing, from 19 % to 18.3 % thanks to 
improving  income  conditions  of  people  at  the 
bottom  of  the  earnings  distribution.  National  data 
point  to  a  continuing  fall  in  both  rates  in  2018 
(income  year  2017),  respectively  to  21.6 %  and 
17.3 %;  an  improvement  in  the  latter  is  also 
suggested  by  Eurostat  flash  estimates  (3).  Still, 
improved labour market conditions are not leading 
to  a  significant  reduction  in  the  in-work  poverty 
risk  which only declined by  0.1 percentage  points 

(3)  https://ec.europa.eu/eurostat/web/experimental-

statistics/income-inequality-and-poverty-indicators 

Income  inequality  has  been  declining  in  recent 
years  but  remains  above  the  EU  average.   In 
2017, the ratio of incomes earned by the top 20 % 
to the bottom 20 % of the income distribution (the 
S80 / S20 ratio or income quintile ratio, measured 
after taxes and transfers) decreased from 5.9 to 5.7, 
down from a peak of 6.2 in 2014, but significantly 
higher  than  the  EU  average  of  5.1.  The  recent 
improvement was mostly driven by an increase in 
the  share  of  income  earned  by  the  lowest  part  of 
the  distribution,  possibly  related  to  improving 
labour  market  conditions,  the  impact  of  recent 
minimum  wage  increases  on  lower  incomes  and 
improved adequacy of some benefits. At the same 
time,  the  Gini  coefficient  (4)  slightly  decreased 
from  33.9  in  2016  to  33.5  in  2017,  and  is  now 
below  pre-crisis  levels  but  above  the  EU  average 
(30.3). Wealth indicators (e.g. the Gini coefficient 
of net wealth or the share of net wealth owned by 
the  wealthiest  10 %  households,  as  measured  by 
European Central Bank) are close to the euro area 
average. 

External position and competitiveness 

international 

The  country's  net 
investment 
position  (NIIP) (5)  remains  a  significant  source 
of vulnerability. At -104.9 % of GDP at the end of 
2017,  it  is  one  of  the  largest  in  the  EU  and  goes 
beyond 
and 
fundamentally-explained  thresholds,  which  stand 
at  -48 %  and  -26 %  (6)  respectively.    At  the  same 
time,  the  current  account  is  projected  below  the 
estimated benchmark of 2.4 % for closing the gap 
investment  position 
to 

international 

prudential 

estimated 

the  net 

the 

(4)  The  Gini  coefficient  ranges  between  0  and  100.  Lower 

values indicate higher equality.  

(5)  Net  international  investment  position  is  defined  as  the 
difference  between  the  country's  external  financial  assets 
and liabilities. 

(6)  The country-specific prudential threshold denotes the NIIP 
level  beyond  which  the  risk  of  an  external  crisis becomes 
relatively high. The NIIP level  explained by fundamentals 
represents  the  NIIP  that  would  result  if  a  country  had  run 
its  current  account  in  line  with  fundamentals  since  1995. 
For  details  regarding  the  estimation  of  NIIP  benchmarks 
see  Turrini  and  Zeugner  (2018).  For  details  regarding  the 
estimation of current accounts based on fundamentals, see 
Coutinho et al. (2018)  

10 

-4-3-2-10123456200420052006200720082009201020112012201320142015201620172018%Nominal compensation growth consistent with constant UCL-based REERPrediction based on inflation, productivity and unemploymentActual nominal compensation growth 
 
                                                           
                                                           
1. Economic situation and outlook 

The  weak  dynamics  in  labour  productivity 
weighs negatively on unit labour costs. However, 
pressure on cost competiveness remains modest as 
unit  labour  cost  continue  to  move  broadly  in  line 
with trading partners due to sustained modest wage 
developments.  As  regards  non-cost  indicators  on 
competitiveness,  Portugal  has  continued  to  gain 
the  past  years.  This 
market 
improvement  is  observed  for  both  goods  and 
services and is explained by cyclical and structural 
factors (see Section 4.4). 

shares  over 

the  net 

the  structure  of 

prudential level over a 10-year (7). On the positive 
side, 
international 
investment  position  has  improved  at  a  faster  rate 
over  the  past  years  due  to  increased  inflows  of 
foreign  direct  investment.  The  net  international 
investment  position  excluding  non-defaultable 
instruments is estimated at -60.9 % of GDP at end-
2017,  improving  from  -66.5 %  a  year  earlier.  The 
ratio of net external debt to GDP is also improving 
but remains high. 

Graph 1.6:  Current Account and Net International 

Investment Position 

Financial sector 

Financial  sector  performance  is  improving  but 
vulnerabilities  are  still  in  place.  Portuguese 
banks  have  steadily  reduced  their  stocks  of  non-
performing 
loans.  This  has  been  helped  by 
increased  investor  interest,  favourable  economic 
conditions  and  higher  property  prices.  Banks’ 
profitability also improved in the first half of 2018. 
These  trends  are  set  to  continue  but  the  main 
indicators on asset quality and capital adequacy are 
still  weak  compared  to  the  aggregated  balance 
sheets  of  the  euro  area.  In  addition,  there  are  still 
legal bottlenecks in the insolvency framework and 
the 
is  still 
weighing  negatively  on  lending  conditions.  (see 
Sections 3 and 4.2). 

legacy  of  non-performing 

loans 

Graph 1.7: 

Return on equity (%), domestic banks 

Source: Eurostat 

The  current  account  is  expected  to  deteriorate 
over  the  medium  term.  It  is  projected  to  move 
from  a  slightly  positive  balance  in  past  years  to  a 
neutral level in 2018 and slightly negative in 2019-
2020, mainly reflecting deterioration in the balance 
of goods and a slowdown in  tourism. In 2018, oil 
prices  have  also  adversely  affected  the  terms  of 
trade  and  the  nominal  balance  of  trade.  The 
projected  increase  in  absorption  of  EU  structural 
funds  and 
interest  cost  for  domestic 
borrowers should only partially offset the negative 
evolution 
regards 
competitiveness, Portuguese exporters are forecast 
to  gain  market  shares  in  2018  helped  by  the  still 
strong  nominal  revenues  in  tourism  and  the 
capacity  expansion 
the  automotive  sector. 
However, exports are projected to perform broadly 
in line with external demand over the medium term 
(see Section 4.4). 

factors.  As 

lower 

other 

of 

in 

(7)  The current account required to reach a certain NIIP target 
represents  the  average  current  account  balance  as %  of 
GDP,  based on Commission T+10 projections for nominal 
GDP, assuming zero cumulated NIIP valuation effects, and 
a  stable  capital  account  balance.  See  also  European 
Commission, 2015. 

Source: European Central Bank 

11 

-14-12-10-8-6-4-2024-140-120-100-80-60-40-2002040200020012002200320042005200620072008200920102011201220132014201520162017Net direct investmentNet international investment position (NIIP)Marketable debt (portfolio debt instruments, other investment and reserve assets) (net)Current account balance (rhs)% of GDP% of GDP-15-10-50510152020072008200920102011201220132014201520162017PortugalEUEuro Area% 
 
                                                           
 
1. Economic situation and outlook 

higher  cyclical-related  revenue,  higher  property 
income and lower interest expenditure are used to 
compensate  for  increases  in  primary  expenditure 
and  reductions  in  tax  revenue.  The  structural 
balance  is  accordingly  also  projected  to  remain 
broadly  stable  in  2019  (at  -0.9 %  of  GDP),  while 
the  structural  primary  balance  is  set  to  slightly 
deteriorate (to 2.4 % of GDP). Under the forecast’s 
no-policy-change assumption, absent any new one-
off  impact,  the  headline  deficit  is  set  to  go  down 
slightly  to  0.2 %  of  GDP  in  2020,  while  the 
structural  balance 
to  remain  broadly 
is  set 
unchanged. Risks to the fiscal outlook are tilted to 
the  downside  and  are  linked  to  uncertainties 
surrounding  the  macroeconomic  outlook  and  the 
potential deficit-increasing impact of bank support 
measures. 

The  debt-to-GDP ratio is  projected to continue 
its  gradual  decrease,  albeit  at  a  decelerating 
pace.  After  falling  by  4.5  percentage  points  to 
124.8 %  in  2017,  the  general  government  gross 
debt-to-GDP  ratio  is  forecast  to  further  decline  to 
121.5 % in 2018, 119.2 % in 2019 and 116.8 % in 
2020, mainly due to primary budget surpluses and 
the 
impact  of  nominal  GDP  growth.  While 
expected  to  have  still  exceeded  more  than  3 
percentage points in 2018, the decrease in the debt 
ratio  is  set  to  decelerate  to  around  2  percentage 
points  in  2019  and  2020  mostly  due  to  higher 
stock-flow adjustments. 

Private indebtedness 

Private debt has declined over recent years and 
the  outlook  remains  favourable.  In  consolidated 
terms,  the  private  debt-to-GDP  ratio  has  fallen 
steadily  from  its  peak  of  210.3 %  at  the  end  of 
2012  to  162.2 %  at  the  end  of  2017,  declining  in 
both the corporate and the household sectors. Data 
for  2018  confirm  that  the  process  of  deleveraging 
continues  albeit  at  a  slower  pace.  Yet,  debt  ratios 
the  estimated  country  specific 
remain  above 
prudential  and 
thresholds.  For 
fundamental 
households, the debt ratio dropped to 69 % of GDP 
at  the  end  of  2017  relative  to  prudential  and 
fundamental  levels  estimated  at  38 %  each.  For 
corporates, the debt ratio dropped to 93 % of GDP 
relative to prudential and fundamental benchmarks 
of 57 % and 66 % respectively.  

Public finances 

Public  finances  are  benefiting  from  higher 
revenue on the back of strong domestic demand 
and  favourable  labour  market  conditions,  as 
well  as  from  decreasing  interest  expenditure. 
is 
The  general  government  headline  deficit 
projected  to  have  decreased  from  3.0 %  in  2017 
(0.9 %  of  GDP  net  of  one-offs  (8))  to  0.7 %  of 
GDP  in  2018  (0.3 %  of  GDP  net  of  one-offs  (9)) 
according  to  the  Commission’s  2018  Autumn 
Forecast,  mainly  due  to  higher  cyclical-related 
interest  expenditure  and 
revenue,  decreasing 
lower-than-budgeted  public 
investment.  The 
structural balance is projected to have improved by 
around 0.3 % of GDP to -0.9 % of GDP, reflecting 
the  corresponding  decline  in  interest  expenditure, 
while the structural primary balance is projected to 
have remained unchanged at 2.5 % of GDP. 

In  2019  and  2020,  the  general  government 
headline  deficit  net  of  one-offs  and 
the 
to  remain 
structural  deficit  are  expected 
broadly  stable  in  the  absence  of  further  fiscal 
consolidation.  According  to  the  Commission’s 
2018  Autumn  Forecast,  the  headline  deficit  is 
projected  to  decrease  only  slightly  to  0.6 %  of 
GDP  in  2019  (0.2 %  of  GDP  net  of  one-offs),  as 

(8)  In 2017 the one-offs include in particular the 2.0 % of GDP 
impact  of  the  public  recapitalisation  of  Caixa  Geral  de 
Depósitos. 

(9)  In 2018 the one-offs include in particular the 0.4 % of GDP 
impact  of  the  activation  of  the  Novo  Banco  contingent 
capital mechanism. 

12 

 
                                                           
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - Portugal 

(1) NIIP excluding direct investment and portfolio equity shares         
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.         
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation         
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

13 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)1.7-1.40.51.92.82.11.71.7Potential growth (y-o-y)0.9-0.3-0.20.81.41.61.71.6Private consumption (y-o-y)2.0-1.61.12.42.3...Public consumption (y-o-y)1.5-1.1-0.40.80.2...Gross fixed capital formation (y-o-y)0.6-7.70.92.39.2...Exports of goods and services (y-o-y)6.11.65.84.47.8...Imports of goods and services (y-o-y) 5.7-2.67.04.78.1...Contribution to GDP growth:Domestic demand (y-o-y)1.8-2.80.82.13.0...Inventories (y-o-y)0.2-0.20.2-0.10.0...Net exports (y-o-y)-0.31.5-0.5-0.10.0...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.3-1.1-0.10.81.11.21.00.8Capital accumulation (y-o-y)0.80.3-0.3-0.2-0.10.00.10.2Total factor productivity (y-o-y)0.50.40.20.30.40.50.60.6Output gap-0.3-1.2-3.0-0.70.71.21.41.5Unemployment rate8.712.014.411.29.07.16.35.9GDP deflator (y-o-y)3.00.61.71.81.51.41.51.5Harmonised index of consumer prices (HICP, y-o-y)2.51.90.30.61.61.21.31.6Nominal compensation per employee (y-o-y)3.20.40.71.71.61.82.12.1Labour productivity (real, person employed, y-o-y)1.80.60.60.3-0.5...Unit labour costs (ULC, whole economy, y-o-y)1.3-0.20.21.42.11.81.61.2Real unit labour costs (y-o-y)-1.6-0.8-1.5-0.30.50.40.1-0.4Real effective exchange rate (ULC, y-o-y)0.0-2.1-0.81.62.21.3-0.6-0.7Real effective exchange rate (HICP, y-o-y)0.4-0.8-1.01.70.70.9-1.0-0.4Savings rate of households (net saving as percentage of net disposable income)1.00.3-2.2-3.7-4.1...Private credit flow, consolidated (% of GDP)13.94.3-3.0-2.11.3...Private sector debt, consolidated (% of GDP)174.7203.3190.7169.3162.2...of which household debt, consolidated (% of GDP)81.690.581.572.168.9...of which non-financial corporate debt, consolidated (% of GDP)93.1112.7109.297.193.3...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)1.24.111.914.411.0...Corporations, net lending (+) or net borrowing (-) (% of GDP)-5.3-2.14.11.73.00.80.40.1Corporations, gross operating surplus (% of GDP)19.820.921.621.921.321.321.621.9Households, net lending (+) or net borrowing (-) (% of GDP)1.73.02.61.31.00.91.00.9Deflated house price index (y-o-y)-1.6-2.91.16.17.9...Residential investment (% of GDP)5.73.72.52.62.8...Current account balance (% of GDP), balance of payments-9.7-8.10.60.60.50.20.10.0Trade balance (% of GDP), balance of payments-8.1-5.41.52.01.8...Terms of trade of goods and services (y-o-y)-0.1-0.12.01.7-0.7-0.10.20.2Capital account balance (% of GDP)1.41.51.41.00.9...Net international investment position (% of GDP)-76.2-104.9-116.0-105.5-104.9...NIIP excluding non-defaultable instruments (% of GDP) (1)..-75.7-66.5-60.9...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)..211.4192.9186.4...Export performance vs. advanced countries (% change over 5 years)5.5-1.50.72.89.5...Export market share, goods and services (y-o-y)..2.14.13.4...Net FDI flows (% of GDP)0.2-2.5-1.3-1.7-4.3...General government balance (% of GDP)-4.9-7.6-5.5-2.0-3.0-0.7-0.6-0.2Structural budget balance (% of GDP)..-2.3-2.0-1.3-1.0-1.0-1.0General government gross debt (% of GDP)66.797.8129.5129.2124.8121.5119.2116.8Tax-to-GDP ratio (%) (3)34.334.437.136.636.937.337.237.3Tax rate for a single person earning the average wage (%)22.323.127.627.6....Tax rate for a single person earning 50% of the average wage (%)13.913.411.011.0....forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

66 % 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations (CSRs) addressed to Portugal 
have recorded at least ‘some progress’ (10). 34 % 
of the  country-specific recommendations recorded 
'limited'  or  'no  progress'  (see  Graph  2.1).  Most 
progress  was  observed  for  CSRs  associated  to 
challenges  in  the  labour  market,  education  and 
social  policies, 
the  financial  sector,  and  the 
business  environment.  Progress  with  regard  to 
challenges  related  to  fiscal-structural  issues  has 
is 
limited.  In  all,  further  effort 
been  more 
warranted to effectively tackle these challenges. 

a 

in 

started 

Over  recent  years,  Portugal  has  made  limited 
fiscal-structural 
addressing 
progress 
challenges.  Portugal 
bottom-up 
efficiency-enhancing spending review in 2016 that 
has  been  progressively  broadened 
to  cover 
additional policy areas. The entry into force of the 
new  accrual-based  public  accounting  framework 
and  of  the  2015  Budget  Framework  Law  have 
however  witnessed  repeated  delays,  with  full 
effective implementation having been postponed to 
January  2019  and  April  2020,  respectively. 
Although  efforts  were  made  to  improve  the 
financial  sustainability  of  state-owned  enterprises, 
the  objective  of  achieving  an  overall  net  income 
close  to  equilibrium  has  been  moved  forward  by 
to  2019.  While  past  reforms  had 
one  year 
the 
improved 
the 
long-term  sustainability  of 
pension 
recent  balance-deteriorating 
system, 
initiatives  and  the  growing  pressure  from  the 
ageing  population  would  point  to  the  need  for 
compensatory  balance-improving  measures  of  a 
structural  nature 
the  overall 
the  pension  system.  Despite 
sustainability  of 
steady  efficiency-improving  efforts  in  the  health 
sector,  hospital  arrears  continue 
to  pose  a 
substantial challenge. A new  programme for 2019 
the  underlying  causes  of 
aiming 
persistent  hospital  arrears  represents  a  promising 
first  step  in  the  right  direction.  Finally,  progress 
has been made towards improving tax compliance 
and making tax collection more efficient. 

to  address 

strengthen 

to 

Over  the  past  years  Portugal  improved  debt 
restructuring mechanisms and reduced the debt 
bias. The high private indebtedness and large share 

10 For the assessment of other reforms implemented in the past, 

see in particular Section 4. 

of  non-performing  loans  accumulated  during  the 
crisis  increased  the  need  for  debt  restructuring 
mechanisms.  These  have  been  put 
in  place 
allowing  viable  firms  to  engage  in  restructuring 
processes  at  an  early  stage.  In  order  to  provide 
incentives  for  firms  to  use  more  capital  financing 
Portugal has also reduced the debt bias in taxation. 
Measures  have  also  been  taken  to  improve  the 
sustainability  of  state-owned  enterprises  but  their 
indebtedness remains high. 

population,  Portugal 

training  opportunities 

The vocational educational and training system 
has  a  wider  offer  and  active  labour  market 
policies  improved.    In  a  context  of  low-skilled 
provided  more 
adult 
to  different 
vocational 
educational  levels  and  is  achieving  an  increased 
share of employability for these graduates. In order 
to  tackle  youth  and  long-term  unemployment, 
active  labour  market  policies  are  improving  in 
terms  of  outreach  and  engagement  while  public 
employment  services  upgraded  coordination  with 
social  services.  Nevertheless,  effectiveness  is  still 
an issue when comparing with EU Member States 
and requires monitoring.  

Portugal  has  adopted  measures  to  improve  the 
business  environment,  as  well  as  the  efficiency 
of  network  industries.  Various  measures  have 
been  effective  in  reducing  the  administrative 
burden,  although  sector-specific  procedural  rules 
remain  a  significant  challenge.  Energy  efficiency 
has  improved  on  the  back  of  measures  targeting 
the  sustainability  of  the  energy  system.  There  has 
also  been  progress  in  improving  efficiency  in  the 
transport  sector,  particularly 
in  railways  and 
maritime ports.  

The  transparency  and  efficiency  of  the  judicial 
system has improved. Measures have been able to 
reduce  the  case  backlog.  Although  direct  awards 
remain  sizeable,  greater  transparency  has  been 
achieved  with  regard  to  concessions  and  public 
private partnerships. 

Portugal  has  made  some  progress (11) 
addressing 

in 
country-specific 

2018 

the 

(11)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact 

14 

 
 
                                                           
                                                           
2. Progress with country-specific recommendations 

Graph 2.1:  Overall multiannual implementation of 
2011-2018 CSRs to date 

* The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact 
** 2011 annual assessment: Different CSR assessment 
categories 
** The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first adopted. 
*** The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first adopted. 
Source: European Commission 

to 

to 

the 

promote 

reviewing 

continuing 

including  by 

increase  enrolment 

recommendations.  Limited  progress  has  been 
made  with  respect  to  the  fiscal-structural  part  of 
the 
country-specific  recommendation  1,  with 
cost-
government 
effectiveness  measures  in  the  health  sector.  Yet, 
hospital  arrears  continue  to  pose  a  substantial 
challenge. There has also been limited progress in 
improving  the  financial  sustainability  of  state-
owned  enterprises.  There  has  been  some  progress 
in  addressing  country-specific  recommendation  2, 
with  Portugal  promoting  hiring  on  open-ended 
contracts, 
legal 
framework  in  consultation  with  social  partners. 
There  has  also  been  some  progress  on  skills  and 
education  thanks  to  new  policy  measures  (in 
particular 
in  higher 
education) and the implementation of programmes 
such as Qualifica and the National Adult Literacy 
Plan.  For  country-specific  recommendation  3, 
there  has  been  some  progress  on  increasing  the 
efficiency of insolvency and recovery proceedings, 
and  for  improving  access  to  finance.  With  regard 
to  the  business  environment,  there  has  been  some 
progress 
through  simplifications  for  business-
administration  relations  (such  as  E-government 
initiatives),  largely  through  measures  within  the 
SIMPLEX+  programme.  There 
is  also  some 
progress improving judicial efficiency. Portuguese 
Administrative  proceedings  continue,  however,  to 
be among the most lengthy in the EU. No progress 
has taken place removing regulatory restrictions in 
professional  services.  The  Competition  Authority 
the  Organisation  for  Economic 
jointly  with 
Cooperation  and  Development  (OECD)  presented 
to  the  government  suggested  reforms  to  lift 
in  13  self-regulated  professions. 
restrictions 
Portugal 
such 
this  stage  no  clear 
recommendations  but  at 
timeline is set.  

is  expected 

follow  up 

to 

15 

No Progress4%Limited Progress30%Some Progress52%Substantial Progress9%Full Implementation5% 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of 2018 CSR implementation 

Source: European Commission 

16 

Commitments  Summary assessment  2018 country-specific recommendations (CSRs)   Limited progress in addressing CSR 1 CSR 1: Ensure that the nominal growth rate of net primary government expenditure does not exceed 0.7 % in 2019, corresponding to an annual structural adjustment of 0.6 % of GDP. Use windfall gains to accelerate the reduction of the general government debt ratio. Strengthen expenditure control, cost effectiveness and adequate budgeting, in particular in the health sector with a focus on the reduction of arrears in hospitals. Improve the financial sustainability of state-owned enterprises, in particular by increasing their overall net income and by reducing debt.   Limited Progress Limited progress has been achieved in putting persistently-high hospital arrears on a steadily declining path.  Limited Progress Limited progress has been achieved in improving the financial sustainability of state-owned enterprises (SOEs).   Some progress in addressing CSR 2 CSR 2: Promote an environment conducive to hiring on open-ended contracts, including by reviewing the legal framework in consultation with social partners. Increase the skills level of the adult population, including digital literacy, by strengthening and broadening the coverage of the training component in adult qualification programmes. Improve higher education uptake, namely in science and technology fields.  Some progress in promoting an environment conducive to hiring on open-ended contracts  Some progress in increasing the skills level of the adult population, including digital literacy.  Some progress in improving higher education uptake, namely in science and technology fields.  Some progress in addressing CSR 3 CSR 3: Increase the efficiency of insolvency and recovery proceedings and reduce impediments to the secondary market for non-performing loans. Improve access to finance for businesses. Reduce the administrative burden by shortening procedural deadlines, using more tacit approval and reducing document submission requirements. Remove persistent regulatory restrictions by ensuring a proper implementation of the framework law for highly regulated professions. Increase the efficiency of administrative courts, inter alia by decreasing the length of proceedings.  Some progress in increasing the efficiency of insolvency and recovery proceedings and reduce impediments to the secondary market for non-performing loans.  Some progress has been made to improve access to finance.  Some progress in reducing the administrative burden.   No progress in removing persistent regulatory restrictions.  Some progress in increasing the efficiency of administrative courts.   
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and 
fostering growth and competitiveness development in Portugal 

Portugal  is  one  of  the  largest  beneficiaries  of  EU  funds.  Financial  allocation  from  European 
Structural  and  Investment  Funds  aimed  to  support  Portugal  in  facing  development  challenges, 
amount  to  up  to  EUR 25.9  billion  in  the  current  multiannual  financial  framework,  potentially 
representing  around  1.9 %  of  GDP  annually.  By  the  end  of  2018,  some  EUR 21.1  billion  had 
already  been  allocated  to  specific  projects.  In  addition,  EUR 674  million  had  been  allocated  to 
specific  projects  on  transport  networks,  energy  and  digital  projects,  through  the  Connecting 
Europe Facility. Furthermore, numerous Portuguese research institutions and firms have benefited 
from other EU funding instruments, notably Horizon 2020 which provided EUR 560 million. 

EU  funding  has  helped  to  address  policy  challenges  identified  in  the  2018  CSRs.  Actions 
financed  include  promoting  research  and  innovation  and  synergies  between  academia  and 
business;  improving  access  to  finance  for  small  and  medium-sized  enterprises,  stimulating 
entrepreneurship  and  innovation.  This  has  paved  the  way  for  over  13 000  enterprises  to  receive 
support  with  over  1 000  receiving  support  to  introduce  new  products  and  600  enterprises 
cooperating  with  research  institutions,  favouring  overall  the  creation  of  37 000  new  jobs.  EU 
investments  supported  by  the  European  Social  Fund  contribute  to  increasing  the  skills  level, 
reducing early school leaving and favouring the educational attainment. 

The Commission can provide tailor-made technical support upon a Member State's request 
via the Structural  Reform  Support Programme to  help Member States implement growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or 
other  national  reforms.  Portugal,  for  example,  is  receiving  support  to  develop  the  legal 
foundations  and  new  processes  for  the  new  Budget  Framework  Law  and  to  implement  the  new 
Accounting  Framework.  The  Commission  is  also  assisting  the  authorities  in  their  efforts  to 
improve  the  functioning  of  the  inter-ministerial  coordination  platform,  which  estimates  the 
administrative burden in the existing regulatory framework in order to promote a better regulatory 
framework and to reduce gold-plating of EU legislation. In addition, in 2018, work has started on 
designing a National Plan  for Adult  Literacy. Moreover, in the  financial  sector, support is being 
delivered to identify impediments to and reform priorities for enhanced access to capital markets.  

EU  funds  strengthen  the  administrative  capacity  of  national,  regional and  local  authorities 
and the civil society. European Structural and Investment Funds alone mobilise additional private 
capital  by  allocating  about  EUR 726  million  in  the  form  of  loans,  guarantees  and  equity.  In 
addition, the European Fund for Strategic Investment has allocated EUR 2.4 billion to projects in 
Portugal,  which  is  set  to  trigger  a  total  of  EUR 8.7  billion  in  additional  private  and  public 
investments.  Portugal  ranks  3rd  as  to  the  overall  volume  of  approved  operations  as  a  share  of 
GDP.  25  projects  involving  Portugal  have  so  far  been  approved  under  the  infrastructure  and 
innovation window of European Fund for Strategic Investment. They amount to EUR 1.2 billion in 
total  financing,  which  should,  in  turn,  generate  EUR 4.3  billion  in  investments.  Under  the  small 
and  medium-sized  enterprises  component,  15  agreements  with  intermediary  banks  have  been 
approved  for  a  total  of  EUR 1.3  billion,  which  should  mobilise  around  EUR 4.4  billion  of  total 
investment.  11 951  small  and  medium-sized  enterprises  and  mid-cap  companies  are  expected  to 
benefit  from  this  support.  ‘Science4You’  is  a  notable  example  of  such  projects  in  Portugal. 
‘Science4You’  is  a  Portuguese  company  specialised  in  developing  and  producing  scientific  and 
educational toys to improve the cognitive capacities of children. The European Investment Bank is 
providing the company a EUR 10 million loan to develop new products and expand its sales. 

https://cohesiondata.ec.europa.eu/countries/PT 

17 

 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

Introduction 

to  assess 

for  Portugal 

in-depth  review 

The  2019  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken 
the 
imbalances 
persistence  or  unwinding  of 
(European Commission, 2018b). In Spring 2018, 
Portugal  was  identified  as  having  macroeconomic 
imbalances  (European  Commission,  2018a).  The 
imbalances 
to 
external,  public  and  private  debt,  banking  sector 
vulnerabilities  and  weak  labour  productivity.  This 
chapter summarises the findings of the analyses in 
the  context  of  the  MIP  in-depth  review  that  is 
contained in various sections in this report (12) (13).  

identified  related 

in  particular 

3.1. 

IMBALANCES AND THEIR GRAVITY 

the 

estimated 

prudential 

Portugal's net international investment position 
remains  a  significant  source  of  vulnerability.  It 
is  one  of  the  most  negative  in  the  EU  and  goes 
and 
beyond 
fundamentally-explained  thresholds,  which  stand 
at  -48 %  and  -31 %,  respectively.  On  the  positive 
side, 
international 
investment  position  has  improved  at  a  faster  rate 
over  the  past  years  due  to  increased  inflows  of 
foreign direct investment. The ratio of net external 
debt to GDP is also improving but remains high. 

the  structure  of 

the  net 

Current  account  developments  point  to  a 
slowdown  in  external  adjustment.  The  current 
account  moved  to  a  small  surplus  in  2016-2017.  
However,  the  latest  estimates  point  to  a  broadly 
balanced  performance  in  2018  and  small  deficits 
thereafter.  This  is  well  below  the  current  account 
value  required  to  reach  the  net  international 
investment  position  target  over  a  10-year  period. 
The capital account is set to retain a broadly stable 
surplus  supported  by  net  inflows  of  EU  transfers. 
Overall,  the  combined  impact  of  the  projected 
current  and  capital  accounts  suggests  that  the 
balance of external flows would bring only a very 
the  stock  of  external 
slow  adjustment 

to 

(12)  Analyses relevant for the in-depth review can be found in 
the  following  sections:  Public  finances  (Section  4.1); 
Financial  sector  and  private  sector  debt  (Section  4.2); 
Labour market (Section 4.3); and Investment (Section 4.4). 
(13)  An  asterisk  indicates  that  the  analysis  in  the  section 

contributes to the in-depth review under the MIP. 

imbalances.  Consequently,  it  is  expected  that  the 
net  international  investment  position  would  only 
reach the estimated prudential threshold by around 
2030.  

the 

corporate 

Private debt is on a steady downward path but 
remains  above  prudential  and  fundamental 
benchmarks (14).  Both 
and 
household  debt  ratios  are  beyond  the  estimated 
country-specific  prudential  and 
fundamentals-
based  benchmarks.  The  legacy  of  non-performing 
loans  remains  a  key  weakness  in  the  financial 
system.  The  risk  exposure  is  mainly  to  the 
corporate  sector, which accounts  for two thirds of 
all non-performing loans.  

Public debt continues to exceed significantly the 
Treaty  reference  value  of  60 %  of  GDP. 
However,  the  general  government  gross  debt-to-
GDP  ratio  started  declining  in  2017  and  is  set  to 
remain  on  a  downward  path  over  the  forecast 
horizon. Upgrades in credit ratings have also been 
financing 
contributing 
conditions.  Nevertheless, 
interest  burden 
remains  one  of  the  highest  in  the  EU.  In  2018, 
episodes  of  volatility  in  the  European  bond 
repercussions  on 
limited 
markets  had  only 
Portuguese 
potential 
contagion risks require continuous monitoring. 

favourable 
the 

to  more 

sovereign 

yields 

but 

The strong increase in job creation in 2017 and 
the first half of 2018 substantially improved the 
country's labour market performance. Headline 
unemployment  dropped  to  7 %  in  2018,  which  is 
well below the  euro area average and close  to the 
EU  average.  Long-term  and  youth  unemployment 
also decreased significantly and the labour market 
is not considered an imbalance or adjustment issue 
anymore. 

(14)  Fundamentals-based  benchmarks 

are  derived 

from 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
which the probability of a banking crisis is relatively high, 
minimising the probability of missed crisis and that of false 
alerts.  Methodologies 
in  European 
are 
Commission  (2017)  and updates  to  the  methodology  have 
been  subsequently  proposed  in  European  Commission 
(2018).   

describe 

18 

 
 
                                                           
                                                           
 
3. Summary of the main findings from the MIP in-depth review 

to 

continues 

Low  productivity 
restrain 
Portugal’s growth potential. It is also negatively 
affecting  the  country’s  capacity  to  correct  stock 
imbalances and dampens income convergence. The 
weak  performance  is  mainly  explained  by  low 
labour  skills  and  low  level  of  investment  and 
capital accumulation while total factor productivity 
has been rising over the past  years. Specialisation 
in  low  value  added  sectors  as  well  as  the  large 
share  of  small  firms  also  weigh  negatively  on 
Portugal’s  productivity  rates  vis-à-vis  the  EU 
average. 

Risks  linked  to  the  increase  in  house  prices 
appear  to  be  contained  for  the  time  being.  The 
rebound  in  house  prices  since  2016  is  seen  as  a 
correction from previously low levels of valuation 
and  construction  activity  and  is  currently  not 
considered  an  imbalance.  Moreover,  the  stock  of 
housing loans relative to GDP is declining and new 
housing  loans  are  substantially  below  the  rates 
reached before the crisis in 2008.  Nevertheless, it 
warrants  closer  monitoring  if  the  current  rapid 
pace  of  real  house  price  growth  is  sustained  over 
the medium term. The increase in house prices also 
risks having a negative impact on the affordability 
of  housing  for  socially  vulnerable  groups  (see 
Section 4.3.2). 

3.2. 

EVOLUTION, PROSPECTS AND POLICY 
RESPONSES 

Policy  efforts  to  address  external  imbalances 
are focused on measures to support exports and 
improve the business environment. This includes 
targeted  support  to  firms  entering  global  markets 
and measures to reduce the administrative burden, 
increase  competition  in  business  services  and 
regulated  professions,  and  improve  the  judicial 
system.  Some  of  these  policies  promote  the 
adoption  of  digital  technologies  by  small  and 

medium-sized  enterprises,  through  the  Indústria 
4.0  programme.  Portugal  is  one  of  the  least 
restrictive  host  economies 
foreign  direct 
investment  and  has  taken  tailored  measures  to 
attract  this  type  of  capital.  Yet,  a  number  of 
weaknesses 
framework 
persist,  including  the  areas  of  professional  and 
transport services. 

the  administrative 

to 

in 

Private debt has declined over recent years and 
the  outlook  remains  favourable.  Data  for  2018 
confirm that the process of deleveraging continues 
albeit  at  a  slower  pace  driven  mainly  by  the 
positive  denominator  impact  of  economic  growth 
(see  Section  4.2).  Since  the  peak  in  2012,  private 
debt dropped from 210.3 % of GDP to 162.2 % at 
the end of 2017. This shows  that  more than 60 % 
of  the  deviation  from  the  indicative  threshold  of 
133 %  has  been  corrected  in  this  period.  Overall, 
the pace of adjustment appears adequate. 

The  high  stock  of  non-performing 
loans 
remains a key weakness in the financial system 
but  the  adjustment  process  is  advancing.  The 
aggregate  non-performing  loans  ratio  dropped  but 
remains  among  the  highest  in  the  EU  and  well 
above the EU average. Portugal is implementing a 
three-pillar 
reduction 
strategy. The reduction in non-performing loans is 
broadly  in  line  with  the  targets  in  the  strategy 
where  the  banks  with  the  largest  non-performing 
loans  ratios  have  submitted  plans  for  substantial 
reduction in bad loans by 2021.  

non-performing 

loans 

Public  debt  started  declining  in  2017  and  is 
projected  to  decrease  further  to  around  117 % 
of  GDP  by  2020.  The  recent  upward  revision  of 
debt-increasing stock-flow adjustments and deficit-
increasing  one-offs,  as  shown  in  both  the  2019 
draft  budgetary  plan  and  the  Commission’s  2018 
Autumn  Forecast,  have  made 
the  structural 
adjustment  needed  to  comply  with  the  minimum 

Table 3.1: 

Sensitivity analysis: current account balance and net international investment position 

The table above shows the annual average current account balance required to reach a certain NIIP by 2027, based on 
different assumptions for GDP growth, assuming no NIIP valuation effects and a stable capital account set at its median 
forecast over 2017-19 (0.9 % of GDP). See also European Commission, 2015, 'Refining the methodology for NIIP-based current 
account benchmarks', LIME Working Group 17 June 2015. 
Source: European Commission 

19 

Low nominal GDP growth (2% avg 2018-27)Baseline scenario (3% avg 2018-27)High nominal GDP growth (4% avg 2018-27)NIIP stabilisation-2,9-3,9-4,9NIIP at -70% of GDP0,90-0,7NIIP at -48% of GDP3,32,51,9NIIP at -35% of GDP4,743,4 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

productivity. The low level of qualification of the 
adult population also plays an important role. 

3.3.  OVERALL ASSESSMENT 

to 

correct 

continues 

Portugal 
its 
macroeconomic  imbalances.  A  major  progress 
has  been  achieved  in  terms  of  labour  market 
indicators. Strong employment growth has resulted 
into a drastic correction of the unemployment rate, 
which has fallen significantly below the euro area 
average,  and  is  now  in  line  with  pre-crisis  levels. 
Deleveraging  in  the  private  sector  is  advancing  at 
an  adequate,  albeit  slowing,  pace  and  banks  are 
reducing  their  non-preforming  loans  as  planned. 
As  of  2017,  the  public  debt  has  also  moved  on  a 
downward  trend  benefiting  from  the  favourable 
economic  conditions.  The  main  areas  of  slow 
adjustment refer to the net external position, where 
the pace of improvement has weakened, and labour 
productivity, which remains below the EU average 
and  is  projected  to  increase  only  marginally. 
Productivity 
remain 
potential 
restrained  by  the  low  level  of  investment,  as 
Portugal’s share of gross fixed capital formation in 
GDP is among the lowest in the EU. 

growth 

and 

to 

relevant 

benchmarks 

Stock  imbalances  are  still  high  despite  positive 
flows.  Although  all  main  indicators  on  the  stocks 
of  imbalances  are  moving  in  the  right  direction, 
distance 
remains 
significant.  The  main  vulnerabilities  relate  to  the 
high  stock  of  public  debt  and  external  liabilities. 
Private  indebtedness  is  also  among  the  highest  in 
the  EU  but  the  underlying  risks  have  subsided 
substantially.  As  imbalances  in  the  labour  market 
have been largely corrected over the past years, the 
main  challenges  are  now  concentrated  on 
addressing  skills  and  removing  bottlenecks  that 
impact investment and productivity. 

sustainability 

Policy  progress  differs  across  areas.  While 
measures  are  being  deployed  to  address  hospital 
arrears,  debt 
further 
budgetary  consolidation  and  growth-enhancing 
structural  measures.  Various  measures  address 
challenges related to the administrative burden and 
judicial  efficiency,  while 
the  progress  on 
addressing barriers to competition is more modest. 

requires 

linear  structural  adjustment  more  demanding.  The 
Commission’s debt sustainability analysis points to 
a  high  level  of  sustainability  risks  over  the 
medium-term  (see  section  4.1.1).  In  particular,  it 
indicates that the debt-to-GDP ratio remains highly 
sensitive  to  shocks  to  nominal  GDP  growth, 
interest rates and changes to the structural primary 
balance  as  compared  with  the  Commission’s  no-
policy-change  baseline  scenario.  The  public 
spending  review  in  place  since  March  2016  is 
slowly 
implemented 
measures.  The  review  was  originally  focused  on 
education,  healthcare,  state-owned  enterprises, 
public  real  estate  management  and  centralised 
public procurement, and the government has since 
committed  to  add  the  justice  and  internal  affairs 
sectors. However, hospital arrears continue to pose 
a  substantial  challenge  despite  recurrent  capital 
injections,  while  attempts  to  tackle  underfunding 
and inefficiency  may only progress gradually (see 
section 4.1.2). 

translated 

being 

into 

significant  although 

The  labour  market  continues  to  improve  at  a 
strong pace. Unemployment dropped to below the 
levels prior to the crisis. Employment growth also 
remained 
slowing.  The 
activity rate (20-64 years old) stabilised at 81 % in 
2018  as  the  labour  slack,  though  still  relevant, 
declined  substantially.  Growing  signs  of  labour 
supply  shortages  in  some  market  segments  put 
upward  pressures  on  wages  helped  also  by  the 
unfreezing  of  career  progressions  in  the  public 
sector.  Yet,  wage  growth  is  projected  to  remain 
moderate  in  the  medium  term  along  with  the 
expected slowdown in the economic growth. 

and 

services 

Labour  productivity  declined  slightly  in  2016-
2017 and was broadly stable in 2018. The weak 
performance is mostly cyclical due to the high rate 
of  job  creation  in  labour  intensive  sectors  such  as 
tourism-related 
residential 
construction  in  the  absence  of  stronger  capital 
accumulation.  In  the  second  half  of  2018,  labour 
productivity  has  started  to  improve  slightly  as  the 
pace  of  job  creation  dropped  slightly  below  GDP 
is 
growth 
projected  to  gradually  improve  in  2019  and  2020 
on  expectations  for  a  less  strong  and  more  broad-
based 
low 
investment  levels  and  some  product  and  labour 
markets'  rigidities  are  still  having  a  negative 
and 
impact 

terms.  Productivity 

employment.  Still 

in  annualised 

strengthening 

investment 

increase 

on 

in 

20 

 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.2: 

MIP assessment matrix 

(Continued on the next page) 

21 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External balance The net international investment position (NIIP) remains very negative (-104.9 % of GDP at the end of 2017) standing well beyond the estimated prudential threshold of -48 %. Risks are however partly offset by the increased share of non-defaultable instruments. The current account posted a surplus of 0.2 % of GDP in 2017, which is still short of the estimated 2.4 % of GDP per year that would be required to reach the country specific prudential NIIP benchmark over a 10-year period. Portugal has made significant progress in adjusting its external imbalances, including improving competitiveness and current account flows. Yet, the pace of external adjustment has slowed and the current account is projected to be broadly balanced in 2018 and slightly negative in both 2019 and 2020. These projections suggest that the pace of adjusting the stock of external imbalances is slowing. Unit labour costs are increasing at a rate similar to main trading partners. Exports have recently gained market shares but their medium-term growth is set to weaken.  Progress has been made in past years to tackle rigidities in product and labour markets. But further measures to boost productivity and improve cost and non-cost competitiveness remain essential to a more significant external balance improvement. Risks that the positive economic cycle increases upward pressure on unit labour cost (ULC) and slows down the export-led recovery warrants continuous caution on the side of policy makers for balancing income growth and competitiveness targets.   Private debt High private sector debt is still weighing negatively on investment and growth. However, the pace of deleveraging is strong.  Consolidated private debt fell from a peak of 210.3 % of GDP at end-2012 to 162.2 % at end-2017. Both the corporate and household sectors contributed to the deleveraging process. The high level of non-performing loans harms financial stability and banks’ profitability. Private debt has declined over recent years and the outlook remains favourable. The process of deleveraging continues albeit at a slower pace. Since the peak in 2012, private debt dropped from 210.3% of GDP to 162.2% at the end of 2017.  The high stock of non-performing loans remains a challenge. Although the aggregate non-performing loans ratio has dropped, it is still one of the highest in the EU. Banks are however committed to continue decreasing the NPL stock in a steadily way, according to the plans submitted to the supervisor. A three-pillar non-performing loans reduction strategy is being implemented. The strategy includes supervisory action under which banks with the largest non-performing loans ratios submitted plans for a significant reduction in bad loans by 2021.   
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: European Commission 

22 

Productivity Weak productivity dynamics weighs on competitiveness and potential growth, limiting the capacity to bridge the income gap with the EU average and to enable a more inclusive pattern of growth. This is linked to the low investment rate in the country and skills gaps, remaining rigidities in product and labour markets as well as to weaknesses in public administration and the judiciary. Productivity is expected to improve in 2019 and 2020, amidst milder and more broad-based increase in employment. Low investment levels and rigidities in product and labour markets continue inhibiting productivity. Various measures have been taken to address rigidities in the labour market and investment barriers from high corporate debt. Important challenges remain in these areas.  Bottlenecks to productivity growth are also related to innovation, low qualification of the workforce, and restrictions in certain regulated professions. Several policy initiatives have been put in place recently, including Qualifica and In.CoDe2030.  Conclusions from IDR analysis  Despite the progress achieved over the past years, the Portuguese economy continues to be characterised by a large stock of imbalances. This mainly relates to external and internal debt, both public and private, high share of non-performing loans and low productivity growth. The pace of deleveraging in the private sector is advancing, albeit at a slowing pace, and non-performing loans are reducing as planned, helped by both policy measures and favourable economic conditions. As of 2017, the public debt is also set on a downward path but remains high and vulnerable to shocks. The main areas of slow adjustment refer to the net external position, where the pace of improvement has weakened, and labour productivity, which has performed weakly over the last three years.  Private debt is declining in both the corporate and household sectors and the pace of adjustment is considered adequate despite the recent slowdown. Despite the projected downward path, the public debt-to-GDP ratio is set to remain at a very high level and weighs on the stock of external liabilities. The country's net international investment position (NIIP) remains a significant source of vulnerability. It improved only marginally in 2017 and the projected pace of adjustment is also slow, as the country’s current account deteriorated somewhat in 2018. On the other hand, the structure of external liabilities improved over recent years due to a shift from debt to foreign direct investment (FDI). The high stock of non-performing loans also remains a key weakness but the adjustment is advancing in accordance with the strategy implemented by banks and national authorities.  Policy progress differs substantially across areas. As regards public finances, the spending review is set to continue and a new project is being implemented to address persistent hospital arrears, while measures on state-owned enterprises are delayed. In the real sector, goals like the reduction of the administrative burden or the improvement of the judicial system are advancing amidst various measures. Reforms addressing the barriers to competition progress at a more modest pace, particularly regarding license requirements and procedures. More structural challenges, such as labour segmentation or the skill endowment of the adult population require a longer timeframe to register an impact from the measures being implemented.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS* 

in 

the 

The  general  government  gross  debt-to-GDP 
ratio is projected to continue to go down, while 
last  global 
remaining  very  high.  With 
that 
financial  crisis  and  economic  recession 
followed,  very  high  headline  deficits, 
the 
reclassification  of  off-balance  sheet  items  and 
entities  into  general  government  and  stabilising 
interventions in the financial system led to a steep 
rise 
the  debt-to-GDP  ratio  by  over  30 
percentage  points  between  2010  and  2013.  After 
hovering  around  130 %  between  2014  and  2016, 
Portugal’s  debt-to-GDP 
first 
substantial  decline  to  124.8 %  in  2017,  while 
remaining  the  third  highest  in  the  EU.  Backed  by 
favourable 
solid  primary  surpluses  and 
nominal  growth-interest 
rate  differential  — 
whereby  the  combined  debt-reducing  effects  of 
continued real GDP growth and inflation offset the 
sizeable, yet gradually diminishing, interest burden 
on  the  high  debt  overhang  —,  the  debt-to-GDP 
ratio is expected to gradually decline from 121.5 % 
in 2018, to 116.8 % in 2020, under the customary 
no-policy-change assumption. 

ratio  posted  a 

the 

that  a  cumulated  additional  improvement  in  the 
structural primary balance by 4.3 % of GDP over 5 
years, compared with the Commission’s no-policy-
change  baseline  scenario,  would  be  required  to 
bring  the  debt-to-GDP  ratio  down  to  the  Treaty 
reference  value  of  60 %  by  2033.  This  very  high 
value  for  the  S1  indicator  is  mainly  due  to  the 
distance of the debt-to-GDP ratio from the Treaty 
reference  value  of  60 %  (contribution  of  4.1 
percentage points). 

analysis 

incorporating 

The  Commission’s  debt  sustainability  analysis 
confirms that the debt-to-GDP ratio remains at 
high  risk  in  the  medium  term.  In  a  debt 
sustainability 
the 
Commission’s  2018  Autumn  Forecast  and  other 
technical  assumptions  (see  Annex  B)  (15)  for  the 
medium term, the debt-to-GDP ratio is expected to 
gradually decline by around 1 percentage point per 
year  and  to  reach  approximately  107 %  in  2029. 
Partly  due  to  the  projected  unfavourable  nominal 
growth-interest  rate  differential  and  increasing 
ageing  costs  in  the  projection’s  outer  years,  the 
debt-to-GDP  ratio  is  projected  to  remain  still 
significantly  above  the  Treaty  reference  value  of 
60 % (see Graph 4.1.1). 

(15)  These  assumptions  comprise:  (i)  a  structural  primary 
balance, before ageing costs, of 2.3 % of GDP as of 2020; 
(ii) inflation converging to 2.0 % by 2023 and the nominal 
long-term  interest  rate  on  new  and  rolled-over  debt 
converging  linearly  to  5 %  by  the  end  of  the  10-year 
projection  horizon  (as  for  all  Member  States);  (iii)  real 
GDP growth rates of around 1 %; and (iv) ageing costs in 
line  with  European  Commission  (2018c).  More  details  on 
the assumptions in the different scenarios can be found in 
European Commission (2019a). 

Despite  the  high  general  government  debt-to-
GDP  ratio,  there  are  no  significant  fiscal 
sustainability  risks  in  Portugal  in  the  short 
term.  The  S0  indicator  that  evaluates  fiscal 
sustainability  risks  in  the  short  term,  stemming 
from the fiscal, macro-financial or competitiveness 
sides of the economy is below its critical threshold 
(European Commission, 2019a). In particular, both 
the  fiscal  and  the  financial  competitiveness  sub-
indices have values below their critical thresholds. 
This is confirmed by the lower and stable spreads 
of credit defaults swaps and a gradually improving 
credit  rating,  which  allows  Portuguese  sovereign 
debt  holdings  to  be  included  in  wide  institutional 
investor  portfolios  based  on  the  investment  grade 
credit  assessment  by  all  four  relevant  rating 
agencies. 

Having  said  that,  Portugal  is  projected  to  face 
high  fiscal  sustainability  risks  in  the  medium 
term.  The  S1  indicator  that  evaluates  fiscal 
sustainability  risks  in  the  medium  term  suggests 

23 

 
 
                                                           
4.1. Public finances and taxation 

structural  primary  balance  were  to  revert  back  to 
its historical trend (this is, to gradually converge to 
its  last  15-year  historical  average  at  a  structural 
primary deficit of 0.5 % of GDP), the debt-to-GDP 
ratio  would  reach  as  much  as  126 %  by  2029,  19 
percentage  points  above  the  Commission’s  no-
this 
policy-change  baseline  scenario.  Against 
the 
implementation  of 
full 
background, 
reformed  Budget  Framework  Law  and  enhanced 
revenue  collection  could  positively  contribute  to 
stronger  fiscal  sustainability.  Moreover,  renewed 
efforts to tackle the increasing ageing costs at their 
is,  healthcare  expenditure  and 
roots  — 
pensions — could help identifying new sources of 
efficiency savings. 

this 

the 

Graph 4.1.2:  General government gross debt projections 

under baseline and alternative fiscal 
consolidation scenarios 

Source: European Commission 

4.1.2.  FISCAL-STRUCTURAL ISSUES, INCLUDING 

PENSIONS AND HEALTHCARE* 

Portugal’s  pension  system  is  under  continuous 
pressure from adverse demographic trends. The 
old-age dependency ratio  —  i.e. the proportion of 
people aged 65 and over relative to those between 
16  and  64  —  stood  at  32.1 %  in  2016,  above  the 
euro-area 
(European 
of 
Commission,  2018c).  Importantly,  the  ratio  is 
projected 
increase  significantly  by  35.1 
percentage  points,  reaching  67.2 %  by  2070.  This 
implies  that  Portugal  would  go  from  having  3.1 
working-age people for every person aged over 65 
years to only 1.5 working-age people. On the other 

average 

29.6 % 

to 

Graph 4.1.1:  General government gross debt projections 
under baseline and alternative nominal GDP 
growth and interest rate scenarios 

Source: European Commission 

The  high  debt-to-GDP  ratio  constitutes  a  long-
lasting  burden  on  Portugal’s  public  finances, 
which reduces fiscal policy’s capacity to absorb 
macroeconomic  shocks  and  reduce  business 
cycle 
fluctuations.  The  Commission's  debt 
sustainability  analysis  shows  that  the  projected 
moderately declining path of the debt-to-GDP ratio 
is  sensitive  to  shocks  to  nominal  GDP  growth, 
interest  rates  and  the  structural  primary  balance 
the  Commission’s  no-policy-
compared  with 
change  baseline  scenario.  Alternative  scenarios 
incorporating  plausible  potential  shortfalls 
in 
nominal GDP growth, sharp interest rate hikes or a 
less  ambitious  structural  fiscal  adjustment  would 
actually  put  the  debt-to-GDP  ratio  back  on  an 
upward  path,  with  clear  penalising  effects  for 
Portugal’s  overall  economic  performance  and 
potential  outward  negative  spill-over  effects  via 
the sovereign risk channel. 

Without continued fiscal consolidation and with 
no  progress  on  growth-enhancing  structural 
reforms,  it  will  be  difficult  to  safeguard  fiscal 
sustainability  and  keep  the  debt-to-GDP  ratio 
on  a  steady  downward  path.  The  Commission’s 
debt sustainability analysis shows that if Portugal’s 
structural  adjustment  were  consistently  in  full 
compliance  with 
the 
preventive arm of the SGP, the  debt-to-GDP ratio 
would  substantially  decrease  to  close  to  90 %  by 
the 
2029, 
Commission’s  no-policy-change  baseline  scenario 
if  Portugal’s 
(see  Graph  4.1.2).  Conversely, 

requirements  of 

percentage 

below 

points 

the 

16 

24 

90,095,0100,0105,0110,0115,0120,0125,0130,0135,020132014201520162017201820192020202120222023202420252026202720282029Baseline no-policy-change scenarioStandardised (permanent) negative shock (-1 pp.) to the short- and long-term interest rates on newly-issued androlled-over debtStandardised (permanent) positive shock (+1 pp.) to the short- and long-term interest rates on newly-issued androlled-over debtStandardised (permanent) negative shock (-0.5 pp.) to GDP growthStandardised (permanent) positive shock (+0.5 pp.) to GDP growthCombined (permanent) negative shock to GDP growth (-0.5 pp.) and interest rates (+1 pp.)Combined (permanent) positive shock to GDP growth (+0.5 pp.) and interest rates (-1 pp.)% of GDP75,085,095,0105,0115,0125,0135,020132014201520162017201820192020202120222023202420252026202720282029Baseline no-policy change scenarioNo-policy change scenario without ageing costsStability and Growth Pact (SGP) scenarioStability Programme (SP) scenario% of GDP 
 
 
4.1. Public finances and taxation 

retirement  started 

for at least 46 years and started when they were 16 
years  old  or  under.  A  further  phase  in  the 
flexibilisation  of  early 
in 
January  2019  and  is  applicable  to  citizens  who  at 
age 60 had paid contributions for at least 40 years. 
The  new  scheme  will  allow  them  to  retire  early 
without  the  sustainability  factor  penalty  but  will 
maintain  a  penalty  proportional  to  the  distance  in 
months  to  the  legal  retirement  age.  Beginning  in 
January  2019,  this  new  modality  will  be  open  to 
citizens  aged  at  least  63  years  and  will  then  be 
extended  to  citizens  aged  at  least  60  years 
beginning  in  October  2019.  The  authorities  have 
estimated  the  associated  deficit-increasing  impact 
in 2019 at EUR 66 million. 

The  projected  surplus  of  the  social  security 
balance  appears  to  mainly  reflect  the  current 
economic expansion, casting doubt on its overall 
sustainability 
if  the  economic  cycle  turns. 
Indeed,  improvements  in  the  labour  market  are 
projected to continue translating into higher social 
contributions  and 
lower  unemployment-related 
expenditure.  Nonetheless,  the  contributions  are 
complemented by general transfers  from the State 
budget  and  specific  State  transfers.  related  to 
consigned  tax  revenue  coming  from  a  percentage 
of  the  revenue  from  the  value  added  tax,  the 
surcharge  on  the  real  estate  tax  (Adicional  ao 
Imposto  Municipal  sobre  Imóveis)  and,  finally,  a 
percentage  of  the  revenue  from  the  corporate 
income  tax  —–  0.5 %  in  2018,  rising  by  0.5 
percentage  points  per  year  up  to  2 %  in  2021.  In 
view  of  the  potential  balance-deteriorating  effect 
of  the  ongoing  special  pension  increases,  early 
retirement reforms and the growing pressure from 
the  ageing  population,  in  combination  with  the 
lack  of  compensatory  balance-improving  fiscal-
structural reforms, the overall sustainability of the 
pension  system  may  be  at  risk  of  not  having 
improved in a durable manner. 

While  healthcare  expenditure  in  Portugal  has 
been  below  the  EU  average,  its  long-term 
increase  is  expected  to  be  among  the  largest  in 
the  EU.  Owing  to  pressures  from  the  ageing 
population  and  non-demographic  determinants, 
healthcare  expenditure  is  projected  to  increase  by 
approximately  40 %  in  the  long  term,  from  5.9 % 
of GDP in 2016 (below the EU average of 6.8 %) 
to 8.3 % of GDP in 2070 (above the EU average of 
7.7 %).  This  expected  increase  by  2.4  percentage 
points significantly exceeds the projected increase 

hand, steps were taken in the past to strengthen the 
long-term  sustainability  of  the  pension  system, 
notably  by  increasing  the  statutory  retirement  age 
from 65 to 66 years and by linking future increases 
to  rises  in  life  expectancy (16),  and  by  restricting 
access  to  early  retirement.  The  average  effective 
exit age  in 2017 is estimated  at 64.4 years, above 
the euro-area’s average of 63.4 years. The duration 
of  retirement  is  estimated  at  18.3  years  for  men 
and  22.8  years  for  women,  both  below  the  euro-
area’s  averages  of  19.3  and  23.5  years, 
respectively.  

While  past  reforms  improved  the  long-term 
sustainability  of  the  pension  system,  recent 
initiatives  have  entailed  discretionary  increases 
in pension spending. In August 2017 and August 
2018,  lower  pensions  benefitted  from  special 
increases  —  i.e.  on  top  of  the  regular  pension 
indexation linked to inflation and real GDP growth 
—,  with  a  full-year  deficit-increasing  impact  of 
around  EUR 140  million. 
the 
increases were focused on those pensions that had 
not  been  updated  between  2011  and  2015.  Such 
special  increases  are  planned  to  continue  in 
January  2019,  leading  to  an  estimated  deficit-
increasing impact of EUR 137 million in 2019. In 
addition,  a  new  special  pension  supplement  was 
to  minimum 
announced  for  2019,  applicable 
pensions  that  start  to  be  paid  in  that  year.  This 
should 
limited  deficit-
to  an  estimated 
increasing impact of around EUR 26 million (17). 

In  particular, 

lead 

Pathways  to  early-retirement  for  workers  with 
long  careers  are  being  broadened.  In  October 
2017, a new early retirement scheme for very long 
careers  entered 
into  force.  It  allowed  early 
retirement without penalty for citizens aged at least 
60 years who had paid contributions for at least 48 
years  into  the  social  security  system  or  into  the 
legacy civil service pension system (18). This early 
retirement scheme was broadened in October 2018 
to  also  cover  citizens  who  had  paid  contributions 

(16)  On that basis, the statutory retirement age rose to 66 years 
and 4 months in 2018 and is planned to continue rising to 
66 years and 5 months in 2019. 

(17)  Both 

the  special  update  and 

the  special  pension 
complement are limited to pensioners receiving an overall 
pension  amount  equal  to  or  below  1.5  ×  IAS  (Indexante 
dos  Apoios  Sociais,  this  is  the  reference  value  for  social 
benefits set at EUR 428.9 in 2018). 

(18)  Or,  alternatively,  for  those  aged  60  years  who  paid 
contributions  for  at  least  46  years  and  started  when  they 
were 14 years old or under. 

25 

 
                                                           
4.1. Public finances and taxation 

stock of hospital arrears has an adverse impact on 
supply  chain  relationships,  limiting  the  scope  for 
cost-savings. 

A new programme for 2019 aims to address the 
underlying causes of persistent hospital arrears. 
It  was  launched  in  early  2018  as  a  joint  initiative 
between  the  Ministry  of  Finance,  the  Ministry  of 
Health  and  the  Administração  Central  do  Sistema 
de Saúde — an entity responsible for managing the 
financial  resources  of  the  Portuguese  National 
Health  System  —  to  improve  the  sector’s  overall 
to 
financial 
recommendations  for  a  programme  to  address 
hospital arrears, which is to move forward in 2019. 
The joint collaboration between these three parties 
is key to the programme’s ultimate success. 

sustainability. 

This 

led 

The  new  programme 
to  address  hospital 
arrears  intends  to  introduce  a  new  governance 
model  for  public  hospitals,  coupled  with  a 
substantial  increase  in  their  annual  budgets.  In 
so  doing,  it  aims  to  help  identify  the  specific 
causes  of  arrears  by  differentiating,  at  hospital 
level,  between  inadequate  budgeting  and  hospital 
management  practices.  The  programme  is  to  be 
implemented  in  such  a  way  as  to  apply  both 
positive  and  negative  management  incentives  to 
increase  accountability,  reduce  moral  hazard  and 
reward  efficiency  savings.  According 
the 
programme,  public  hospitals  will  be  grouped  into 
three  categories  based  on 
their  efficiency, 
measured  as  an  average  adjusted  cost  per 
patient (19). The most efficient hospitals, in the first 
category, will be granted more autonomy and have 
their  budgets  increased  to  close  the  gap  between 
budgeted  funds  and  actual  expenditure.  The  less 
third 
efficient  hospitals, 
categories,  will  undergo  increased  scrutiny  and 
receive  greater  policy  assistance  according  to  the 
magnitude  of their efficiency  shortfalls. They  will 
also receive more conditional increases in funding. 
A total of EUR 500 million has been committed to 
the 
increase 

budgets.  Although 

the  second  and 

hospital 

to 

in 

(19)  Some  stakeholders  have  expressed  concerns  about  the 
average adjusted cost per patient used to allocate hospitals 
per  efficiency  group.  While 
the  authorities  aim  at 
differentiating between hospitals’ management deficiencies 
and  structural  limitations,  the  lack  of  available  data  may 
interfere with their ability to do so effectively by taking all 
relevant  factors  into  account.  This  concern  is  however 
partly  addressed  by  the  fact  that  the  authorities  have 
performed 
the  analysis  considering  similar  hospital 
groupings. 

by  0.9  percentage  points  for  the  EU  as  a  whole 
(European  Commission,  2018c).  Importantly,  the 
projected 
in  public  expenditure  on 
healthcare  due  to demographic  change  over 2016-
2070 is estimated at 2.7 percentage points of GDP, 
which is one of the highest in the EU. 

increase 

The  short–term  financial  sustainability  of  the 
health  system  continues  to  be  a  concern, 
although progress has been made in some areas. 
The  balance  of  the  Portuguese  National  Health 
Service  deteriorated  by  EUR 389  million  in  cash 
in  2018  compared  with  2017,  with 
terms 
expenditure  growth  exceeding  revenue  growth  by 
4  percentage  points  (Portuguese  Ministry  of 
Finance,  2018). The  underlying  factors  for  such  a 
deterioration  included  a  year-on-year  increase  in 
expenditure  for  medicines  and  other  healthcare 
goods  and  services  (including  complementary 
means  of  diagnosis  and  therapeutic  use,  and 
material for clinical consumption) and an increase 
in  the  healthcare  workforce  and  in  the  wage  bill 
(partially  related  to  the  switch  to  the  35  hour 
working  week  also  for  private  sector  contracts  in 
July  2018).  Some  savings  have  nevertheless  been 
achieved,  for 
instance,  by  relying  more  on 
centralised purchasing and making a greater use of 
generics  and  biosimilars.  While  there  are  plans  to 
make  even  greater  use  of  centralised  procurement 
and  generics  in  the  future,  the  latter  might  be 
challenging,  as  the  share  of  generics  appears  to 
have  levelled  off  in  recent  years.  The  need  to 
invest  in  the  National  Health  Service  remains 
substantial  in  view  of  the  construction  of  new 
hospital  centres,  reinforcements  in  primary  health 
care  and  medical  equipment  updates  (European 
Observatory  on  Health  Systems  and  Policies, 
2018). 

Despite substantial clearance measures, hospital 
arrears continue to pose a substantial challenge. 
Hospital  arrears  stabilised  at  somewhat  lower 
levels in the first half of 2018, primarily as a result 
of  a  capital  injection  of  EUR 500  million  at  the 
end  of  2017.  They  resumed  their  increase  in 
September  2018,  reaching  EUR 903  million  in 
November  2018 
(compared  with  EUR 1 103 
million  in  November  2017). An  additional  capital 
injection of EUR 500 million in the second half of 
2018 (in addition to customary year-end clearance 
measures)  has helped to reduce hospital arrears to 
EUR 484  million  in  December  2018  (compared 
with EUR 837 million in December 2017). A high 

26 

 
                                                           
4.1. Public finances and taxation 

spending (22). Empirical studies typically find that 
government  expenditure  on  both  human  and 
physical  capital  through  investment  in  education 
is  associated  with  positive 
and  infrastructure 
growth effects in the long term, while spending on 
other  categories  is  usually  found  to  have  no  such 
impact (European Commission, 2016). In Portugal, 
expenditure  for  the  long  term  —  which  includes 
education,  transport  and  R&D  expenditure  — 
accounted  for  7.7 %  of  GDP  in  2016,  slightly 
below  the  EU  average.  However,  while 
the 
country’s  welfare  spending  —  which  includes 
expenditure  on  social  protection  and  health  –  was 
below  the  EU  average  in  2016  (24.1 %  of  GDP 
compared with 26.6 % of GDP), Portugal deployed 
comparatively  more  resources  on  other  spending 
—  which  mostly  covers  expenditure  on  general 
public services. 

Graph 4.1.3:  Government expenditure by function in 2016 

Source: European Commission 

improving 

A  series  of  initiatives  across  the  public  sector 
aim  at 
the  quality  of  public 
expenditure.  Many  of  these  are  included  in  the 
ongoing  spending  review  exercise,  which 
is 
expected  to  yield  savings  of  EUR 236  million 
(around  0.1 %  of  GDP)  across  a  series  of  public 
sectors  in  2019.  Around  half  of  the  savings  is 
expected to come from health and education, while 

(22) More precisely in terms of the classification of the functions 
of  government  (COFOG):  "Spending  for  the  long  run" 
includes categories GF09, GF05, GF0405, GF0406 and the 
sum  of  GF0105,  GF0204,  GF0305,  GF0408,  GF0505, 
GF0605,  GF0705,  GF0805,  GF0907  and  GF1008  (which 
are  grouped  together  as  R&D  expenditure).  "Welfare 
spending" includes categories GF10, GF0601, GF0602 and 
GF07. Finally, "Other spending" consists of the remaining 
COFOG categories. 

programme represents a promising first step in the 
right direction, it remains to be seen whether it will 
lead to a sizeable slowdown in the accumulation of 
hospital arrears in the short term. 

4.1.3.  FISCAL FRAMEWORK AND STATE-OWNED 

ENTERPRISES* 

Improving  framework  conditions  for  fiscal 
policy  is  key  to  achieving  a  growth-friendly 
path  for  structural  fiscal  consolidation.  In  this 
context,  the  full  effective  implementation  of  the 
Budget  Framework  Law  —  which  entered  into 
force  in  2015  —  remains  essential.  The  Budget 
Framework Law is designed to make budget units 
more  accountable  and  strengthen  the  medium-  to 
long-term focus of public finances. It allowed for a 
three-year  transitional  period  for  applying  most 
new  features.  The  implementation  unit  of  the 
Budget  Framework  Law  has  convened  regularly, 
and preparatory work mostly involving IT systems 
set-up  has  been  progressing,  in  particular  for  the 
State  accounting  entity  project (20).  However,  due 
to repeated delays, the entry into force of the main 
provisions  of  the  revised  Budget  Framework  Law 
was  postponed  by  1  and  a  half  years  to  1  April 
2020  via  the  amending  law  37/2018  of  7  August. 
Thus,  only  the  2021  budget  is  planned  to  be 
prepared  under  the  new  rules.  Some  elements 
might  however  become  operational  at  an  earlier 
stage.  In  terms  of  regulatory  preparation,  a  series 
require  adjustment  and 
of  decree-laws  will 
consolidation, and the decree-law on the set-up of 
the  new  budgetary  programmes  will  need  to  be 
prepared (21).  The  full  effective  application  of  the 
new  accrual-based  public  accounting  framework 
that was last set to start in January 2018 has been 
rescheduled  to  January  2019,  following  delays  in 
particular for local authorities and social security. 

Government  expenditure  with  direct  positive 
effects in long-term economic growth represents 
less  than  20 %  of  total  expenditure.  The 
composition  of  government  expenditure  can  be 
broken  down  into  three  categories:  spending  for 
term,  welfare  spending  and  other 
the 

long 

(20)  A  first  preliminary  opening  balance  sheet  has  been 

established as of 1 January 2018. 

(21)  The  amendment  to  the  BFL  sets  a  new  deadline  by  June 
2019  for  the  approval  of  the  corresponding decree-law  on 
budgetary programmes. 

27 

0,010,020,030,040,050,060,070,080,090,0100,0PTEU28Long-term spendingWelfare spendingOther spending% of total expenditure 
                                                           
 
                                                           
4.1. Public finances and taxation 

also  imply  performance  awards  (by  50 %  of  their 
amount and up to the available funding). 

the  overall 

There has been progress in local administration 
reforms  in  recent  years,  but  employment  has 
been  growing  at  accelerating  rates.  Local  and 
regional  arrears  have  remained  broadly  stable  in 
local  and  regional 
2018,  while 
budgetary surplus improved in 2018. Employment 
in local administration increased by 4.3 % year-on-
year  in  the  year  ending  on  30  September  2018, 
around 2.5 times the  growth  rate  observed for the 
the 
general  government  as  a  whole.  While 
Financial Coordination Council set up in 2014 has 
not  been  convening,  there  have  been  quarterly 
meetings  of  the  Regional  Coordination  Council. 
Local 
Portugal’s  Directorate-General 
Administration  supported  by  Unidade  Técnica  de 
Acompanhamento  e  Monitorização  do  Setor 
Público  Empresarial  —  a  unit  in  the  Ministry  of 
Finance  specialising  in  State-Owned  Enterprises 
(SOEs)  —,  and  the  country’s  Directorate-General 
for Budget have improved the monitoring of local 
SOEs  and  public-private  partnerships.  This  is 
supported by a decree-law from July 2017 creating 
the  obligation  for  local  SOEs  to  provide  direct 
local 
information  without  going 
authorities,  while 
local 
public-private  partnerships  has  been  reported 
quarterly since 2016. 

information 

the 
on 

through 

for 

the  net 

While  overall 
incomes  of  SOEs 
improved  in  2017,  they  are  expected  to  have 
remained negative on the aggregate and to vary 
significantly at the sectoral level. The authorities 
are planning net incomes of SOEs to approach as a 
whole a level close to, but still below, equilibrium 
in  2019;  this  corresponds  to  a  one-year  delay  as 
compared  with earlier announcements aiming at a 
similar  outcome  already  in  2018.  The  underlying 
operational  results  have  been  developing  very 
significant 
across  SOEs,  with 
differently 
improvements in the transport and financial sector 
in  2017,  and  substantial  and  rising  deficits  in  the 
health  sector.  The  unconsolidated  debt  of  public 
non-financial  corporations  included  in  general 
government  has  fallen  from  19.1 %  to  17.6 %  of 
GDP between September 2017 and 2018 (Bank of 
Portugal,  2019).  Looking  ahead,  a  range  of 
measures  is  being  envisaged  to  improve  the 
monitoring  of  SOEs  and 
to  ensure  closer 
adherence  to  their  initial  budgetary  plans.  This 
involves  moving  forward  with  the  automatic 

in 

regarding 

regular  and 

the  other  half  should  come  from  measures  in  the 
justice  system  and  internal  administration  and 
from  the  growing  use  of  centralised  procurement 
and  a  shared  services  strategy.  Having  said  that, 
concrete  measures  still  need  to  be  specified  in 
sufficient  detail.  Furthermore,  the  exercise  is  not 
independent 
yet  undergoing  a 
the 
particular 
evaluation, 
quantification  of  the  savings  effectively  achieved. 
This  has  so  far  only  been  done  for  selected  cases 
on  an  ad-hoc  basis  by  the  authorities.  Overall, 
while  broadening  the  ongoing  spending  review  is 
set to have a  positive effect,  the  resulting bottom-
up  savings  should  be  complemented  with  a  clear 
top-down  focus  on  containing  overall  expenditure 
growth  and  deploying  a  comprehensive  strategy 
for  medium-term  public  administration  reform,  in 
combination  with  strengthening 
the  growth-
friendliness of public expenditure. 

There  appears  to  be  continued  pressure  to 
increase the number of employees and the wage 
bill beyond the authorities’ own budget targets. 
The wage bill increased by 2.1 % in cash terms in 
2018,  significantly  above  the  2018  budget  target, 
while  the  average  headcount  of  public  employees 
rose  by  1.6 %  year-on-year  in  the  year  ending  on 
30 September 2018, with more pronounced growth 
in  the  areas  of  local  administration,  state-owned 
enterprises  (SOEs)  and  education.  This  occurred 
despite  the  planned  decrease  based  on  the  target 
3:2  replacement  ratio  rule  for  2018.  At  the  same 
time,  the  wide-ranging  programme  to  convert 
temporary  contracts  for  permanent  tasks  in  the 
public sector into permanent ones is expected to be 
concluded  by  the  end  of  2018  (concerning  an 
estimated  number  below  20 000).  The  planned 
extension of the 35 hour week in the health sector 
to employees with private sector contracts (around 
40 %  of  the  workforce  in  the  sector)  has  put 
additional pressure on the headcount and the wage 
bill  (e.g.  via  extra  hours  compensation)  since  1 
July 2018. The unfreezing of career progression — 
which  had  been  frozen  since  2010  —  has  started 
since  January  2018.  The  additional  payments  are 
gradually being phased in (25 % by January 2018, 
50 % by September 2018, 75 % by May 2019 and 
100 %  by  December  2019)  with  an  estimated 
incremental  cost  of  around  0.2 %  of  GDP  in  both 
2018 and 2019 (and another 0.1 % of GDP in 2020 
according  to  the  2018  stability  programme).  In 
2019,  the  unfreezing  of  career  progression  will 

28 

 
4.1. Public finances and taxation 

de  Acompanhamento 

information  between  SOEs  and 
exchange  of 
Unidade  Técnica 
e 
Monitorização  do  Setor  Público  Empresarial. 
There  are  plans  to  introduce  new  incentives  for 
employees  and  managers  to  improve  reporting 
standards. The authorities have  also indicated that 
SOEs  that  have  fulfilled  their  purposes,  that  are 
economically  unviable  or  that  can  be  merged  to 
generate  savings  will  continue  to  be  liquidated. 
Also, there are plans to prioritise improvements in 
the  capital  structure  for  those  SOEs  that  have 
positive operational results but high levels of debt. 
rationalisation  efforts  and 
Overall,  planned 
increased monitoring have still yet to translate into 
corrective action where needed. 

4.1.4.  TAXATION ISSUES, INCLUDING TAX 

ADMINISTRATION* 

Tax  revenue  as  a  share  of  GDP  has  slightly 
increased  in  2017.  The  overall  tax  revenue-to-
GDP ratio, meaning the sum of revenue from taxes 
and  net  social  contributions  as  a  percentage  of 
GDP, stood at 34.4 % in 2017, slightly higher than 
in  2016.  Portugal’s  tax  revenue  relies  relatively 
heavily  on  consumption  taxes  (12.7  %  of  GDP  in 
2017, compared with 11.1% of GDP in the EU in 
the same year) (European Commission, 2019d). 

Graph 4.1.4:  Tax revenue by economic function in 2017 

Source: European Commission 

planned  for  2019.  In  2018,  in  addition  to  the 
already  planned  full  abolishment  of  the  personal 
income  tax  surcharge,  including  for  higher  tax 
brackets,  both  the  number  of  tax  brackets  and  the 
value  of  the  net  income  guarantee  (mínimo  de 
existência)  increased.  The  authorities  estimated 
that  the  result  of  these  measures  will  be  a 
the  general 
combined 
government  of  EUR 230 million  in  2018  and 
EUR 156 million  in  2019  (i.e.  when  the  2018 
personal  income  tax  statements  are  filled).  While 
no  major  changes  to  general  personal  income  tax 
rules have been included in the 2019 budget, a new 
specific temporary 5-year tax regime has been put 
forward  for  emigrants  who  return  to  live  in 
Portugal in 2019 and 2020 (23).  

revenue 

loss 

to 

in 

The  corporate  income  tax  rate  applicable  to 
high taxable profits remains among the highest 
in the EU. This relative position was reinforced by 
the 2018 increase of the State surcharge from 7 % 
to  9 %  for  large  companies,  i.e.  with  taxable 
profits exceeding EUR 35 million (with additional 
revenue  estimated  at  EUR 60 million),  which 
the  corresponding  statutory  corporate 
brought 
income  tax  rate  to  31.5 %  in  2018,  significantly 
above  the  EU  average  of  21.9 %.  Portugal’s 
effective  average  corporate  income  tax  rate  of 
27.5 %  in  2017  is  the  4th  highest  among  the  EU 
Member  States  and  compares  with  an  effective 
average corporate income tax rate of around 20 % 
in the EU (OECD, 2018e). The budget adopted for 
2019  includes  some  additional  minor  changes  to 
the  corporate  income  tax,  notably  the  end  of  the 
special advanced payment (estimated revenue loss 
of  EUR 140  million)  and  new  tax  benefits  for 
reinvested profits and firms located in the  interior 
of  the  country  (around  EUR 50  million  as  a 
whole). Overall, the proliferation of both size- and 
location-dependent  preferential  corporate  income 
tax  rules  may  put  a  drag  on  productivity  and 
investment  growth;  in  particular,  by  privileging 
smaller-sized  firms  and/or  those  operating  in 
specific — possibly less productive — areas, such 
policies  may  detract  businesses  from  scaling  up 
and/or  benefiting  from  agglomeration  spill-over 
effects  that  could  help  achieve  greater  economies 
of  scale  and  efficiency  gains,  while  providing 
scope for profit-shifting within the country. 

Changes  in  direct  taxes  were  primarily  to 
in  2018,  while  some 
personal 
further  adjustments  are 
relatively  minor 

income  tax 

(23)  Eligibility  is  conditional  on having  been  a  non-resident  in 

Portugal for tax purposes for at least 3 years. 

29 

 
 
                                                           
4.1. Public finances and taxation 

(Centre 

provides  an  estimate  of  revenue  loss  due  to  tax 
fraud, evasion and avoidance, among other factors 
—  has  been  steadily  declining  since  2011,  falling 
by  more  than  5  percentage  points  between  2012 
and 2016, from 16 % to 10 % of the VAT total tax 
liability 
for  Social  and  Economic 
Research,  2018).  Therefore,  the  VAT  gap  in 
Portugal remained visibly below the EU average of 
12 %. Having said that, Portugal’s VAT policy gap 
— which provides an estimate of revenue loss due 
to  the  use  of  reduced  VAT  rates  and  exemptions 
—, remained high, at 51.5 % in 2016, compared to 
an  EU  average  of  44.8 %.  In  particular,  the 
actionable VAT policy gap  — which excludes tax 
liability  from  imputed  rents,  public  services  and 
financial services — amounted to 19.6 % in 2016, 
being  above  the  EU  average  of  16.5 %.  The  high 
actionable VAT policy gap is composed of the rate 
gap and the actionable exemption gap.  Given  that 
the actionable exemption gap is slightly below the 
EU  average,  the  comparatively  high  actionable 
VAT  policy  gap  in  Portugal  mostly  results  from 
the  relatively  high  rate  gap  (13.9 %  in  Portugal, 
compared  with  10.0 %  in  the  EU),  reflecting  the 
use  of  reduced  VAT  rates.  However,  as  far  as 
inequality  matters  are  concerned,  reduced  VAT 
rates are  generally a rather poorly targeted tool to 
support 
and  direct 
mechanisms  such  as  income-tested  cash  transfers 
should be preferred. 

low-income  households 

Environmental  tax  revenues  rely  mostly  on 
transport-related  taxes.  Transport-related  taxes 
accounted  for  0.7%  of  GDP  in  2017,  compared 
with  an  EU  average  of  0.5%  of  GPD.  Taxes  on 
pollution  and  resources  accounted  for  0.02 %  of 
GDP, compared  with an EU average  of 0.08 % in 
2017 (European Commission, 2019d). Having said 
that,  Portugal  has  relatively  high  subsidies  for 
company  cars  (among  the  highest  in  the  EU  in 
2015)  (European  Commission,  2017a).  Although 
diesel has a higher carbon and energy content than 
gasoline,  the  applicable  excise  duty  rates  on  the 
former have been higher than on the latter. Despite 
progress to address the issue over the past 4 years, 
Portugal still has a significantly low ratio of diesel 
to  gasoline  excises  (0.71  in  the  country  in  2018, 
compared with 0.81 in the EU).  

Overall,  despite  some  improvements,  there  is 
scope  to  strengthen  the  growth-friendliness  of 
the  Portuguese  tax  system.  As  a  result  of  the 

Additional  changes  to  direct  taxes  in  2019 
include  a  tax  on  the  renewable  energy  sector 
and a new bracket in the surcharge on the real 
estate tax. The authorities estimate that the tax on 
the  renewable  energy  sector  will  yield  EUR 30 
million  in  additional  revenue.  Furthermore,  the 
additional  bracket  in  the  surcharge  on  the  real 
estate  tax  introduced  by  the  budget  adopted  for 
2019  is  also  expected  to  yield  EUR 30  million  in 
additional  revenue.  The  revenue  from  recurrent 
property  taxes  was  relatively  low  in  Portugal  in 
2017, representing 0.8 % of GDP (or 2.3 % of total 
tax  revenue),  compared  with  the  EU  average  of 
1.6 %  of  GDP  (or  4.0 %  of  total  tax  revenue) 
(European  Commission,  2019d).  More  ample 
changes  to  benefits  concerning  direct  taxes  are 
only  planned  to  be  decided  once  the  dedicated 
working  group  on  the  evaluation  of  tax  benefits 
will  have  presented  their  report  (expected  for 
March 2019). 

for 

(VAT)  payment  scheme 

For indirect taxes, besides the new value added 
tax 
imports 
(reverse-charge  mechanism),  implemented  in 
2018,  some  changes  are  planned  for  2019.  On 
the one hand, the budget adopted for 2019 includes 
rate increases for excise duties and changes to the 
stamp  tax  on  credit  contracts  (with  additional 
revenue  estimated  at  EUR 75  million).  On  the 
other  hand,  the  decrease  for  gasoline  of  the 
petroleum  tax  supplement  in  2019  is  estimated  to 
generate  a  revenue  loss  of  EUR 48  million.  The 
new VAT payment scheme for imports is expected 
to  generate  some  short-term  revenue  shortfalls 
from  customs  VAT  in  2018  and  2019,  which 
overall  should  be  largely  compensated  by  lower 
reimbursements. The budget adopted for 2019 also 
includes  the  application  of  the  reduced  VAT  rate 
of 6 % to the contracted power in electricity and to 
the  fixed  cost  of  access  to  the  gas  network 
(estimated 
loss  of  around  EUR 19 
million). Moreover, the  2019 budget has extended 
the  reduced  VAT  rate  of 6 %  to  electronic  books, 
newspapers  and  periodicals,  thereby  aligning  the 
VAT 
treatment  of  electronic  and  physical 
publications.  The  reduced  VAT  rate  of  6 %  will 
also  apply  to  other  supplies  such  as  cultural 
services (estimated revenue loss of around EUR 10 
million),  the  rental  of  certain  medical  equipment 
and forest cleaning. 

revenue 

VAT  collection  has  become  significantly  more 
efficient in recent years. The VAT gap — which 

30 

 
4.1. Public finances and taxation 

it 

equity-financing.  However, 

introduction  of  a  Notional  Interest  Deduction  (24) 
regime  (effective  from  1  January  2017),  the  so-
called  debt  bias (25)  in  corporate  taxation  has 
decreased substantially and is now zero (Centre for 
European  Economic  Research,  2017).  The  same 
holds  for  family  businesses  that  tend  to  have  a 
higher  share  of  equity-financing.  This  low  debt-
bias  could  in  particular  reward  investments  by 
young, innovative and high-risk firms that usually 
rely more on equity financing. The same holds for 
family businesses that tend to have a  higher share 
of 
remains 
burdensome  to  comply  with  taxes  in  Portugal. 
According  to  the  Paying  Taxes  2019  Report 
(World  Bank,  2018a)  despite  ranking  34th (26) 
overall  as  regards  the  ease  of  doing  business,  the 
time  needed  to  pay  and  file  taxes  in  Portugal 
remained 243 hours in 2017, the 4th longest in the 
EU.  This 
the 
unweighted  EU  average  of  around  172  hours  and 
median of around 143.3 hours. Furthermore, while 
Portugal  offers  one  of  the  highest  implicit  R&D 
tax  subsidy  rate  for  large  profitable  companies  in 
the EU (OECD, 2018f), private R&D expenditure 
as  a  percentage  of  GDP  remains  relatively  low 
compared  with 
average.  Closely 
the  EU 
monitoring  and  evaluating  the  different  R&D  tax 
measures  would  help  better  understand 
their 
effectiveness, notably in boosting investment. 

is  both  significantly  above 

(24)  See  European  Commission  (2018a)  for  a  more  detailed 

description of the regime. 

(25)  Measured as the additional rate of return before taxes that 
an  equity-financed  investment  needs  to  achieve  to  break 
even in comparison to a debt-financed investment. 

(26)  Out of 190 countries. 

31 

 
                                                           
4.2.  FINANCIAL SECTOR 

4.2.1.  BANKING SECTOR*  

the  back  of  a 

Financial  stability  metrics  continue  to  improve 
favourable  operating 
on 
environment.  Banks’  profitability 
increased 
sharply  in  the  first  half  of  2018  reflecting  a 
decreasing  flow  of  impairments  and  provisions 
(respectively  down  by  30.5 %  and  39 %  year-on-
year), a reduction in staff costs (by 7.7 %) and, to a 
lesser extent,  an  increase in income from  services 
and commissions (up by EUR 72 million or 5.2 % 
year-on-year).  Liquidity  and  funding  remained  at 
comfortable  levels  as  deposits  have  gradually 
increased and the loan-to-deposits ratio dropped to 
87.1 %  in  mid-2018.  Asset  quality  improved 
gradually  each  quarter  (down  to  11.7 %  in  the 
second  quarter  of  2018  from  a  peak  at  17.9 %  in 
mid-2016)  and  the  non-performing  loan  coverage 
ratio (27)  increased  to  53.4 %  at  the  end  of  June 
2018, close to 10 percentage points higher than in 
June  2016.  In  nominal  terms  the  progress  in 
reducing the stock of legacy non-performing loans 
is  substantial,  at  EUR 18  billion  or  36 %  of  the 
original  stock  from  the  second  quarter  of  2016. 
Solvency  ratios  remained  broadly  stable  with  the 
total capital adequacy ratio at around 15 % in June 
2018  and  the  common  equity  tier  1  ratio  –  an 
alternative measure of bank solvency that gauges a 
bank’s  capital  strength  -  at  13.4 %.  The  banking 
system’s assets began increasing again in the  first 
half of 2018, reversing the downward trend seen in 
recent years, in which the total assets of the sector 
shrank by over a quarter after 2011.  

The Portuguese banks’ total assets stabilised at 
around EUR 400 billion - around twice the level 
of  GDP.  This  compares  with  EUR 580  billion 
(345 %  of  GDP)  in  March  2012.  With  deposits 
growing  slightly  and  loans  remaining  stable,  the 
loan-to-deposit ratio fell to 89 % in June 2018- the 
lowest ratio since euro introduction.  

Consumer  loans  are  growing  rapidly,  while 
gross  mortgage 
lending  remains  subdued. 
Overall,  loans  to  households  increased  by  only 
0.6 %  between  June  2017  and  June  2018,  but 
consumer  loans  grew  by  11.3 %.  Monthly  new 
consumer  loans  amounted  to  less  than  EUR 200 
million  in  2012-2013,  but  are  now  at  around 
(see  Graph  4.2.1).  New 
EUR 400  million 

(27)  Loan-loss reserves to cover expected losses relative to non-

performing loans 

mortgages  were  on  average  below  EUR 175 
million  per  month  in  2012-2013,  having  fallen 
from  EUR 1.5  billion  per  month  in  2004-2007. 
Since  summer  2017,  they  have  been  consistently 
above  EUR 700  million.  But  despite  double-digit 
growth  in  new  mortgage  attribution,  redemptions 
still  outweigh  new  housing  loans.  Consequently, 
the  stock  of  outstanding  mortgages  fell  by  1 %. 
Loans for other purposes fell by 2.4 %.    

Graph 4.2.1:  New loans granted 

Source: Bank of Portugal 

Deposits  have  reached  a  new  all-time  high 
driven  by  growth 
in  corporate  deposits.  
Remuneration of deposits is relatively higher than 
in  the  Netherlands,  Germany  or  Luxembourg 
where banks pay on average negative interest rates 
on  their  corporate  deposits  since  early  2017. 
Unlike  other  EU-jurisdictions,  Portuguese  banks 
are  forbidden  by  law  to  charge  negative  interest 
rates,  even  to  large  companies.  This  restriction 
increases  the  incentives  for  corporate  savings  in 
latter  has  been 
Portugal.  Consequently, 
experiencing  year-on-year  growth  in  the  double 
digits since early 2017, pushing aggregate deposits 
to  ever-higher  record  levels,  while  household 
deposits have remained stable at around EUR 140 
billion  since  June  2016.  Whereas  the  average 
interest  rate  for  new  deposits  was  0.15 %  in  June 
2018,  the  interest  rate  on  the  overall  stock  of 
savings was 0.22 %. This is the result of very high 
interest rates in 2011-2012 (see Graph 4.2.2). 

the 

32 

0,00,20,40,60,81,01,21,41,61,82,0012345678sept-2007mars-2008sept-2008mars-2009sept-2009mars-2010sept-2010mars-2011sept-2011mars-2012sept-2012mars-2013sept-2013mars-2014sept-2014mars-2015sept-2015mars-2016sept-2016mars-2017sept-2017mars-2018sept-2018NFCsHouseholds - Mortgages (rhs)Households - Consumer credit (rhs)EUR billionEUR billion 
 
                                                           
 
4.2. Financial sector 

Graph 4.2.2:  Saving with domestic banks 

has  helped  lower  the  ratio.  In  parallel,  banks  are 
focusing  on  the  non-performing  loans  coverage 
ratio,  which  stood  at  52.8 % 
in  mid-2018, 
9.7 percentage  points  above  the  level  recorded  in 
June  2016,  when  the  non-performing  loan  ratio 
reached  its  peak.  While  the  coverage  ratio  for 
mortgages  was  relatively  low  at  26 %,  due  to  the 
importance of collaterals, it stood at 57.9 % in the 
segment of non-financial corporations, and 60.9 % 
in the consumption and other purposes segment.  

The  Portuguese  banking  system  is  increasingly 
profitable, reflecting lower loan losses and past 
cost-cutting.  Return  on  equity  stood  at  3.1 %  in 
June  2018,  improving  from  0.2 %  12  months 
earlier. The cost-to-income ratio stood at 57.7 % in 
Q2-2018, which represents a 8.2 percentage points 
decline  compared  to  March  2017  and  compares 
well  with  the  EU’s  average  of  65 %.  Operational 
expenses  decreased  by  4.5 %  over  those  12 
months. Banks are starting to reap the fruits of past 
cost  cutting  and  re-sizing,  and  should  continue 
adapting 
income 
increased  by  8.3 %  over  that  time  period,  due 
mainly  to  significant  impairment  reduction  and 
slightly  better 
intermediation  revenue 
based on lower deposit remuneration.  

systems.  Operating 

interest 

their 

in  June  2018,  compared 

Portuguese banks  managed  to issue  shares and 
to  attract  new  shareholders,  yet  their  capital 
ratio  is  converging  to  the  EU’s  average.  The 
system’s  total  capital  and  reserves  amounted  to 
to 
EUR 59 billion 
EUR 34.3 billion in June 2007. Between June 2017 
and  June  2018  the  common  equity  tier  1  ratio 
increased  slightly  by  0.2 percentage  points  to 
13.4 %. Since late 2016 CGD, Novo Banco, Banco 
Comercial  Português,  and  Montepio  strengthened 
their capital to the tune of EUR 4.9, 2.2, 1.63, and 
0.25  billion  respectively,  adding  close  to  EUR  9 
billion  capital  to  the  system.  Yet  even  after  those 
recapitalisations, Portuguese banks are still among 
the EU’s least capitalised, and only the Italian and 
Spanish  banking  systems  have 
lower  overall 
common equity tier 1 ratios. Portuguese banks will 
have  to  further  improve  profitability  to  generate 
capital  organically.  Speeding-up  non-performing 
loans  disposal  would  also  improve  the  capital 
ratios’ denominator. 

In  July  2018,  Banco  de  Portugal  started  to 
apply the recommendations on borrower-based 
macro-prudential  measures  to  new  mortgage 

Source: Bank of Portugal 

While 
loans 
the  ratio  of  non-performing 
remains  high,  there  has  been  a  considerable 
reduction  as  the  secondary  market  gains 
momentum.  Portuguese  banks  have  steadily 
decreased their stocks of non-performing loans and 
non-performing  loan  ratios  in  line  with  guidance 
from  the  Single  Supervisory  Mechanism.  Lenders 
either  work  out  bad  debts  internally,  jointly 
through  a  servicing  platform  or  increasingly  put 
them  up  for  sale  on  the  secondary  market.  As  the 
Portuguese  property  market  is  experiencing  a 
strong period of growth, the secondary market for 
non-performing loans (often backed by real estate) 
is  becoming  increasingly  competitive,  with  many 
foreign  players  actively  looking  to  purchase  non-
performing assets. In 2017, the total value of non-
performing  loan  secondary  market  transactions 
reached  about  EUR 2.3  billion.  Given  the  strong 
pipeline  of  new  deals,  this  figure  is  set  to  be 
surpassed in 2018.  

The  aggregate  non-performing  loans  fell  by 
roughly  one  third  over  the  last  two  years.  It 
stood  at  11.7 %  in  June  2018.  The  ratio  of  non-
performing loans in the corporate segment was still 
very  high  at  22.3 %  but  also  fell  by  over  5 
percentage  points  year-on-year.  Non-performing 
loans 
loans  and  mortgages 
segments stood at 12.6 % and 4.9 %, respectively, 
decreasing  year-on-year  from  15 %  and  6.5 %. 
Non-performing loan disposals have improved the 
ratios numerator while, more recently, loan growth 

the  consumer 

in 

33 

-1,00,01,02,03,04,05,06,0020406080100120140160180200Sep-2017Mar-2018Sep-2018Mar-2019Sep-2019Mar-2020Sep-2020Mar-2021Sep-2021Mar-2022Sep-2022Mar-2023Sep-2023Mar-2024Sep-2024Mar-2025Sep-2025Mar-2026Sep-2026Mar-2027Sep-2027Mar-2028Sep-2028Households' deposits (stock)NFC's deposits (stock)Weighted interest rate on new deposits (rhs)Weighted interest rate on outstanding amounts of deposit (rhs)Euribor 3m (rhs)EUR billion% 
 
4.2. Financial sector 

insolvency  practitioners  acting  as  mediators  for 
viable  companies  and/or  assisting  the  debtors  in 
both court and out-of-court procedures.   

4.2.2.  HOUSING MARKET* 

House  prices  continued  accelerating  in  2017 
and  the  first  quarter  of  2018.  In  annualised 
terms, the growth in house prices peaked to 12.2 % 
in Q1-2018 but moderated somewhat afterwards to 
11.2 %  in  Q2-2018  and  8.5 %  in  Q3-2018.  This 
compares to a year-average growth rate of 9.2 % in 
2017. The recent statistics on construction volumes 
issued  construction  permits  show 
and  newly 
substantial  growth.  Along  with  the  slowdown  in 
tourism,  these  developments  indicate  that  supply 
of real estate properties is likely to gradually catch 
up with demand.  Therefore, the increase in house 
prices  is  set  to  slow  down  over  the  medium  run. 
However,  a  more  significant  rebalancing  effect 
from the recent growth in construction is likely to 
be seen as of 2019, as many projects are still in the 
pipeline and will not have an immediate impact on 
the market. 

Table 4.2.1: 

Financial stability indicators 

Source: ECB 

to 

loans 

prevent 

consumer 

and 
the 
accumulation  of  financial  imbalances.  Against 
the  background  of  easing  credit  conditions,  these 
recommendations comprised a shortening of upper 
limits  for  the  loan  maturities  and  upper  limits  for 
the  loan-to-value  (28)  ratio.  The  recommendations 
also  included  ceilings  on  the  debt-service-to-
income  (29)  ratio  and  a  requirement  for  regular 
payments of interest and capital.  

the 

and 

Developing  the  market  for  distressed  asset 
transfers  remains  a  priority,  along  with 
improving 
recovery 
insolvency 
frameworks.  Portugal  has  been  struggling  with 
both  high  corporate  debt  and  a  high  level  of  non-
performing loans in the banking sector. Both often 
go  hand  in  hand,  so  addressing  these  issues  has 
been  a  priority  over  the  past  few  years.  In 
particular,  it  was  important  that  new  servicing 
companies  entered  the  secondary  market  for  non-
performing  loans  to  allow  the  market  to  develop 
and  gain  momentum.  Also,  further  facilitating  the 
loans  portfolios 
transfer  of  non-performing 
through a system allowing mass registration of the 
transfer  of  collateral  and  mass  communication  to 
courts  in  insolvency  proceedings,  as  foreseen  in 
Plano  Capitalisar,  will  be  key  milestones  in 
supporting  faster  market  transactions.  The  length 
of insolvency proceedings remains the weak point 
of  the  system,  although  a  set  of  measures  has 
already  been  introduced  to  expedite  proceedings 
through  the  use  of  technology  and  the  creation  of 

(28)  Loan-to-value is the ratio between housing loan(s) and the 
minimum  between  the  purchase  price  and  the  appraisal 
value of the house granted as collateral.  

(29)  Debt-service-to-income  is  the  ratio  between  the  total 
monthly  amount  of  a  borrower’s  repayment  obligations 
resulting  from  all  credit  agreements  and  the  borrower’s 
total available annual net income. 

34 

(%)20102011201220132014201520162017Q2-2018Non-performing debt3.75.37.07.813.614.414.411.09.5Non-performing loans----16.617.517.213.311.7Non-performing loans NFC----27.928.329.425.222.3Non-performing loans HH----9.79.48.77.16.4Coverage ratio61.556.654.356.437.940.645.449.953.4Loan to deposit ratio*123.9116.1119.5111.4104.999.393.690.187.1Tier 1 ratio8.38.611.312.211.412.611.714.514.1Capital adequacy ratio10.39.812.613.712.313.312.315.215.2Return on equity**6.7-4.2-3.3-9.3-3.50.9-5.5-0.83.1Return on assets**0.4-0.2-0.3-0.7-0.20.1-0.30.00.3*ECB aggregated balance sheet: loans excl to gov and MFI / deposits excl from gov and MFI**For comparability only annual values are presented 
                                                           
 
 
 
 
4.2. Financial sector 

Graph 4.2.3:  Valuation gap on price/income, price/rent 

and fundamental model valuation 

investment,  mostly  concentrated  on  real  estate 
acquisitions.  

Property valuations appear broadly in line with 
fundamentals. The estimated price-to-income and 
price-to-rent ratios in 2017 are still below the long-
term average (see Graph 4.2.3). The gap based on 
deviation  from  equilibrium  values  based  on 
demand  and  supply  fundamentals  shows  an 
overvaluation  of  7.5 %  in  2017  but  the  estimated 
overall  house  price  gap  is  close  to  zero.  House 
prices  are  therefore  not  considered  a  source  of 
imbalances for the moment given also the non-debt 
nature  of  factors  behind  the  recent  price  drivers. 
However,  these  developments  warrant  a  closer 
monitoring  under  the  macroeconomic  imbalances 
procedure. 

4.2.3.  PRIVATE INDEBTEDNESS* 

Private  debt  retains  a  steady  downward  trend. 
Benefiting from upward revisions to GDP in 2016 
and  2017,  the  share  of  consolidated  private  debt 
dropped  to  162.2 %  of  GDP  at  the  end  of  2017 
from  previously  reported  163.5 %.  The  new  ratio 
indicates  even  a  faster  adjustment  path  from  the 
peak  of  210.3 %  reached  in  2012  (see  Graph 
relevant 
4.2.4). 
Macroeconomic  Imbalances  Procedure  threshold 
of  133 %  was  thus  substantially  reduced  over  the 
five-year period. 

distance 

The 

the 

to 

Graph 4.2.4:  Private sector indebtedness 

Source: Bank of Portugal 

Both  the  corporate  and  household  sectors 
contributed  to  the  deleveraging  process.  At  the 
end  of  2017,  consolidated  corporate  debt 

Source: European Commission 

The increase in the deflated house price index is 
expected  to  exceed  again  the  6 %  indicative 
threshold  in  the  macroeconomic 
imbalance 
procedure scoreboard in 2018. This would mark 
the third consecutive breach  of the threshold after 
8.0 %  in  2017  and  6.1 %  in  2016.  However,  the 
rebound  in  house  prices  is  seen  as  a  correction 
from  previously  low  levels  of  valuation  and 
construction  activity  and  the  stock  of  mortgage 
loans is still on a downward trend relative to GDP. 
The  market  was  mainly  driven  by  tourism  and 
foreign  capital  inflows,  particularly  in  the  main 
cities  of  Lisbon  and  Porto  where  the  price  hikes 
are  well above the average. This is  moving prices 
not  only  in  popular  tourist  areas  but  affects  also 
residential  quarters.  This 
thus  having 
implications  on  housing  affordability,  particularly 
for socially vulnerable groups (see Section 4.3.2). 

is 

The impact of foreign capital flows is linked to 
purchases  of  properties  by  both  non-residents 
and non-habitual residents30. It is estimated that 
about  20 000  non-habitual  residents,  including 
about  7 000  directly  attributable 
targeted 
regulation  and  financial  incentives,  have  been 
attracted between 2012 and 2018. These incentives 
have  drawn  over  EUR  4  billion  in  additional 

to 

30  The  Non-Habitual  Resident  status  applies  to  those  who 
become  tax  residents  in  Portugal,  which  requires  them  to 
live  more  than  183 days  a  year  in  the  country.  The  status 
enables them to receive a preferential tax treatment over a 
period of ten years. 

35 

-20-15-10-505101520199719981999200020012002200320042005200620072008200920102011201220132014201520162017Model-based valuations gapPrice-to-income vs. historical averagePrice-to-rent vs. historical averageOverall valuation gap050100150200Q2-2001Q2-2002Q2-2003Q2-2004Q2-2005Q2-2006Q2-2007Q2-2008Q2-2009Q2-2010Q2-2011Q2-2012Q2-2013Q2-2014Q2-2015Q2-2016Q2-2017Q2-2018HouseholdsNon-financial corporationsTotal% of GDP 
 
                                                           
 
4.2. Financial sector 

growth. These data indicate a more efficient credit 
allocation in the economy.  

in 

to 

from 

loans 

the  net 

investment 

Non-bank  financing  is  increasing.  The  share  of 
debt securities in GDP widened from 17.3 % at the 
end of 2016 to 17.8 % at the end of 2017, while the 
share of bank loans fell from 41.4 % to 38.0 % for 
the  same  period.  The  increasing  share  of  foreign 
direct 
international 
investment  position  also  indicates  an  improved 
access 
foreign-owned  parent 
companies.  The  data  thus  imply  that  at  aggregate 
the  ongoing  process  of  deleveraging, 
level 
particularly  in  the  banking  sector,  is  not  having  a 
significant  negative  impact  on  private  investment, 
which  have  risen  strongly  in  2017  though  from  a 
low base. The potential for corporate investment is 
also  supported  by  the  improving  profitability  in 
many 
the  economy.  The  high 
indebtedness is however still posing constraints on 
smaller  firms,  companies  in  a  difficult  financial 
situation  as  well  as  new  entrants  with  limited 
access to alternative (non-bank) financing. 

sectors  of 

the 

Access  to  finance  remains  challenging,  along 
with  an  underdeveloped  capital  market.  Loans 
to non-financial corporations continued to decline, 
but at a slower pace compared to 2017. The loans’ 
contraction  affects  also  exporting  firms  and  firms 
with  growth  potential,  with  the  latter  being  likely 
to  finance  investments  with  own  resources,  at 
times leading to  sub-optimal  levels of investment. 
Furthermore,  the  non-negligible  share  of  zombie 
firms in the economy (although reducing) provides 
evidence  of  misallocation  of  resources  by  banks 
(Alexandre  et  al.,  2017).  Credit  access  is  also 
constrained  by 
limited  availability  and 
awareness of alternative sources of financing. The 
share  of  venture  capital 
investments  as  a 
percentage  of  GDP  is  one  of  the  lowest  among 
OECD  countries  and  still  below  the  pre-crisis 
this  context,  various  government 
level. 
initiatives  aim  to  facilitate  access  to  finance. 
Notably, 
the  programme 
Capitalizar  have  been  increased  from  EUR 1.6 
billion  in  2017  to  EUR 2.7  billion  in  2018. 
Additionally,  the  programme  StartUp  Portugal+ 
includes  an 
international  co-
investment funds as well as co-financing lines with 
incubators and accelerators, among others. Further 
diversification  of  financing  sources  and  risk 
finance remains key to increase investment. 

initiative  on 

the  credit 

lines  of 

In 

accounted  for  93.3 %  of  GDP  relative  to  68.9 % 
for households. Yet, the debt ratios in both sectors 
remain  well  above  the  country-specific  prudential 
and fundamental thresholds. For households, these 
thresholds  are  estimated  at  38 %  each.  For 
corporations,  the  benchmarks  are  estimated  at 
57 % and 66 % respectively. 

The  corporate  sector  is  expected  to  deleverage 
faster than households in the medium term. The 
latest  statistics  show  that  the  corporate  sector 
retains a substantial pace of active deleveraging in 
terms  of  bank  loans.  This  is  seen  from  the  fall  in 
the  consolidated  stock  of  bank  loans  to  private 
corporations  up  to  August  2018.  However,  the 
consolidated  stock  of  loans  to  households  has 
slightly increased in absolute terms  since the start 
of the year while still declining as a share in GDP. 
The  monthly  statistics,  available  only  in  non-
consolidated terms, clearly show that the corporate 
sector is deleveraging much faster than households 
over  the  past  months,  benefiting  from  improved 
profit  rates  and  foreign  direct  investment  inflows 
allowing for non-debt financing of investments. 

Graph 4.2.5:  Sectoral breakdown of domestic loans to non 

financial corporations (NFCs) 

Source: Bank of Portugal 

The corporate credit allocation pattern changed 
in a way that increasingly favours the tradable 
sectors  in  detriment  of  the  non-tradable  ones 
Earlier analysis indicated that strong credit growth 
to  non-tradable  sectors  before  the  financial  and 
economic  crisis  contributed  not  only  to  the  high 
level  of  indebtedness  but  thereby  also  limited  the 
expansion  of 
stock. 
Recently, in terms of sectorial dispersion, loans to 
tradable sectors reached 61 % of the total loans at 
the  end  of  2017  and  finally  generated  positive 

the  productive  capital 

36 

010203040506070Q1-2009Q3-2009Q1-2010Q3-2010Q1-2011Q3-2011Q1-2012Q3-2012Q1-2013Q3-2013Q1-2014Q3-2014Q1-2015Q3-2015Q1-2016Q3-2016Q1-2017Q3-2017Q1-2018Q3-2018TradableNon-tradableConstruction and real estateManufacturing% of total 
 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET 

Key  labour  market  indicators  are  close  to  pre-
crisis  levels  as  the  labour  market  situation 
continues  to  improve,  though  at  a  decelerating 
pace.  The  unemployment  rate  has  reached  2008 
levels  and  stood  at  6.7 %  in  Q4-2018  (below  the 
euro  area  average  of  8 %),  while  the  employment 
rate 
(seasonally  adjusted,  age  group  20-64) 
continued  to  grow  steadily  up  to  75.4 %  in  Q3-
2018  (above  the  Europe  2020  target  of  75 %) 
decelerating somehow from 75.3 % in the previous 
quarter.  The  long-term  unemployment  rate  fell 
from  4.3 %  in  Q3-2017  to  3 %  in  Q3-2018,  now 
close  to  the  EU  average  of  2.9 %.  Conversely, 
although  decreasing,  youth  unemployment  (15-24 
year  olds)  remains  sizeable  (19.3 %  in  Q3-2018 
compared  to  14.9 %  in  the  EU),  though  the  share 
of  young  people  (15-24)  neither  in  employment 
nor  in  education  or  training  (NEET)  of  9.3 %  in 
2017  was  the  below  EU  average  of  10.9 %. 
Regional  differences  on  key 
labour  market 
indicators  are  moderate  (the  unemployment  rate 
ranged between 6.9 % and 10.4 % in 2017).  

larger 

the  unemployment  rate. 

than 
Labour  market  reserves  are 
suggested  by 
In 
particular,  the  share  of  workers  available  to  work 
but  not  seeking  a  job  remains  above  the  EU 
average (3.4 % in Q3-2018 as a share of the active 
population,  compared 
the  EU). 
Although the overall activity rate is above the EU 
average (see Section 1), this evidence suggests that 
there is room for  further increasing labour  market 
participation,  which  will be critically important in 
view of Portugal’s ageing population and low birth 
rates (31).  

to  3.1 % 

in 

Youth  Guarantee  measures  have  been  far 
reaching  and  contributed  to 
lower  youth 
unemployment  and  NEET  rates.  On  average 
during 2017 almost 6 out of every 10 NEETs aged 
under  25  were  registered  in  the  Youth  Guarantee 
scheme  (compared  to  an  EU  average  of  40.5 %). 

(31)  The 2018 Ageing Report estimates a decline in population 
from  10.3  million  in  2016  to  9.9  million  in  2030  and  9.1 
million in 2050, with fertility rates in a range  between 1.3 
and  1.5  (among  the  lowest  in  the  EU  and  well  below  the 
replacement  level  of  about  2.1).  The  old-age  replacement 
ratio is set to double within the same period. 

More  than  half  of  those  who  left  the  Youth 
Guarantee in 2017 (54 %)  were in employment or 
in education and training six months later. Follow-
up  data  on  the  long-term  outlook  suggest  that 
outcomes  are  sustainable.  However,  achieving  the 
target  of  providing  an  offer  within  four  months  is 
proving difficult. The percentage of  young people 
still  in  the  preparatory  phase  (i.e.  not  having 
received a quality offer of employment, education 
or training) after 4 months stood at 58 % in 2017, 
above  the  EU  average  (51 %).  This  is  delaying 
labour  market  access  and  may  slow  down  the 
long-term  unemployment  among 
reduction  of 
young people.  

and 

Contrato-Emprego 

Active labour  market policies achieved positive 
results  but  there  is  scope  for  wider  coverage 
and focus on upskilling. Hiring support measures 
like 
traineeship 
programmes  like  Estágios  Profissionais  (which 
includes  a  bonus  award  for  traineeship  to  open-
ended  employment  contract  conversion  called 
Prémio-Emprego)  brought  about  good  results  in 
terms  of  outreach  and  engagement  of  the  main 
target  groups.  The  take-up  of  both  measures  is 
high  (above  70 %  under  Contrato-Emprego  and 
around  95  %  for  Estágios  Profissionais)  and  the 
main  targets  are  widely  covered  (open-ended 
hiring  and  youth).  However,  the  envisaged  two-
fold  measure  Contrato-Geração,  that  combines 
hiring support and exemptions from social security 
contribution,  which  was  announced  in  late  2017, 
to  national 
remains  on  hold  and  according 
authorities  will  only  be  implemented  in  2019.  By 
promoting  young  people’s  integration  into  the 
labour market while allowing the elderly to make a 
smooth  transition  to  retirement,  this  measure  has 
the  potential  to  promote  intergenerational  fairness 
and  cushion  the  expected  impact  of  population 
ageing,  which  represents  a  key  challenge  and  a 
labour  market 
priority 
low 
the 
conditions 
qualification  level of the labour force (see  section 
4.3.3)  appears  a  priority  for  future  investment  in 
active  labour  market  policies.  Currently,  training 
programmes  account  for  around  65  %  of  total 
coverage  of  jobseekers  by  active  labour  market 
programmes  (compared  to  below  60  %  in  late 
2016).

investment.  As 

addressing 

improve, 

for 

37 

 
 
                                                           
4.3. Labour market, education and social policies 

Box 4.3.1: Monitoring performance in light of the European pillar of social rights in Portugal 

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards  better  working  and  living  conditions  in  the  European  Union (1).  It  sets  out  twenty  essential 
principles  and  rights  in  the  areas  of  equal  opportunities  and  access  to  the  labour  market;  fair  working 
conditions; and social protection and inclusion.  

recent 

to  some 

indicators  of 

While  the  social  and  employment  situation  is 
faces  challenges  with 
recovering,  Portugal 
regard 
the  Social 
Scoreboard  supporting  the  European  Pillar  of 
Social  Rights.  The 
labour  market 
performance  drove  a  significant  improvement  of 
rates  and  a 
employment  and  unemployment 
reduction in the share of people at risk of poverty or 
social  exclusion.  Nonetheless,  income  inequality 
remains  high  and  the  percentage  of  early  leavers 
from  education  and  training  still  represents  a 
challenge.  On  the  positive  side,  Portugal  continues 
to  be  among  the  best  performers  in  terms  of 
participation  to  formal  childcare  for  children  aged 
less  than  three,  though  with  a  slight  reduction  in 
2017,  and  though  provision  of  childcare  is  still 
insufficient in some areas of the country. 

The 
impact  of  social  transfers  (other  than 
pensions)  on  poverty  reduction  remains  limited, 
highlighting a critical situation when compared to 
the  EU  average.  While  transfers  contributed  to  a 
reduction of the poverty rate by 22.5 % in 2017, this 
impact  has  decreased  in  recent  years  and  lies  below 
the  EU  average  of  34  %.  Portugal  has  reinforced 
some  benefits  in  recent  years,  however  this  has  not 
changed  the  overall  trend.  In  particular,  while  the 
minimum  income  scheme  has  increased  its  take-up 
by 14 500 people since September 2017, its adequacy 
is  among  the  lowest  in  the  EU:  on  average,  the  net 
income  of  a  minimum  income  recipient  amounts  to 
around 40 % of the national poverty threshold. 

Portugal faces a low average qualification level of the adult population, with potentially negative effects 
on labour market adaptation and productivity growth, in a context of ageing population. The lack of skills of 
the population, notably digital, prompted the Portuguese authorities to reprogram their European Social Fund 
operational programmes in order to reinforce interventions linked with skills upgrading and adult education 
while,  simultaneously,  aligning  them  with  the  country-specific  recommendations.  The  largest  share  of  the 
ESF  reprogramming  was  allocated  to  the  Qualifica  programme  (launched  in  2017),  which  aims  to  raise 
qualifications, facilitate tailored training pathways and better align training provisions to labour market needs 
(see Section 4.3.3).  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission:  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en  

38 

Early leavers from education and training (% of population aged 18-24)Weak but improvingGender employment gapBetter than averageIncome quintile ratio (S80/S20)To watchAt risk of poverty or social exclusion (in %)On averageYouth NEET (% of total population aged 15-24)On averageEmployment rate (% population aged 20-64)Better than averageUnemployment rate (% population aged 15-74)Better than averageLong-term unemployment rate (population aged 15-74)Better than averageGDHI per capita growth On averageNet earnings of a full-time single worker earning AWTo watchImpact of social transfers (other than pensions) on poverty reductionCritical SituationChildren aged less than 3 years in formal childcareGood but to monitorSelf-reported unmet need for medical care On averageIndividuals' level of digital skillsTo watchSocial protection and inclusionEqual opportunities and access to the labour marketSOCIAL SCOREBOARD FOR PORTUGALMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJoint Employment Report 2019, COM (2018)761 final. Data update of 29 January 2019.NEET:neitherinemploymentnorineducationandtraining;GDHI:grossdisposablehousehold income.                      Dynamic labour markets and fair working conditions 
 
 
 
 
 
 
 
 
4.3. Labour market, education and social policies 

the 

(e.g. 

implementation  of 

improved 
job 
integration  agreements  for  other  areas  beyond 
employment/training,  like  health,  education  or 
social action).  

a 

signed 

tripartite 

In  June  2018  the  government  and  social 
partners 
agreement 
envisaging  measures  to  tackle  labour  market 
segmentation. As  shown in  Section 1 and in past 
country  reports,  the  Portuguese  labour  market  has 
one of the highest shares of workers on temporary 
contracts  in  the  EU  (with  negative  consequences 
for  job  quality,  earnings  and  career  perspectives). 
The  agreement,  which  was  officialised 
in  a 
government resolution (Resolucão do Conselho de 
Ministros  n.  72/2018),  aims  at  addressing 
segmentation  through  an  “Action  Plan  to  tackle 
precariousness and promote collective bargaining” 
(see  description  in  Box  4.3.2).  Other  related 
measures,  notably  the  reinforcement  of  the  labour 
inspectorate,  are  ongoing  with  the  procedures  to 
recruit 122 labour inspectors almost completed. In 
2019, the Labour Ministry plans to open a new call 
to  recruit  48  extra  workers  for 
the  Labour 
Conditions Authority. 

Graph 4.3.1:  Annual change in the employment rate of low 
and medium-skilled workers (age 20-64) since 
Q1-2009 

Source: European Commission based on Eurostat, LFS 

Achieving  a  proper  balance  between 
the 
currently tabled proposals will be key for their 
effectiveness  in  reducing  segmentation  while 
sustaining job creation. Introducing limitations to 
combination  with 
fixed-terms 

contracts 

in 

Portugal  is  implementing  measures  to  tackle 
long-term  unemployment,  but  effectiveness 
remains  a  challenge.  Monitoring  data  of  the 
Council  Recommendation  on  the  integration  of 
long-term unemployed reveals a very high share of 
implementation on all segments (around 98 % and 
well above the  EU average of 83 %), as  well as a 
high  share  of  sustainability  (73 %  of  users  with 
2016 job integration agreements in employment 12 
months  after  exiting  versus  an  EU  average  of 
60.7 %). However, effectiveness remains low with 
only 16.8 % transiting to employment in 2017 and 
around half of the 2016 users still unemployed 12 
months after receiving a job integration agreement.  

and 

governance 

Multi-level 
cooperation 
between  Public  Employment  Services  (PES), 
companies  and  training  organisations  is  not 
always  effective.  At  36.7 %  in  2017  the  share  of 
unemployed  people  using  public  employment 
services  to  find  a  job  is  among  the  lowest  in  the 
EU  and  has  been  steadily  decreasing  since  2008 
when  it  stood  at  60.3 %  (Eurostat,  Labour  Force 
Survey). Changes in the  working  methods of PES 
were  introduced  to  allow  more  focus  on  job-
seekers  less  likely  to  find  a  job,  such  as  the  low-
skilled  and  long-term  unemployed.  While  a  better 
segmentation  of  clients  to  provide  individualised 
services  and  focus  on  re-skilling  and  up-skilling 
needs  is  welcome,  the  effectiveness  of  these 
measures is to be monitored and further investment 
may be required. There is still limited cooperation 
of PES with other stakeholders, but authorities are 
working  to  improve  their  matching  function  both 
by  upgrading  the  online  vacancy  database  and  by 
strengthening  the  cooperation  with  employers, 
namely  by  introducing  dedicated  case  managers 
for relevant employers (Gestor+). 

for 

tool 

interface 

IEFPonline 

Public  Employment  Services  have  introduced 
an  online 
job-seekers  and 
employers,  setting  up  a  “one-stop  shop”  for 
employment.  The  new 
is 
designed  to  allow  users  to  obtain  full  responses 
without  physical  presence  in  the  employment 
fully 
service.  This 
implement  the  Council  recommendation  on  the 
integration of the long-term unemployed. Effective 
inter-institutional  connectivity  and 
information 
sharing (e.g. with social security) is assured every 
year in the budget law (the 2019 draft envisages a 
new  connection  between  employment  and  health 
services).  However,  some  features  could  be 

initiative  contributes 

to 

39 

-4-3-2-101234-3-2-101234Change int he employemnt rate of     low-skilled, over four quartersChange in employment rate of medium-skilled, over four quarters Q1-2018Q1-2017Q1-2014Q1-2016Q1-2015Q1-2009Q1-2011Q1-2010Q1-2013Q1-2012 
 
4.3. Labour market, education and social policies 

than expected. This evidence suggests that possible 
negative  effects  of  the  minimum  wage  on  low-
skilled  employment  are  not  evident  in  recent 
aggregate  developments,  in  a  context  of  cyclical 
upturn that may have favoured job creation among 
this group of workers (33). Disparities between the 
employment  rates  of  high,  medium,  and  low-
skilled  workers  are  smaller  in  Portugal  than  in 
most  other  Member  States,  and  this  is  true  for 
young  workers  as  well  (draft  Joint  Employment 
Report 2019, Fig. 22).  

Legislation  to  address  the  gender  pay  gap  was 
introduced in August 2018. Portugal has a higher 
than average gender pay gap, which has increased 
significantly  in  recent  years  (in  unadjusted  terms) 
from  8.5 %  in  2007  to  17.5 %  in  2017  (versus 
16.2 %  in  the  EU).  While  female  labour  market 
participation is high, the growing pay gap suggests 
that  women  are  increasingly  employed  in  lower-
paid sectors and jobs, although they are on average 
more  qualified  than  men.  In  addition,  they  may 
receive lower hourly wages compared to men with 
similar  experience.  Recent  measures  include  an 
in 
annual 
remuneration  between  women  and  men  and  an 
assessment  per  company,  profession  and  level  of 
qualifications  (to  be  applied  to  companies  with 
250+ employees in the first 2 years, and with 50+ 
after  that).  Specific  actions  from  the 
labour 
inspectorate  and  sanctions  against  employers  or 
discriminatory treatment are envisaged. 

differences 

report 

about 

(34) 

incentives  to  open-ended  hiring  could  help  to 
reduce  labour  market  segmentation.  However,  too 
strict constraints for hiring on temporary contracts 
could  reduce  investment  and  job  creation,  in  a 
context  where  job  creation  is  mainly  in  services 
with  a  significant  share  of  seasonal  activity,  and 
some aspects of the legal framework for dismissals 
could still discourage open-ended hiring (as shown 
in  the  2017  and  2018  country  reports).  Also, 
lengthy  court  procedures  in  case  of  employment 
disputes  may  be  a  disincentive  to  permanent 
hiring,  though  this  has  improved  recently  (the 
average  length  of  labour  trials  in  first  instance 
decreased from 11 months in 2016 to 9 in 2017).  

time, 

it  places 

the  same 

A further minimum wage increase took place in 
2018. The monthly minimum wage increased from 
EUR 557  in  2017  to  EUR 580  in  2018  and 
EUR 600 in 2019. In absolute levels, this is in the 
medium  range  as  compared  to  other  EU  Member 
States (32).  At 
the 
Portuguese  minimum  wage  among  the  highest  in 
the EU when compared to the median wage in the 
same  country  (the  wage  earned  by  the  worker  in 
the middle of the wage distribution), with a ratio of 
nearly  60 %  (latest  comparable  OECD  data  for 
2016).  This  high  ratio 
implies  a  significant 
compression  of  the  wage  distribution,  with  more 
than 20 % employees earning the minimum  wage, 
which  by  reducing  the  education  premium  may 
lower  incentives  for  the  low  skilled  to  invest  in 
education and training (see also Section 4.4.3).  

Minimum wage increases were accompanied by 
rises  in  the  employment  rate  of  low-skilled 
workers,  amidst  strong  job  creation  and  a 
favourable  economic  cycle.  Graph  4.3.1  shows 
that  the  employment  rate  is  increasing  for  both 
low-  and  medium-skilled  workers  since  2013.  In 
particular,  the  employment  rate  of  low-skilled 
workers  increased  by  2.7  and  3  percentage  points 
during  the  year  to  the  first  quarter  of  2017  and 
2018,  respectively,  against  an  increase  of  1.8 
percentage points in both years for medium-skilled 
workers. These two annual observations are above 
the  historical 
the  dotted 
relationship,  which  implies  that  the  employment 
rate  of  low-skilled  workers  is  improving  faster 

representing 

line 

(32)  For comparability across countries, Eurostat calculates the 
minimum  wage  per  12  months,  resulting  in  a  level  of 
EUR 700 in Portugal (equivalent to EUR 600 paid 14 times 
a year). 

Collective  agreements  are  nearing  pre-crisis 
levels. Data for 2017 (35) show a 42 % increase in 
the  number  of  agreements  from  2016.  Data  for 
2018  show  a  further  year-on-year  increase  of  6 % 
in 
the  number  of  agreements  and  10 % 
in 
coverage,  reaching  over  900  000  workers.  The 
revival in collective bargaining points to improved 

(33)  The Ministry of Labour has been monitoring the effects of 
minimum  wage 
further  details,  see 
increases.  For 
“Ministério do Trabalho, Solidariedade e Segurança Social, 
2018”. 

(34)  The  law  requires  the  Statistical  Office  of  the  Ministry  for 
Labour,  Solidarity  and  Social  Security  to  produce  regular 
data on pay disparities by sector and company (profession 
and  qualification  level)  based  on  annual  info  provided  by 
companies. Based on the statistical information, companies 
are notified by the labour inspectorate to present a plan to 
evaluate their pay disparities, to be implemented within 12 
months.  After  implementation,  the  company  has  to  either 
correct or justify pay disparities.  

(35)  Direção-Geral  do  Emprego  e  das  Relações  de  Trabalho, 
Ministério do Trabalho, Solidariedade e Segurança Social. 

40 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

minimum  wage increases (see Section 4.3.1) have 
so far shown only a limited impact in reducing in-
work  poverty  though  this  can  be  related  to  the 
overall  increase  in  median  disposable  income, 
while labour  market segmentation remains a  main 
driver.  

in 

the  open 

The  labour  market  situation  of  people  with 
disabilities is improving, with a slight increase in 
their  placements 
labour  market 
compared to the previous years, and a decrease in 
the  number  of  registered  unemployed  (European 
Commission,  2019b).  Nonetheless,  challenges 
remain. Despite an employment rate slightly above 
the EU average (50.5 % vs. 48.1 %), the number of 
those employed in the mainstream labour market is 
very  low  in  both  the  public  and  private  sectors 
(where  it  represents  0.5 %  of  the  workforce, 
against a quota stated by law of 2 %) (36). 

Graph 4.3.2:  At-risk-of-poverty in Portugal and European 

Union (current composition), 2010 vs 2016 

Source: Eurostat 

(36)  The current quota law applying to the public sector is 5 %, 

by Decree-law 29/2001, of 3 February 

social  dialogue  conditions  in  Portugal,  which  is 
also  suggested  by  a  good  level  of  stakeholders’ 
involvement in policy design and monitoring. The 
broad consensus found among most social partners 
in  the  tripartite  agreement  on  labour  market 
reforms  mentioned  above  and 
regular 
consultation on monitoring the impact of minimum 
wage  developments  are  good  examples  of  such 
involvement.  

the 

4.3.2.  SOCIAL POLICIES 

Portugal  saw  a  substantial  decrease  in  its 
poverty indicators. As shown in Section 1, the at-
risk-of-poverty  or  social  exclusion  rate  (AROPE) 
in  2016 
to  decline,  from  25.1 % 
continues 
(referring  to  2015  incomes)  to  23.3 %  in  2017 
(referring  to  2016  incomes),  and  is  now  closer  to 
the EU average of 22.4 %. Significant progress has 
been  recorded  for  children  (0-17)  as  the  indicator 
dropped  by  2.8  percentage  points  in  2017  to 
24.2 %, now below the EU average of 24.9 %. The 
improvement is related in particular to the increase 
in  work  intensity  of  households.  Still,  child 
poverty  remains  high  in  households  with  three  or 
more  dependent  children  and 
lone-parent 
households.  While  improving,  the  situation  of 
elderly people (65+) shows some vulnerabilities as 
their  AROPE  rates  at  20.7 %  in  2017  is  2 
percentage  points  higher  than  the  EU  average. 
National  data  point  to  a  further  decrease  of  the 
AROPE  to  21.6 %  for  the  income  year  2017. 
Notwithstanding  some  improvement,  the  share  of 
people  in  a  situation  of  material  deprivation 
remains significant. In 2017, 18.0 % of Portuguese 
were materially deprived, and 6.9 % were severely 
materially deprived. 

in 

In spite of overall progress, reducing poverty of 
people  in  employment  is  less  evident.  The  in-
work  poverty  rate  remains  above  the  EU  average, 
with  an  only  minor  decrease  in  2017  (by  0.1 
percentage  point  to  10.8 %,  versus  9.6 %  in  the 
EU).  The  percentage  of  working  poor  people  in 
households  with  high  work  intensity  and  with 
children  is  among  the  highest  in  the  EU.  In 
addition, the poverty rate among part-time workers 
in  2017  and  remains 
has  further 
the  EU  average  (31.5 % 
significantly  above 
compared  to  15.8 %  in  the  EU).  The  recent 

increased 

41 

16,715,217,313,415,714,816,919,619,820,622,923,9051015202530EUEUPTPT2016201020162010Rural areasTowns and suburbsCities% 
 
 
 
 
 
                                                           
the  Greater  Lisbon 

The risk of poverty remains high in rural areas. 
The  proportion  of  people  at  risk  of  poverty  is 
significantly  larger  in  rural  areas  than  in  cities, 
with  a  larger  gap  than  EU  average  (see  Graph 
4.3.2).  Recent  data  show  that,  taking  the  national 
poverty threshold as the benchmark (EUR 5 610 in 
2017), 
(Área 
Metropolitana  de  Lisboa)  was  the  region  with  the 
lowest  at-risk-of  poverty  rate  (12.3 %)  while  the 
Autonomous  Regions  were  the  most  affected  by 
the  risk  of  poverty  (31.5 %  in  Azores  and  27.4 % 
in  Madeira).  Nonetheless,  pockets  of  poverty 
persist  also  in  urban  areas,  notably  in  the  capital 
region  when  computing  the  poverty  threshold  at 
regional level (see further details in Section 4.4.3). 

area 

Recent  increases  in  house  prices  (see  Section 
4.2.2)  can  put  housing  affordability  at  risk  in 
urban  areas.  Overall,  indicators  of  housing  cost 
overburden  (37)  do  not  signal  a  challenge  for 
Portugal  compared  to  the  EU  average.  However, 
the  share  of  tenants  experiencing  housing  cost 
overburden,  at  28.2 %  in  2017,  is  above  the  EU 
average  of  26.2 %.  Moreover,  the  rate  of  severe 
housing deprivation in cities, though decreasing, is 
above  the  EU  average  (5.3 %  vs.  3.8 %).  The 
recent rise in housing prices is likely to worsen the 
situation  for  people  who  have  low  incomes, 

particularly in the country’s two largest cities. The 
government 
launched  a  ‘New  Generation  of 
Housing  Policies’  strategy  in  May  2018  which 
acknowledges the problem, notably for lone-parent 
households and young people. The strategy aims at 
promoting  universal  access  to  adequate  housing, 
for  instance  by  increasing  the  share  of  public 
the  housing 
lowering 
supported  housing  and 
overburden within the rental regime. 

Income  inequality  has  declined  but  remains 
above  the  EU  average.  The  ratio  of  incomes 
earned by the top 20 % to the bottom 20 % of the 
income  distribution  (the  S80  /  S20  ratio  (38) 
decreased from 5.9 in to 5.7 in 2017 (against 5.1 in 
the  EU).  The  improvement  was  driven  by  an 
increase in the income share of poorer households, 
with the bottom 20 % of the population’s share of 
income increasing from 6.7 % in 2014 to 7.1 % in 
2017.  While  market 
inequalities  are 
substantially  higher  than  the  EU  average,  the  tax 
and  benefit  system  helps  to  reduce  some  of  these 
effects. According to the OECD (2018e), Portugal 
is among those countries where individuals with an 
income  close  to  the  median  are  more  likely  to 
experience  downward  mobility  than  to  rise  in  the 
income hierarchy. On average, the descendants of 
a  family  within  the  lowest  10 %  of  the  income 

income 

(37)  Share  of  households  who  spent  over  40 %  of  their 

Box 4.3.2: The 2018 Tripartite Agreement 

disposable income on housing costs 

A  tripartite  agreement  was  signed  in  June  2018  to  tackle  precarious  employment,  reduce  labour  market 
segmentation  and  promote  more  dynamism  in  collective  bargaining.  The  measures  proposed  in  the 
agreement,  subject  to  parliamentary  approval  (expected  in  2019),  seek  to  introduce  changes  in  the  labour 
code, the code of contributory schemes, the legal framework for the protection of employees, the framework 
of active labour market policies and other complementary legislation. 

(38)  S80/S20 is an indicator of income inequality, defined as the 
ratio of the proportion of total income received by the 20 % 
of  the  population  with  the  highest  incomes  to  the 
proportion  of  total  income  received  by  the  20%  of  the 
population with the lowest income. 

The approved action plan consists of three main strands of action. The first one tackles precariousness and 
seeks  to  reduce  labour  market  segmentation,  namely  by  limiting  the  scope  for  legal  use  of  fixed-term 
contracts (e.g. reducing the maximum duration of fixed-term contracts) and reducing the safeguard period to 
access social unemployment benefits when unemployment is due to the expiry of fixed-term contracts. Other 
proposals aim to reduce the excessive use of fixed-term contracts, promote open-ended hiring (by increasing 
the  length  of  the  probationary  period  and  by  means  of  incentives)  and  to  increase  contract  duration  for 
seasonal activities. 

The  second  strand  of  the  proposal  focuses  on  fostering  collective  bargaining  as  a  shared  effort  to  involve 
stakeholders  with  a  view  to  improve  labour  market  outcomes.  This  includes  reducing  individualisation  of 
labour  relations,  preventing  gaps  from  occurring  due  to  the  expiration  of  collective  agreements  and 
promoting the collective dimension for instruments of labour regulation. 

The  third  strand  is  policy-driven  and  envisages  the  reinforcement  of  public  means  and  instruments  to 
regulate labour relations. It implies upgrading the capacity of the Labour Conditions Authority, reinforcing 
the  mediation  role  of  the  Labour  Administration  and  simplifying  communication  procedures  regarding 
employment contracts.  

42 

 
 
                                                           
                                                           
4.3. Labour market, education and social policies 

highest  in  the  EU  for  participation  in  formal 
childcare  for  children  under  3  years  old  (47.6 % 
compared  to  an  EU  average  of  34 %  in  2017) 
though  slightly  decreasing  from  49.9 %  in  2016. 
However,  the  indicator  for  children  aged  4-6  is 
below  target  (see  Section  4.3.3).  Moreover,  the 
metropolitan areas of Lisbon and Porto suffer from 
an  insufficient  provision  of  childcare  and  supply 
exceeds  demand  in  small  inland  towns.  The 
National  Strategy 
and  Non-
Discrimination 
Igual  contains 
-  Portugal  + 
proposals  for  investment  in  childcare  services, 
including  an  increase  of  coverage  especially  in 
urban centres (42). 

for  Equality 

in 

this 

target 

A  measure  to  ensure  all  children  aged  4  and  5 
have access to pre-school education is currently 
being implemented, although there are difficulties 
in  accomplishing 
the  main 
metropolitan  areas,  especially  in  Lisbon.  Some 
new  facilities  have  been  built  in  recent  years,  co-
financed  by  the  European  Social  Fund  and  the 
European  Regional  Development  Fund.  Work  life 
balance depends significantly on the availability of 
childcare:  while  legislation  provides  that  both 
mothers and fathers are entitled to flexible working 
hours until children are 12 years old, access to this 
scheme is often difficult.   

Depopulation  also 
to  ageing  puts 
linked 
pressure  on  the  efficiency  and  quality  of  the 
public  services.  This  is  true  in  particular  in  rural 
regions,  with  particular  challenges  in  health  and 
long-term  care,  which  also  highlights 
the 
importance of pursuing active aging strategies. The 
2014  national  health  survey  found  that  about  458 
000  of  the  2.1  million  people  aged  65  or  older 
reported  difficulty  in  performing  at  least  one 
activity  of  personal  care;  among  those,  35 % 
needed help (or more help than they had) in order 
to perform such activities (INE/INSA, 2016). Over 
the last decade, the ageing population’s increasing 
need for care was addressed by developing a long-
term  care  system  based  on  the  provision  of 
community-based 
services, 
though  informal  care  still  plays  a  significant  role 
(European  Commission,  2018c)  and 
further 
investment  may  be  required.  In  June  2016,  the 
2017-2018  strategic  plan  for  the  development  of 
palliative care was launched, and in February 2017 

institutional 

and 

(42)  Resoluçao  do Conselho  de Ministros  n.  61/2018 in  Diário 

da República n. 97/2018, Série I de 2018-05-21 

distribution would need four or five generations to 
approach  the  average  income.  The  Portuguese 
population  ranks  among  the  highest  in  the  EU  in 
setting  social  inequalities  as  the  first  of  the  three 
main challenges for Europe (39). 

in  recent  years  (although 

The  impact  of  social  transfers  (other  than 
pensions) on poverty reduction remains limited, 
the  Social  Scoreboard 
as  highlighted  by 
accompanying 
the  European  Pillar  of  Social 
Rights.  While  transfers  contributed  to  a  reduction 
of the poverty rate by 22.5 % in 2017, this impact 
the 
has  decreased 
coverage  and adequacy of benefits  have increased 
to some  extent) and lies below the EU average of 
34 %. The at-risk-of-poverty gap, a measure of the 
depth  of  poverty,  remains  high  in  particular  for 
children  (30.2 %  vs.  24 %  in  the  EU).  While  the 
minimum income scheme has increased its take-up 
by  14  500  people  since  September  2017,  its 
adequacy  is  among  the  lowest  in  the  EU:  on 
average,  the  net  income  of  a  minimum  income 
recipient  amounts  to  around  40  %  of  the  national 
poverty threshold (40). 

in 

rules 

changes 

increase 

eligibility 

for 
Recent 
unemployment  benefit  may 
their 
coverage.  The  share  of  short-term  unemployed 
covered  by  unemployment  benefits,  at  29.9 %  in 
2017, is below the EU average of 32.4 % and has 
decreased  recently  (41).  In  this  context,  the  recent 
reduction  of  the  guarantee  period  of  the  social 
unemployment  benefit  from  180  to  120  days  of 
work 
temporary  workers 
experiencing  cessation  of  activity,  with  an 
expected  increase  in  their  coverage  rate.  Still,  the 
net  replacement  rate  for  a  low  wage  worker  (i.e. 
earning  67 %  of  the  average  wage)  while  high  at 
the beginning of the unemployment period (75 %) 
drops to only 23 % after one year. 

support 

could 

The  coverage  of  childcare  (0-3  years)  is  high, 
but  a  mismatch  between  supply  and  demand 
occurs  in  some  areas.  Portugal  ranks  among  the 

(39)  Eurobarometer  on  the  Future  of  Europe  (Social  Issues) 

published in 2017 November.   

(40)  According  to  the  Benchmarking  Framework  on  Minimum 
Incomes conducted within the SPC Committee. For details, 
see  the  draft  Joint  Employment  Report  2019, COM(2018) 
761 final. 

(41)  According to the benchmarking exercise on unemployment 
benefits and active labour market policies. For details, see 
the draft Joint Employment Report 2019, COM(2018) 761 
final. 

43 

 
                                                           
                                                           
the  government  announced  the  first  25  pilot 
projects  of  the  long-term  care  network.  Some 
action  was  taken  towards  a  formal  status  for 
informal  carers  and  training  and  empowerment  is 
included in the National Reform Programme.  

The health status of Portuguese citizens is good 
in  many  areas,  but  inequalities  in  access  to 
healthcare  remain.  A  2.3 %  share  of 
the 
Portuguese  population  report  unmet  needs  due  to 
cost, distance or waiting time (2017) which despite 
a  marginal  improvement  is  now  above  the  EU 
average  of  1.6 %.  Although  financial  protection 
mechanisms are in place to ensure equitable access 
to  health  through  a  system  of  exemptions  on  user 
charges  (with  a  wide  set  of  reforms  introduced  in 
2016),  the  rate  is  substantially  higher  for  the 
lowest  income  quintile  (5.1)  than  for  the  highest 
(0.3),  with  a  greater  difference  than  the  EU 
average.  Out-of-pocket  expenditure  on  healthcare 
is  one  of  the  highest  in  the  EU  at  27.8 %  (2016). 
There  are  also  significant  differences  in  health 
indicators between the wider metropolitan areas of 
Lisbon  and  Oporto  and  the  interior  regions,  and 
many  living in rural areas  face barriers (including 
geographic  distance)  to  access  quality  health 
services.  

including 

resources, 

While  registrations  with  family  doctors  have 
increased substantially in the past decade, gaps 
in  health  care  provision  between  regions 
remain.  Healthcare 
the 
number  of  doctors  per  inhabitant  as  well  as 
provisions of specialised care and primary care, are 
unevenly distributed between regions. High  levels 
of  investment  in  regional  facilities  and  incentives 
for health personnel to move to  underserved areas 
in recent  years seek to address these  geographical 
disparities. The health workforce is set to increase 
and the authorities have a target to further increase 
registrations with a general practitioner (92.7 % of 
National  Health Service  users in 2017). However, 
there  are  still  challenges  and  investment  needs  to 
ensure 
retention  and  an  even 
distribution  of  health  professionals.  It  is  also 
projected  that  investment  in  medical  equipment 
and  infrastructure  will  be  needed  (see  Section 
4.1.2). 

recruitment, 

4.3. Labour market, education and social policies 

4.3.3.  EDUCATION, VOCATIONAL TRAINING 

AND SKILLS* 

for 

Spending  on  education  remains  stable  and  is 
slightly  above  the  EU  average.  In  2016,  general 
government  expenditure  on  education  was  4.9 % 
as  a  share  of  GDP  and  10.8 %  as  a  share  of  total 
government  spending  (EU  averages  were  4.7 % 
and  10.2 %  respectively).  However,  since  2015, 
spending  has  fallen  by  about  3 %  in  real  terms, 
mainly 
tertiary  education.  The  annual 
expenditure on Portuguese educational institutions 
per  student  has  increased  significantly,  but  it 
remains  below  the  EU  average.  Funding  is  not 
allocated  on  the  basis  of  any  comprehensive 
evaluation strategy and does not have flexibility to 
in 
challenges. 
address 
education  infrastructure  is  heavily  dependent  on 
EU  financial  support.  Schools  have  very  limited 
budgetary autonomy to respond to challenges.  

Investment 

specific 

from 

the  Europe 

Participation 
in  pre-primary  education  for 
children  4  to  6  years  old  is  decreasing,  moving 
away 
2020  national 
benchmark  of  95 %.  In  2016,  the  participation 
rate  in  early  childhood  education  and  care  was 
92.5 %,  below  the  EU  average  (95.3 %)  –  though 
participation for more than 30 hours a week is the 
highest  in  the  EU.  Household  income  influences 
significantly  participation  in  early  childhood  care 
(children  under  age  of  3),  with  only  36 %  of 
children  whose families are in the bottom third of 
the disposable income distribution enrolled (about 
60 %  in  families  in  the  top  third).  From  2016  to 
2018, 193 new public pre-school classrooms were 
opened.  The  government  aims  to  extend  the 
network  to  provide  universal  access  for  children 
ages 3 to 5 by 2019 (see also Section 4.3.2). It also 
intends  to  improve  teacher  training,  within  the 
scope  of  the  new  curricula  guidelines  for  pre-
primary education. 

Portugal still struggles with early school leaving 
and grade repetition, but is making headway to 
reduce it. Considerable progress  was  made  in the 
last  decade  in  reducing  the  early  school  leaving 
rate (from 28.3 % in 2010 to 12.6 % in 2017; rates 
are,  however,  over  20 %  in  the  autonomous 
regions of Madeira and Azores). However, the rate 
remains  high,  as  also  highlighted  by  the  Social 
Scoreboard  accompanying  the  European  Pillar  of 
Social  Rights  (see  Box  4.3.1).  Moreover,  grade 
repetition is high, with about one third of 15-year-

44 

 
4.3. Labour market, education and social policies 

complete  their  'profiles'  at  the  end  of  compulsory 
education.  

Teachers'  competences  require  improvements 
and  the  ageing  teacher  population  will  pose 
challenges.  As  reported  in  the  2013  OECD 
Teaching and Learning International Survey, 9.2 % 
of  lower  secondary  education  teachers  indicated 
they had a high need for professional development 
in  information  and  communication  technologies 
skills  for  teaching.  In  the  same  survey,  26.5 %  of 
teachers  indicated  training  needs  for  teaching 
students  with  special  education  needs.  Over  the 
past  15  years,  there  has  been  a  substantial  ageing 
of  the  teacher  population:  currently  Portuguese 
teachers are on average in their upper 40s and the 
number of people entering the teaching profession 
has  been  going  down.  The  government  has 
announced  public  competitions  to  incorporate 
teachers as permanent staff. 

for 

Portugal's 

completion 

Measures  are  being 
implemented  to  make 
higher  education  more  attractive  and  increase 
the 
tertiary 
rate. 
educational  attainment  level  among  30-34  year 
olds  (33.5 %)  is  still  below  the  EU  average 
(39.9 %). However, the employment rate of recent 
tertiary  graduates  (80.7 %)  is  slightly  above  the 
EU average (80.2 %). Measures to increase higher 
include  bolstering  social 
education  enrolment 
support  mechanisms 
from 
students 
disadvantaged  backgrounds  through  a  significant 
increase  in  scholarships,  the  creation  of  specific 
scholarships  for  students  with  special  educational 
needs  corresponding  to  the  amount  of  the  fee 
effectively paid, a social scheme for paying tuition 
fees 
the 
redefined  +Superior 
a 
implementation 
programme  to  promote  and  support  enrolment  in 
less  densely  populated  regions  and  in  regions 
where  demand  is  lower.  The  tertiary  education 
attainment rate of people with disabilities is below 
the EU average (25.5 % versus 30.3 % in the EU), 
and  reasonable  accommodation  is  not  ensured  for 
students  with  disabilities 
in  post-secondary 
education. 

in  multiple 
of 

instalments, 

and 

Low  graduate  numbers  in  information  and 
communication  technologies  may  affect  the 
country’s  innovative  capacity  and  productivity 
growth.  The  number  of  people  aged  20  to  29 
holding  science, 
technology,  engineering  and 
mathematics  degrees  per  1000  inhabitants  at  18.6 

olds  having  repeated  at  least  one  grade.  The 
repetition  rate  varies  across  education  levels  and 
regions  and  is  significantly  higher  in  the  Lisbon 
and southern regions than in the north and centre. 
Policy  measures  to  promote  school  success,  to 
provide  extra support to students at risk of failing 
and to increase the vocational education offer have 
helped to steadily reduce repetition rates in recent 
years. Other  measures have also contributed, such 
as  the  reduction  of  the  student-teacher  ratio  and 
free  school  manual  for  public  primary  education. 
The  early  school  leaving  rate  for  people  with 
disabilities remains at 27.4 % much higher than the 
EU  average  of  23.6 %.  In 
the 
implementation  of  the  new  law  on  inclusive 
education 
lack  of  adequate 
resources.  

is  affected  by 

this  regard, 

The  physical  infrastructure  of  schools  has 
improved but concerns persist about the overall 
quality  of  school  infrastructure.  In  2007,  the 
government  launched  two  programmes:  one  to 
expand  pre-schooling  and  to  requalify  primary 
schools,  through  funding  and  technical  support  to 
municipalities,  and  the  other  to  modernise  and 
improve  public  secondary  school  infrastructures, 
implementing  a  management  and  maintenance 
model 
that  relied  on  a  state-owned  private 
company  Parque  Escolar.  About  one-third  of 
public  secondary  schools  (173  out  of  526)  were 
renovated, ranging from 27 % in the central region 
to 54 % in the Alentejo. However, lack of financial 
resources resulted in the planned investment in the 
remaining  secondary  school  facilities  (around  a 
hundred  of 
interventions)  being  delayed  or 
suspended.  Apart  from  the  re-qualified  secondary 
schools 
infrastructure 
experiences  various  states  of  disrepair.  Capital 
expenditures  correspond  to  less  than  2 %  of  the 
total  budget  of  education  in  Portugal.  This  low 
level  of  investment  results  in  difficult  learning 
conditions  in  many  schools  with  old  buildings 
lacking a proper maintenance.  

buildings, 

school 

schools  were 

Giving schools more autonomy remains high on 
the national policy agenda for education. During 
the  2017/2018  school  year,  235  lower  and  upper 
secondary 
an 
experimental  programme  of  autonomy  and  partial 
flexibility.  The  project  defined 
curriculum 
guidelines  on  how  the  schools,  in  an  autonomous 
way,  could  develop,  operationalise  and  assess 
school curricula, so that students may successfully 

involved 

in 

45 

 
4.3. Labour market, education and social policies 

reaching more than 60 % in Azores and Madeira). 
This  poses  a  challenge,  in  view  of  the  ongoing 
transformations  in  the  labour  markets  and  in  a 
context  of  ageing  population,  as  an  investment 
priority.  According  to  the  European  Investment 
Survey  (European  Investment  Bank,  2018),  the 
availability  of  skilled  staff  is  the  second  most 
important  obstacle  to  investment  faced  by  the 
companies surveyed. In the particular area of adult 
learning,  there  is  scope  to  further  engage  the  low 
qualified (whose participation in learning is below 
the  EU  average)  and  to  increase  the  coverage  of 
and 
incentives 
targeted 
medium-sized  enterprises  for  training  their  staff. 
The  National  Skills  Strategy,  built  with  OECD 
support, is presently in its action phase and focuses 
learning  system. 
the  adult 
on  strengthening 
Additionally,  the  reprogramming  of  structural 
funds  that  Portugal  implemented  in  2018  is  a 
useful  exercise  to  further  address  the  low-skills 
challenge.  It  entails  significant  reinforcement  of 
allocations  and  realignment  of  priorities  on  skills 
upgrading and adult education.  

public 

small 

to 

in  March  2017, 

The  Qualifica  programme  is  an  important  tool 
to  tackle  the  challenge  of  a  low-skilled  adult 
population.  Launched 
this 
programme  aims  to  raise  qualifications,  facilitate 
tailored training pathways and better align training 
provisions  to  market  needs.  By  the  end  of  2018, 
the programme had reached around 278 000 adults. 
According  to  national  data,  up  to  December  2018 
the majority of referrals had gone to training offers 
(71 %), of which 60 % were modular trainings and 
23 % to adult education and training courses. 29 % 
of  the  adults  were  guided  to  recognition  and 
certification  of  prior 
learning.  Additionally, 
Portugal  had  in  Q3-2018  49.6  %  of  the  active 
population with upper secondary education (target 
for  2020  is  50  %),  although  participation  in  adult 
learning  in  2017  is  below  the  EU  average  (9.8  % 
against  10.9  %).  National  authorities  have  a  new 
branch of the programme  –  Qualifica AP – in the 
pipeline 
to 
implement a structural reform of the qualifications 
level  of  the  population  prompted  the  national 
authorities 
largest  share  of 
European  Social  Fund  reprogramming  allocations 
to  Qualifica  and  to  the  operations  of  its  300 
centres, not only at national level (with the human 
capital  operational  programme 
-  Programa 
Operacional Capital Humano) but also at regional 
level. 

for  public  servants.  The  need 

to  dedicate 

the 

is  roughly  in  line  with  the  EU  average  of  19.1. 
However,  in  2016  the  share  of  total  graduates  in 
information  and  communication 
technologies 
(1.2 %)  was  well  below  the  EU  average  (3.4 %). 
Similarly,  the  share  of  graduates  in  the  natural 
sciences,  mathematics  and  statistics  was  below 
(6.2 %  versus  7.5 %).  To  promote 
average 
information  and  communication 
in 
enrolment 
physics, 
technologies, 
the 
electronics 
government  has 
the  study  places 
increased 
available  in  these  areas.  In  2017,  around  40 %  of 
the  students  newly  enrolled  in  higher  vocational 
education  and  training  courses  (Cursos  Técnicos 
Superiores  Profissionais)  were 
science, 
technology, engineering and mathematics areas. 

and 

in 

and 

The  review  of  the  Higher  Education  System  is 
ongoing. Following the presentation in early 2018 
of the OECD Review on higher education, science, 
technology 
the 
government  approved  a  number  of  legal  and 
programme  initiatives  notably  for  degrees  and 
diplomas,  for  access  of  international  students  to 
higher  education  and  for  recognition  of  foreign 
degrees.  

innovation 

systems, 

training,  and 

Portugal  has  made  significant  progress  on  the 
offer  of  vocational  education  and  training 
opportunities.  Vocational  education  and  training 
is  available  at  lower,  upper,  and  post-secondary 
levels.  Apprenticeship  programmes  and  other 
vocational  education  and  training  programmes 
incorporate  work-based learning. A range of adult 
education  and  training  programmes,  including 
certified  modular 
recognition, 
validation  and  certification  of  competences  have 
been  developed,  particularly  within  the  Qualifica 
programme.  Data  suggest  a  high  share  of 
employability  amongst  vocational  education  and 
training  graduates  (75.8 %  and  above  the  EU 
average of 74.8 % in 2017), but the share of 30-34 
years old with vocational education and training or 
higher  education  is  low  when  compared  with  the 
EU  average  (46.7 %  versus  73.2 %  in  2017).  The 
main  challenges  of  the  vocational  education  and 
training  system  are  the  quality  of  training  offers 
(and  respective  alignment  with  labour  market 
needs) and the capacity of providers.  

The  average  qualification  level  of  the  adult 
population  is  low.  About  52 %  of  the  population 
aged 25-64 has low educational attainment levels, 
well above the EU average of 22.5 % in 2017 (and 

46 

 
4.3. Labour market, education and social policies 

Insufficient  digital  skills  can  hinder  inclusion, 
employability  and  competitiveness.  In  2017, 
50 %  of  the  Portuguese  population  still  did  not 
have  basic  digital  skills,  and  30 %  had  no  digital 
skills at all. This compares with an EU average of 
43 % and 17 % respectively. Vulnerable groups of 
the  population,  such  as  the  elderly  or  those  with 
low levels of education or on low incomes, are at 
risk  of  digital  exclusion  (see  2018  Country 
Report).  Furthermore,  18 %  of  the  Portuguese 
active  labour  force  (employed  and  unemployed 
individuals) has no digital skills, compared with an 
EU average of about 10 % (European Commission, 
Digital Scoreboard). 

mobility.  Using  the  full  labour  potential,  also  in 
view  of  population  ageing,  requires  investment  in 
the  capacity  of  employment  services,  effective 
active and preventative labour market policies, and 
measures  to  promote  a  better  work-life  balance. 
Persisting  inequalities,  high  child  poverty  and  in-
work  poverty  call  for 
in  active 
integration  policies  and  supporting 
inclusion, 
services, including healthcare and long-term care. 

investment 

to 

training 

interventions, 

Portugal  initiated  a  number  of  initiatives  to 
improve digital skills and competences in 2018. 
This  was  mostly  done  through  INCoDe.2030,  the 
country's  national  initiative  in  this  domain,  which 
consists  of  five  main  axes  (inclusion,  education, 
qualification,  specialisation  and  research)  and 
associated  targets  for  2020,  2025  and  2030.  A 
(2018-2019)  was 
budget  of  EUR 20 million 
allocated 
including 
mandatory  ICT  modules,  for  unemployed  people 
with low qualifications (Vida Ativa Qualifica+). A 
workplan  was  defined  for  the  Capacitar  i4.0 
initiative,  which  seeks  to  integrate  Indústria  4.0 
the  digital 
and  INCoDe.2030  by 
preparedness  of  businesses  (see  also  section  4.4). 
Promising  initiatives  to  promote  digital  inclusion 
are also underway, such as ‘Creative Communities 
for  Digital  Inclusion’  (to  develop  the  digital 
competences  of  vulnerable  groups)  and 
the 
development of an action plan to close the gender 
gap in digital technologies that is in line with EU-
level  actions  in  this  area.  Timely  implementation 
and  upscaling  with  adequate  investment  will  be 
crucial for these and related measures (a number of 
which are at the pilot stage) to be effective. 

increasing 

Investment needs 

Increased investment in education and training, 
modern  employment  institutions  and  services, 
and  social  inclusion  policies  are  important  for 
improving  Portugal’s  productivity  and  long-
term  inclusive  growth.  The  low  qualification 
level  of  the  labour  force  is  an  obstacle  to 
investment and productivity growth. Investment in 
education  and  training,  including  infrastructure,  is 
key  to  addressing  a  high  rate  of  early  school 
leaving  and  improving  employability  and  social 

47 

 
4.4. COMPETITIVENESS REFORMS AND INVESTMENT 

4.4.1.  PRODUCTIVITY GROWTH AND 

Graph 4.4.1:  Labour productivity 

INVESTMENT*  

Productivity developments 

the 

is  exhibiting 

feeble  productivity 
Portugal 
growth.  The  weakness  of 
country’s 
productivity dynamics also explains to some extent 
the  absence  of  income  convergence  (see  Graph 
4.4.1). This is partially due to low investment and 
capital  accumulation  over  the  past  years.  The 
contribution  of  capital  is  still  weaker  than  before 
the crisis, which explains why labour productivity 
and  potential  growth  remain  at  a  relatively  low 
level.  However,  other  specific  structural  factors 
also  affected  productivity  performance.  Total 
factor productivity has been growing over the last 
years,  although  at  lower  pace  compared  to  euro 
area average, and slowing down in 2017 and 2018. 
Following  the  2016  Council  Recommendation, 
Portugal  has  appointed  the  Conselho  para  a 
Produtividade  as  National  Productivity  Board  in 
March 2018 

insurance  services, 

Labour  productivity  growth  differs  markedly 
across sectors and firm sizes. In market services, 
productivity  is  dragged  down  mainly  by  the 
financial  and 
real  estate 
activities  and  information  and  communication 
technologies  subsectors.  By  contrast, 
labour 
productivity  growth 
in  manufacturing  was 
comparable  to  the  euro  area  average  since  2000. 
There are signs that credit allocation is being more 
responsive  to  sector  differences,  and  increasingly 
channelled to tradable sectors  with greater growth 
potential and productivity: loans to tradable sectors 
increased to 61 % of total loans at the end of 2017. 
higher 
corporates 
Portuguese 
productivity,  profitability  and  easier  capacity  to 
repay debt across all main sectors of the economy. 
Although  small  and  medium-sized  enterprises 
large 
increase 
enterprises since the crisis period, the productivity 
gap  between  different  non-financial  corporations 
remains 
(European  Commission, 
2019c). 

their  productivity  more 

significant 

report 

than 

big 

Source: Eurostat 

Investment  

Investment  is  increasing  but  remains  low.  The 
ratio  of  investment  over  GDP  reached  16.6 %  in 
this 
the  highest  since  2012.  Despite 
2017, 
improvement,  the  investment  rate  in  Portugal 
remains one of the lowest in the EU. The extended 
period  of  weak  investment  deteriorated  existing 
capital  stock  and  slowed  down  the  rate  of  capital 
deepening,  which  still  stands  significantly  below 
the  EU  average  (see  Graph  4.4.2). The  gap  in  the 
capital  deepening  between  Portugal  and  the  EU 
accounts  for  a  large  proportion  of  the  labour 
productivity gap.  

to  grow  faster 

Public  investment  rebounded  during  2017  but 
remained  well  below  pre-crisis  levels.  In  2017, 
public investment registered an increase of 23.4 % 
year-on-year.  Yet,  its  share  in  total  investment 
(11 %) is one of the lowest in the historical series. 
Over  the  medium  term,  public  investment  is 
than  nominal  GDP 
expected 
reaching 2.6 % of GDP in 2020. Properly targeted 
public  investment  can  do  much  to  boost  potential 
growth  by  fuelling  productivity  growth  through 
improved  human  capital  and  more  technological 
innovation.  According  to  the  empirical  evidence, 
public  investment  in  Portugal  might  also  create  a 
crowding-in 
relevant 
by 
effect 
infrastructure for private investment. 

providing 

48 

020406080100120140160180200BGROLVHUHREELTPLPTCZSKSIELCYMTUKESDEITFINLSEDKFRATBELUIE20172007EU19% of EU28 total based on PPS 
 
 
4.4. Competitiveness reforms and investment 

Foreign  direct  investment  is  helping  to  reduce 
the  investment  challenge  that  Portugal  faces. 
Inflows  of  foreign  direct  investment  increased 
8.3 %  year-on-year  in  2017.  Moreover,  the  stock 
of foreign direct investment liabilities to GDP (an 
indicator  of  de  facto  openness  to  foreign  direct 
investment)  stands  at  62 %.  In  2017,  the  services 
sector showed the highest increase in foreign direct 
investment 
in 
wholesale  and 
(+21.7 %)  and 
professional,  scientific  and  technical  activities 
(+12.5 %).  The 
in 
construction  (+7.6 %),  but  continued  to  shrink  in 
manufacturing (-19.9 %).  

liabilities  (+10.3 %),  especially 
trade 

increased  also 

liabilities 

retail 

Investment  is  also  held  back  by  a  number  of 
macroeconomic and structural factors (see Box 
4.4.1).  According 
recently  published 
to  a 
Eurobarometer  Survey  (Political  and  Social  TNS, 
2018),  Portugal  is  among  the  EU  countries  with 
investment  challenges.  Only  48 %  of 
greater 
Portuguese  firms  interviewed  in  the  survey  were 
able  to  make  at 
least  some  of  the  desired 
investment.  The  most  commonly  mentioned 
factors  preventing  investment  were  a  poor  or 
uncertain  outlook  (at  least  a  ‘minor  obstacle’  for 
84 %  of  respondents),  the  complexity  and  the 
stability of tax legislation (76 %) labour costs and 
administrative burdens (both 73 %). 

Graph 4.4.2:  Net capital stock per person employed 

Source: European Commission 

skills, 

innovation, 

to 
Investment  challenges  relate  primarily 
infrastructure, 
climate 
change  and  the  environment.  Infrastructure 
deficits  in  transport  and  skill  gaps  are  critical 
obstacles to investment (Box 4.4.1). Investments to 
improve  rail  connections  with  Spain  and  the 
maritime  port  infrastructure  are  key  to  export 
in  particular 
competitiveness.  Skill  shortages, 
digital  skills  (see  Section  4.3),  may  hinder 
productivity, especially for small and medium-size 
enterprises.  Current  R&D  intensity  is  insufficient 
to  upgrade  the  national  research  and  innovation 
system and its connection to the real economy (see 
Section  4.4.1).  Investment  challenges  in  energy 
relate to the need to improve internal and external 
connectivity  of 
the 
digitisation and decentralisation of energy services, 
and  the  integration  of  renewables  in  the  grid  (see 
Section 4.4.2). Investment deficits are also present 
in  the  area  of  waste  management,  with  Portugal 
being at risk of failing to meet the 2020 municipal 
waste 
(see  Section  4.4.2). 
Prioritising  investments  and  policies  to  meet  EU 
decarbonisation needs and recycling targets would 
help  to  ensure  the  sustainability  of  economic 
growth and development.  

Iberian  Peninsula, 

recycling 

target 

the 

to  deal  with 

Portuguese  firms  face  challenges  to  grow.  The 
proportion  of  micro  firms  in  Portugal  finding  it 
difficult  to  grow  is  higher  than  the  EU  average. 
The  fear  of  having 
increased 
regulatory  and  taxation  footprint  may  act  as  a 
significant barrier for firms to grow and incentivise 
them to remain small. Newly born firms with less 
than  3  years  have  low  survival  rates  (53.85 %  in 
2016),  suggesting  structural  weaknesses  and 
challenges,  including  scarce  managerial  skills  and 
low  financial  literacy.  In  2012-2016  Portugal  was 
one of the countries with the highest death rates for 
firms  in  relation  to  active  firms,  amounting  to 
14.6 %  (almost  twice  the  EU  average  of  8.4 %). 
The small size  is also likely  to affect the  capacity 
to invest: according to the survey on management 
practices  performed  by  the  Portuguese  Statistical 
Institute, small and medium-sized enterprises tend 
and 
to  have 
consequently  lower  investment.  Other  obstacles 
may  stem  from  the  difficulty  to  retain  talents  and 
limited  availability  of  skilled  workers.  Moreover, 
the  level  of  internationalisation  of  Portuguese 
firms remains low. 

structured  management 

less 

49 

020406080100120140160180LVBGROLTHUSKPLHRSIMTEECZPTCYUKDEELITDKESBEFILUIEFRATNLSE20172007EA-19 in 2017Index EU28 = 100 
 
4.4. Competitiveness reforms and investment 

Box 4.4.1: Investment challenges and reforms in Portugal 

Section 1. Macroeconomic perspective 

After reaching growth of 9 % year-on-year in real terms in 2017, Portugal’s gross fixed capital formation is 
expected  to  moderate  in  2018  before  gaining  some  momentum  again  in  2019-2020.  Over  the  first  half  of 
2018, investment growth moderated from double-digits a year ago to 4 % year-on-year on average. A lower-
than-budgeted  public  investment  and  subdued  external  demand  are  expected  to  have  weighed  investment 
growth in 2018. Over the medium term, some rebound is expected, mainly driven by EU structural support. 
Section 2. Assessment of barriers to investment and ongoing reforms 

Portugal faces multiple constraints to investment. Several features of the financial sector hamper business’ 
access  to  finance  (see  Section  4.2).  Low  qualification,  particularly  on  digital  skills,  and  a  high  share  of 
temporary contracts due to labour market rigidities are prevalent (see Section 4.3). Investment gaps are also 
present in transport and energy infrastructure, in particular related to the internal and external connectivity of 
the  Iberian  Peninsula  (see  Section  4.4).  Regulatory  barriers  restrict  competition  in  business  services, 
hampering  competition  and  the  choice  and  quality  of  the  service  (see  Section  4.4.2).  Challenges  to  the 
business  environment  include  sector-specific  barriers  in  licensing  and  inefficiencies  in  the  justice  system 
(see Section 4.4.4). 

Main barriers to investment and priority actions underway: 

Skill  gaps  and  mismatches  in  the  labour  force  compromise  the  ability  of  the  economy  to  increase 
productivity  and  upgrade  into  knowledge-intensive  sectors.  Policies  to  facilitate  these  goals  include  the 
INCoDE.2030  programme,  focused  on  raising  digital  literacy,  as  well  as  policies  to  expand  vocational 
education  and  training  in  Science,  technology,  engineering,  and  mathematics  areas.  A  final  key  initiative 
towards skills improvement is the Qualifica programme. 

The  development  of  transport  infrastructure,  particularly  railway  and  ports,  would  help  to  underpin  the 
external  competitiveness  of  the  economy.  Railway  connection  with  Spain  remains  a  key  challenge.  Port 
infrastructure, and container terminals in particular, faces significant investment needs. 

In Portugal,  Instituição  Financeira  de  Desenvolvimento  is the  national development  financial  company.  It 
helps finance solutions for small and medium-sized enterprises - particularly in tradable industries -, while 
also  offering  consulting  services  in  areas  such  as  capital  structure,  corporate  strategy,  and  mergers  & 
acquisitions operations. In addition, SPGM, Sociedade de Investimento S.A. is the coordinating entity of the 
Mutual  Guarantee  System,  which  provides  financial  guarantees  to  small  and  medium-sized  enterprises  to 
facilitate their access to finance.  

50 

Regulatory/ administrative burdenCSRTaxationPublic administrationAccess to financeCSRPublic procurement /PPPsCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts CSRConstructionWages & wage settingDigital Economy / TelecomEducation, skills, lifelong learningCSREnergyTransportLegend:No barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ EducationPublic administration/ Business environment 
 
(European 

significantly 

Commission, 

Portuguese small and medium-sized enterprises 
are  lagging  behind  in  digitalisation,  and  the 
share of digital technology investments in  GDP 
has  declined  since  2000.  Although  the  share  of 
firms (excluding microenterprises) with high levels 
of  digital  intensity  in  Portugal  is  above  the  EU 
average 
Digital 
Scoreboard), the share of companies selling online 
is flattening out. The uptake of digital technologies 
and 
is 
lower 
medium-sized  enterprises.  Microenterprises, 
in 
turn, are clearly lagging behind in digitalisation: in 
2016,  only  32 %  of  them  had  some  sort  of  online 
presence  and  less  than  10 %  did  business  online. 
The 
Indústria  4.0 
programme,  which  promotes  the  adoption  of 
digital  technologies  by  firms,  has  progressed:  60 
measures  have  been  launched  out  of  the  64 
announced.  The  authorities  estimate 
the 
programme  will  generate  4 200  new  jobs  and 
EUR 700 million worth of additional exports.  

implementation  of 

among 

small 

that 

the 

Research and innovation  

innovation 

system  and 

After  declining  since  the  crisis,  R&D  intensity 
recovered 
it  remains 
in  2016,  although 
insufficient  to  upgrade  the  Portuguese  national 
its 
research  and 
intensity 
connection  to  the  economy.  R&D 
reached  1.3 %  of  GDP  in  2017  after  steadily 
decreasing since 2010. Business R&D intensity, at 
0.67 %  of  GDP,  surpassed  public  R&D  intensity 
(0.63 %  of  GDP)  in  2017.  A  2018  resolution 
adopted by the Portuguese government established 
the pillars for a national strategy on ‘technological 
and  business  innovation’  that  includes  revised 
targets for public and private investment in R&D: 
3 %  R&D  intensity  by  2030  with  an  ambitious 
share  of  one  third  public  and  two  thirds  business 
driven. The government’s goal is to reach an R&D 
intensity of 1.8 % of GDP by 2020. 

to  upgrade 

Portugal’s  economic  structure  is  anchored  in 
traditional  low  and  medium-low  tech  sectors, 
slowing down structural change. There has been 
the  country's 
meagre  progress 
economic structure towards higher shares of value-
added  in  high-tech  manufacturing  and  services. 
However, technological upgrading has taken place 
in traditional sectors, such as footwear and textiles 
that  boosted  their  global  competitiveness  and 
labour  productivity  (PORDATA  and  AICEP, 
2018).  The  resilience  and  internationalisation  of 

from 

resulted 

these  sectors 
from  clear  priorities, 
strategically  aligned  with  EU  funding  cycles,  and 
early  ‘clusterisation’  in  close  cooperation  with 
universities  and  business  associations.  Other 
traditional  sectors  such  as  agriculture,  benefiting 
namely  from  the  support  of  EU  funds,  would 
benefit 
in 
continuing 
technological upgrades and the  qualification of its 
human  resources  in  particular  in  the  rural  areas. 
Hence,  relevant  traditional  sectors  should  benefit 
from the government’s Industry 4.0 programme to 
provide  human  resources  with  qualifications  and 
tackle  technological  gaps.  At  the  same  time, 
emerging  sectors  such  as  information  technology 
are  creating  new  opportunities  to  upgrade  the 
economic structure. 

investment 

in 

investment 

Promoting 
intangible  assets, 
including  R&D  but  also  economic  and  digital 
competences, offers significant potential for the 
country  to  boost  its  productivity  (European 
Commission, 2018c). The Qualifica scheme for the 
overall  upskilling  of 
and 
INCoDe.2030,  the  country’s  national  strategy  to 
enhance digital competences, both seek to address 
this bottleneck (see Section 4.3.3). 

the  population 

lack 

careers 

stability 

Research 
and 
attractiveness,  and  new  qualifications  are 
needed to better address the needs of the labour 
market. Portugal has made significant progress in 
increasing  the  number  of  science  and  engineering 
graduates, reaching levels close to the EU average 
in  2016  (Eurostat).  However,  the  number  of 
graduates  in  computing  remains  below  the  EU 
average (see Section 4.3.3). Industry (including in 
information technology fields) expressed concerns 
about  the  difficulty  to  find  qualified  people. 
Portugal  lacks  enough  specialised  medium  and 
high-skilled  workers  to  cover  the  current  and 
future 
the  smart 
share  of 
specialisation  priority 
researchers  in  the  labour  force  expanded  but  the 
absorption  capacity  of  businesses  remains  an 
obstacle, although it is slowly improving. Research 
careers in the public sector do not offer stability or 
competitive  salaries  in  relation  to  other  EU 
Member  States.  Contracts  are  typically  short-term 
and  based  on  scholarships  with  limited  social 
benefits. To improve the status of research careers, 
the  Scientific  Employment  programme  includes  a 
fiscal  incentive  through  which  firms  receive  a 
120 %  fiscal  rebate  when  they  hire  doctoral 

in 
fields.  The 

labour  market  demand 

51 

 
 
4.4. Competitiveness reforms and investment 

4.4.2.  THE SERVICES SECTOR AND SINGLE 

MARKET INTEGRATION* 

Services sector  

intra-EU  services 

The 
in 
level  of  regulatory  restrictiveness 
Portugal  is  higher  than  the  Single  Market 
average in several sectors. According to the new 
OECD 
trade  restrictiveness 
index,  the  level  of  regulatory  restrictiveness  in 
Portugal in relation to other EU Member States is 
higher  than  the  single  market  average  in  sectors 
such  as  accounting  services,  construction  services 
and distribution  services (including  wholesale  and 
retail services). 

on 

legal 

form, 

simplify 

Regulatory  barriers  restrict  competition  for 
professional  and  business  services.  Despite 
considerable  efforts 
rules  and 
to 
regulations  with  the  introduction  of  a  framework 
law  in  2013  as  part  of  the  financial  assistance 
programme,  highly  regulated  professions  are  still 
subject  to  major  restrictions.  The  longstanding 
restrictions 
shareholding, 
management,  multidisciplinary  practices  and 
advertising  for  legal  services  are  in  contravention 
of  the  2013  framework  law.  A  ban  on  corporate 
groups  was  introduced  again  in  2015  for  all 
professional  companies,  deterring  major  EU 
players  from  operating  in  Portugal.  Extensive 
regulated 
reserves  of  activities 
professions,  notably 
agents, 
remain  unreformed, 
architects  and  engineers 
keeping  out  competitors  wishing 
to  provide 
ancillary 
recent  OECD  and 
services.  The 
Portuguese  Competition  Authority  study  (OECD 
2018b) has suggested reforms in the  regulation of 
professional  services,  in  particular  as  regards  the 
scope of reserved activities, as well as restrictions 
on 
shareholding,  management, 
advertising  (43)  multidisciplinary  restrictions  and 
incompatibility  rules.  The  study  estimates  that 
lifting  the  identified  restrictions  would  have  a 
positive 
of 
EUR 128 million  per  year  (roughly  0.07 %  of 
GDP)  and  a  multiplier  effect  of  1.5  for  legal  and 

for  highly 

economy 

lawyers, 

impact 

form, 

legal 

legal 

the 

on 

(43)  The  study  covers  13  self-regulated  professions:  lawyers, 
solicitors, bailiffs, notaries, engineers, technical engineers, 
architects, auditors, certified accountants, customs brokers, 
economists, pharmacists and nutritionists.  

the 

graduates  and 
Interface  scheme,  which 
provides  funding  to  incentivise  hiring  doctoral 
graduates under longer-term  contracts,  funding 50 
% of their salary during 3 years. 

Bottlenecks  in  science-business  links  hamper 
the  efficiency  of  the  research  and  innovation 
system, and a package of measures has been set 
in  motion.  The  share  of  public-private  scientific 
co-publications  in  Portugal  declined  over  the  last 
decade with the country ranking among the lowest 
in the EU in 2017. Mutual trust between academia 
and  business  is  not  wide-spread,  entrepreneurial 
research is not incentivised and knowledge transfer 
is  not  duly  considered  (European  Commission, 
2018a).  To  improve  framework  conditions  for 
collaboration,  Portugal  has  launched  Interface 
Programme.  Collaborative  Laboratories  were 
identified  under  the  Interface  scheme  and  the 
country’s  cluster  policy  was  strengthened  in  2017 
to  cover  advanced  technological  sectors  in  the 
Competitiveness  Clusters 
initiative.  Moreover, 
‘Portugal  2020’  launches  calls  for  co-promotion 
projects, establishing joint research and innovation 
centres, demonstration projects and pilot lines. The 
forthcoming 
Economic 
Cooperation  and  Development  (OECD)  Review 
preliminary  recommends  the  setup  of  regional 
innovation platforms that give small and medium-
sized  enterprises  access  to  critical  resources  for 
innovation, 
and 
partnerships 
knowledge-transfer 
organisations. 

support  mutualisation 

Organisation 

between 

and 

for 

in 

Portugal  is  a  moderate  innovator  according  to 
the  2018  European  Innovation  Scoreboard. 
Employment 
fast-growing  enterprises  has 
increased over time, with Portugal ranking slightly 
above  the  average  in  the  EU  in  2015.  The 
innovation  performance  of  small  and  medium-
sized  enterprises  has,  however,  deteriorated  since 
2010  for  product,  marketing  and  organisational 
innovations  and  for  small  and  medium-sized 
enterprises  collaborating  with  others.  Fewer 
venture  capital  investments  since  the  pre-crisis 
period (see Section 4.2) may undermine the scale-
up  of 
firms,  despite  an  overall 
improvement  in  the  start-up  ecosystem  due  to  the 
implementation of StartUp Portugal. 

innovative 

52 

 
                                                           
 
4.4. Competitiveness reforms and investment 

introducing 

platforms that provide  urban  transport services by 
light  passenger  vehicle, 
further 
requirements  on  both  drivers  and  platforms 
intermediating their services. In particular, the law 
gives companies the exclusive right to provide the 
services  (not  private  individuals)  and  introduces 
limitations in the determination of fees. 

The  retail  sector  shows  good  performance,  but 
administrative  burden  persists  in  regulation 
and  taxation.  In  recent  years,  Portugal  has 
reduced  regulatory  constraints  on  retail  business. 
Nevertheless, some elements of the regulatory and 
taxation frameworks could still be burdensome for 
companies, as reflected in the retail restrictiveness 
indicator  (European  Commission,  2018g):  retail-
specific  taxes  and  para-fiscal  fees,  based  on  the 
outlet size, for the establishment or operation of a 
shop;  complex  authorisation  procedures  for  the 
establishment of retail outlets.  

Energy,  environment  and  transport  investment 
challenges  

Significant investments are required to support 
the  clean  energy  transition  in  line  with  the  EU 
2030  climate  and  energy  framework  and  the 
national  objective  to  achieve  carbon  neutrality 
by 2050. In December 2018, Portugal presented a 
roadmap to achieve carbon neutrality by 2050 with 
projected  annual  additional  investments  needs  of 
around  EUR 2  billion  from  2020  to  2050.  Some 
in 
main  focus  areas  for  decarbonisation 
lie 
buildings,  a 
renewables 
electricity,  and  in  mobility  and  electrification  of 
the 
transport  sector.  The  new  roadmap  will 
contribute  to  the  integrated  national  energy  and 
climate  plans.  In  its  national  energy  and  climate 
plan,  to  be  adopted  by  31  December  2019  in  line 
with  the  Regulation  on  the  Governance  of  the 
Energy  Union  and  Climate  Action  (45),  Portugal 
will  provide  an  overview  of  its  investment  needs 
up  to  2030  for  the  different  dimensions  of  the 

increase 

sharp 

in 

(45)  Regulation  (EU)  2018/1999  of  the  European  Parliament 
and  of  the  Council  of  11  December  2018  on  the 
Governance  of  the  Energy  Union  and  Climate  Action, 
amending  Regulations  (EC)  No  663/2009  and  (EC)  No 
715/2009  of  the  European  Parliament  and  of  the  Council, 
Directives  94/22/EC,  98/70/EC,  2009/31/EC,  2009/73/EC, 
2010/31/EU, 2012/27/EU and 2013/30/EU of the European 
the  Council,  Council  Directives 
Parliament  and  of 
2009/119/EC and (EU) 2015/652 and repealing Regulation 
(EU)  No  525/2013  of  the  European Parliament and  of  the 
Council (Text with EEA relevance.) 

accounting  services  (44).  It  is  expected  that  the 
Portuguese  government  will  follow  up  on  the 
recommendations  by  the  OECD  and  Portuguese 
reforms. 
Competition  Authority 
However, 
the 
timeframe are yet to be defined. 

the  action  and 

the  extent  of 

introduce 

to 

Barriers to competition in construction services 
remain. Market access for construction services in 
general  was  simplified  in  2015.  However,  some 
steps  still  need  to  be  implemented  to  reform  the 
registration  fee  system.  Construction  services  in 
specific  segments  of  the  market  remain  burdened 
by  complex  authorisation  schemes,  including  lack 
of  mutual  recognition  of 
installers  of  F-gas 
equipment  from  other  Member  States  (Ecorys, 
for  gas  and  electrical 
2018).  The 
installations were the object of reform recently, but 
multiple  overlapping  procedures  are  still  imposed 
on  providers  of  installation  works  such  as  lifts, 
telecoms,  water,  sewage  and  alarms,  which  could 
benefit  from  simplification.  Finally,  building 
simplified,  notably  by 
permits 
streamlining  procedural  workflows  across 
the 
country  and  eradicating  prescriptive  building 
standards, which still abound. 

could  be 

regimes 

new 

introduced 

lodging  units 

Portugal 
regulatory 
frameworks  for  short-term  accommodation 
rentals and urban transport services.  According  
to the 2018 Eurobarometer survey on the use of the 
collaborative  economy,  Portugal  exhibits  strong 
growth  potential,  since  only  3 %  of  respondents 
offered  services  via  collaborative  platforms  and 
30 %  indicated  that  they  would  consider  offering 
them.  Short-term 
increased  by 
50 000 over the last 2 years. Also, a survey by the 
European Commission shows that 1.6 % of labour 
force  earned  more  than  half  of  their  income  from 
platforms  (against  2.3 %  on  average  for  the  14 
Member States surveyed). To provide a clear legal 
framework  to  operators  and  reduce  tax  evasion, 
Law 
authorisation 
procedure 
for  new  establishments  and  new 
requirements  for  consumer  protection.  The  Law 
also introduces the possibility for municipalities to 
declare  ‘overloaded  areas’,  where  quotas  on 
establishments  can  be  fixed.  In  a  similar  vein, 
the  electronic 
Decree-Law  45/2018  regulates 

introduced 

62/2018 

an 

(44)  Meaning  that  EUR 1.00  of  additional  final  demand  for 
legal and accounting services leads to 1.49 times as much 
increase in output for business. 

53 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

technologies  that  are  not  widely  disseminated  but 
which  have  great  potential,  such  as  ocean  energy 
(waves,  tides,  salinity,  etc.),  geothermal  and  wind 
offshore. 

increasing 

target  by 

the  2020 

Better  connectivity  of  the  Iberian  Peninsula 
could enable more competition and facilitate the 
deployment  of  renewable  energy.    In  2017, 
Portugal’s  electricity  interconnection  level  was 
still  below 
threshold  of  10 %. 
Investments in the completion of ongoing projects 
of common interest will enable Portugal to achieve 
the  Portugal-Spain 
this 
interconnection capacity to 3.2 gigawatt by the end 
of  2022.  Portugal  will  also  benefit  from  further 
integration  into  the  internal  market  thanks  to  new 
infrastructure  developments  completed  in  Spain 
and France in 2018 (Val de Saône gas pipeline  in 
France)  or  under  development  (e.g.  Biscay  Bay 
project). Progress in integrating the Portuguese gas 
market in the Iberian market has been slow, with a 
bilateral  agreement  between  Portugal  and  Spain 
still 
lacking.  Regional  cooperation  between 
Portugal, Spain and France remains key to advance 
in  the  implementation  of  priority  infrastructure 
projects and further integrate the Iberian Peninsula 
in the single electricity market.  

Energy Union. This will include renewable energy, 
energy  efficiency,  security  of  supply,  and  climate 
mitigation  and  adaptation.  The 
information 
provided, including in the draft plan submitted on 
31 December  2018,  will  further  help  to  identify 
and  assess  Portugal‘s  energy  and  climate-related 
investment needs. 

to  ensure 

to  achieve 

Challenges  remain 
the  energy 
efficiency target. While primary and  final energy 
consumption slightly increased in 2016, they were 
1.7 % and 7.4 % below the 2020 indicative target. 
the 
Increased  efforts  are  needed 
achievement  of  the  cumulative  end-use  energy 
savings target according to Article 7 of the Energy 
Efficiency  Directive.  In  Portugal  there  is  still  a 
wide  margin  to  improve  energy  efficiency  in 
buildings.  Investments 
in 
particular  in  the  residential  segment,  are  also  an 
effective means to alleviate energy poverty, which 
in  Portugal  (46).  Additional 
is  a  key 
investments  are  also  needed  to  reduce  energy 
in  business.  Market  uptake  of 
consumption 
available 
solutions, 
energy 
technological  innovation,  digitalisation  and  up-
skilling  of  the  workforce  have  the  potential  to 
drive the energy efficiency further up.  

this  area,  and 

efficiency 

issue 

in 

trajectories  under 

Portugal  is  on  track  to  meet  the  national 
renewables  target  for  2020,  but  lagging  behind 
planned 
the  national 
renewable  action  plan.  With  a  renewable  energy 
share  of  28.5 %  in  2016,  Portugal  is  above  the 
indicative trajectory to meet its 2020 binding target 
of  a  31 %  renewables  share  in  final  energy 
consumption.  However,  further  investments  seem 
necessary  to  ensure  the  2020  target  is  timely  met 
and  to  achieve  the  long-term  decarbonisation 
objectives.  Portugal’s  current  renewable  energy 
strategy  is  focused  on  solar,  with  the  government 
having  authorised  one gigawatt  of  photovoltaic 
solar  power  plants  and  facing  high  demand  for 
further 
current 
constraints  to  further  development  seem  to  relate 
to the lack of grid capacity to accommodate higher 
shares of renewables and to burdensome licensing 
and permitting procedures. There is also a need to 
renewable  energy 
continue  developing  new 

projects.  The 

renewables 

(46)  In  2017,  according  to  the  European  Union  Statistics  on 
Income  and  Living  Conditions  energy  poverty  indicator 
“inability  to  keep  the  home  adequately  warm”  20.4 %  of 
the population in Portugal was energy poor. 

the  municipal 

Additional  investment  requirements  relate  to 
energy  digitalisation,  decentralisation,  and  the 
integration  of  renewables  in  the  grid.  Tenders 
are  expected  to  be  launched  in  2019  for  the 
low-voltage 
concessions  of 
electricity grids. It is important that the conditions 
set  out  for  such  tenders  support  the  clean  energy 
transition  and  take  into  account  the  fact  that 
investments  will  be  needed  for  digitisation  and 
the 
decentralisation  of  energy  services  and 
integration of renewables in the grid.  The roll-out 
of  smart  metering  in  Portugal  has  not  been 
formally  launched  yet,  but  pilot  projects  in  urban 
areas  already  covered  about  20 %  of  the  national 
population at the end of 2017. 

Energy  prices  (including  taxes  and 
levies) 
remain  above  the  EU  average.  Electricity  prices 
are  above  the  EU  average  by  1 %  for  industrial 
users and 12 % for households (47). This is mainly 
due to the burden of levies and taxes, as the energy 
component  is  below  the  EU  average.  This  burden 

(47)  Based  on  data  for  2017  (2018  Report  Energy  Prices  and 

Costs in Europe)  

54 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

fires  must  address  their  root  causes.  Apart  from 
investments  into  restoring  the  forests  affected, 
more  efforts  are  hence  needed  to  prevent  the 
the 
outbreak  of  wildfires  and 
conditions  for 
their  spread  and  progression. 
Investments  in  risk  prevention  and  preparedness, 
as well as in adaptation measures across the sectors 
are  crucial  to  reduce  its  expected  impacts  on 
people, 
the 
economy.  

the  environment  and  ultimately 

to  minimise 

as  highlighted 

Portugal  still  faces  considerable  environmental 
challenges  and  investment  needs  in  the  area  of 
water  and  waste  management,  air  quality  and 
nature  protection, 
the 
in 
Commission’s  Environmental 
Implementation 
Review.  Portugal  continues  to  adopt  measures  to 
promote the transition towards a circular economy, 
such as implementing the National Action Plan for 
Circular Economy 2017-2020. Portugal is at risk of 
failing to meet the EU target of recycling 50 % of 
its municipal waste by 2020. Hence, further effort 
to  improve  waste  management  is  needed,  in 
particular in the outermost region of Azores, which 
has the highest rate  of landfilled municipal  waste. 
Despite  the  progress  achieved  in  recent  years  in 
water management, challenges remain, for instance 
with water governance and the need to close gaps 
in  water  investments,  especially  for  wastewater 
and  water  body  rehabilitation.  At  the  municipal 
level, the sector remains highly fragmented and the 
reorganisation  of 
the  water  and  wastewater 
services has not yet shown its full potential. 

in 

performs  well 

Portugal 
broadband 
connectivity,  although  take-up  levels  remain 
relatively  low.  Broadband  is  available  to  all 
and  ultrafast  broadband 
Portuguese  homes 
networks  are  already  available 
to  95 %  of 
households,  well  above  the  EU  average  of  58 % 
(European  Commission,  Digital  Scoreboard).  The 
extensive  deployment  of  fibre-to-the-home  puts 
Portugal 
the 
European broadband coverage objectives for 2020 
and  2025.  However,  take-up  and  prices  remain  a 
challenge.  Additional  efforts  are,  therefore,  still 
required  to  reach  the  last  5 %  of  households 
without next generation-access coverage as well as 
to increase take-up. In addition, existing optic fibre 
interconnections  Continent-Azores-Madeira  are 
expected  to  reach  the  end  of  their  useful  life 
around 2025. 

in  a  good  position  to  achieve 

mainly  stems  from  charges  related  to  the  need  to 
repay  the  tariff  debt  in  the  sector  and  to  financial 
commitments  made  to  power  producers.  The 
government  adopted  measures  to  reduce  the  tariff 
debt,  which  under  the  current  baseline  scenario 
will be fully repaid by 2022. One of the  measures 
is  the  allocation  of  part  of  the  proceeds  from 
carbon  dioxide  emissions  licences  to  abate  the 
tariff  deficit.  The  tariff  debt  is  also  expected  to 
decline as financial commitments to past contracts 
with  feed-in  tariffs  will  gradually  expire  over  the 
coming  decade.  In  the  gas  sector,  household  gas 
prices  remain  significantly  higher  than  the  EU 
average  (+20 %),  despite  a  significant  decrease  in 
the  last  few  years  (48).  Gas  prices  for  non-
households also declined in the last 3 years and are 
average.  However, 
now 
concentration  on  the  gas  and  electricity  retail 
markets remains high.   

the  EU 

below 

targets  under 

  Portugal  committed 

Although 2020 greenhouse gas emissions targets 
are  within  reach,  additional  effort  and 
investments  are  necessary  for  the  2050  carbon 
neutral  targets. 
to  a 
greenhouse gas target in 2020 that involves a 1 % 
increase  of  emissions  compared  to  2005  levels. 
Portugal  exceeds  its  2016  annual  greenhouse  gas 
emissions 
the  Effort  Sharing 
Decision by 17.1 % and is well in line to meeting 
its  2030 
the  Effort  Sharing 
Regulation. Based on currently available data, total 
greenhouse gas emissions were reduced by 17.4 % 
between 2005 and 2017. However, greenhouse gas 
emissions in 2017 increased by 7.1 % compared to 
2016, due to  forest fires and  the extreme drought. 
2018  greenhouse  gas  inventory  for  2016  indicate 
that the largest sectors in terms of greenhouse gas 
emissions  were  the  energy  sector  (26 %  of  total) 
followed by transport (24 %), industry (20 %) and 
agriculture (10 %). 

target  under 

in 

challenging 

Anticipating  the  adverse  effects  of  climate 
change, such as floods and forest fires, remains 
a 
Portugal. 
priority 
Intensification of natural hazards related to climate 
change  such  as  severe  droughts  and  extreme  heat 
(which  have  increased  the  risk  of  forest  fires, 
biodiversity  loss  and  desertification),  floods  and 
coastal erosion have been  identified as  high risks. 
Policy and management options for reducing forest 

(48)  Based  on  data  for  2017  (2018  Report  Energy  Prices  and 

Costs in Europe)  

55 

 
                                                           
4.4. Competitiveness reforms and investment 

need  for  national  funds  (these  corridors  together 
account for an overall investment of over EUR 1.3 
billion).   

4.4.3.  THE REGIONAL DIMENSION  

in 

the  population  were  concentrated 

Portugal  is  marked  by  territorial  asymmetries, 
in terms of spatial distribution of resources and 
opportunities. 52 % of Portuguese GDP and 44 % 
of 
the 
metropolitan  areas  of  Lisbon  and  Porto,  which 
represent  5.1 %  of  the  territory  of  mainland 
Portugal.  Significant  discrepancies  in  inequality 
and poverty exist across the country. As shown in 
Section  4.3.2,  Azores,  Madeira  and  the  capital 
region were the areas most affected by the risk of 
poverty  (49)  in  2017,  if  regional  poverty  lines  are 
considered  (when  using 
the  national  poverty 
threshold, the poverty rate in Lisbon is low). Social 
vulnerability is spatially concentrated especially in 
the more densely urban areas of the country (with 
some  exceptions,  such  as  the  south  coast  in  the 
Alentejo  region;  see  Section  4.3).  Investment 
priorities at regional and local level must deal in an 
integrated  way  with  the  multi-faceted  territorial 
challenges  of  social  and  economic  exclusion  and 
environmental  sustainability.  In  this  regard,  the 
is 
National  Program  of  Territorial  Planning 
intended  to  be  a  comprehensive  framework  to 
guide  regional  and  local  territorial  strategies  and 
investment.  

Portugal  faces  particular  challenges  linked  to 
urbanisation  and  demographic  trends.  The 
number  of  inhabitants  is  decreasing  in  rural  and 
smaller  urban  areas,  making  them  less  attractive 
for business and increasing the cost of maintaining 
the  level  of  public  services.  In  2017,  the  ageing 
index  was  higher  in  rural  territories  than  in  urban 
areas, and this asymmetry is particularly evident in 
the  Beira  Baixa  (Centro)  and  Terras  de  Trás-os-
Montes  (Norte)  subregions.  At  the  same  time,  the 
metropolitan  areas  have  experienced  challenges 
related  to  urban  sprawl,  poverty  increase,  traffic 
congestion,  and  bad  air  quality.  Investment 
strategies to enhance rural-urban linkages and deal 
with the above mentioned issues can be pursued in 

(49)  Taking  into  account  the  proportion  of  people  living  with 
monetary  incomes  equivalent  to  less  than  60 %  of  the 
median  of  the  available  monetary  income  distribution 
equivalents. 

handling 

especially 

entry  point, 

capacity.  Due 

location,  Portugal 

The  lack  of  adequate  container  capacity  in 
Sines  and  the  Lisbon  area  limits  the  ports’ 
impact on the regional and national economies. 
The  continued  increase  in  global  export/import 
markets creates additional demand in particular for 
container 
its 
to 
is  a  natural 
geographical 
the 
for 
maritime 
transatlantic  routes.  Increasing  container  handling 
capacity would allow Portugal to capture a greater 
share  of 
increased  demand.  Timely 
investments  in  the  new  container  terminals  in 
Sines  and  in  Barreiro  (Terminal  Vasco  da  Gama) 
would  help  reduce  this  lack  of  capacity.  The 
finalisation  of  the  ongoing  investment  projects  in 
the other main Portuguese ports (Viana do Castelo, 
Leixoes,  Aveiro,  Figueira  da  Foz,  Setubal)  would 
the 
also 
increase  handling  capacity.  Finally, 
renegotiation  of  port  concessions  other 
than 
Leixões would increase the participation of private 
investors  in  the  financing  of  port  infrastructure 
investments.     

this 

in 

interoperability 

Railway 
is  still  a  major 
bottleneck. Portugal is conditioned by the need to 
cross  Spanish  territory  to  reach  central  Europe. 
Railways  are  still  widely  underused 
the 
connections  to  Spain  (both  East-West  and  North-
South corridors). A strategy by Portugal and Spain, 
including  specific  planning  for  the  deployment  of 
rail  interoperability  in  the  Iberian  Peninsula  and 
ultimately  its  connection  with  the  French  rail 
network is in place, with projects on both sides of 
the  border  for  the  electrification  of  rail  lines  and 
train  length  augmentation.  The  main  projects  co-
funded by the Connecting Europe Facility are now 
faced  with  delays  which  in  some  cases  cannot  be 
entirely made up for. There seem to be constraints 
in  the  number  of  personnel  involved  in  the 
development of the Connecting Europe Facility co-
funded  projects  and  their  level  of  expertise. 
Iberian  plan, 
comprehensive 
Developing 
including  the  identification  of  the  intermediate 
steps, terminals, interconnections needed to benefit 
from 
the 
the  Spanish  network  upgrade  and 
International  Union  of 
development  of 
Railways  gauge  would  help  boost  the  Portuguese 
international  rail  performance.  This  is  crucial  to 
address the peripheral situation of Portugal and to 
exploit  the  potential  of  Portuguese  ports,  so  far 
harmed  by  a  ‘road-only’  model.  Stepping  up  EU 
co-financed  railway  investments  would  also  help 
optimise  the  use  of  EU  financing  and  reduce  the 

the 

a 

56 

 
                                                           
4.4. Competitiveness reforms and investment 

high  in  the  two  outermost  regions:  27.8 %  in 
Azores (2017) and 23.2 % in Madeira (2016). 

According  to  the  2017  regional  innovation 
scorecard  of  2017,  Portuguese  regions  are 
‘moderate’ innovators. The Metropolitan Area of 
Lisbon and the region Norte had the highest R&D 
intensity,  while  Azores,  Madeira  and  the  Algarve 
had the lowest (see Graph 4.4.3).  

Despite  good  overall  broadband  connectivity 
(see  Section  4.4.2),  coverage  is  insufficient  in  a 
number of rural areas, and regional disparities 
in  next-generation  access  persist.  Although 
Portugal  has  one  of  the  highest  levels  of  ultrafast 
broadband  coverage,  considerable  differences  in 
next-generation  access  coverage  across  regions 
subsist.  In  2017,  Alto  Minho  was  the  only  region 
where  next-generation  access  availability  was 
below 
two-thirds  of  households  (56.4 %).  In 
addition, Alentejo Litoral and Tâmega e Sousa had 
next-generation  access  broadband  coverage  below 
80 %.  At  78.5 %,  coverage  in  rural  areas  is 
considerably lower than in more densely populated 
areas,  although  it  remains  well  above  the  EU 
average. 

Graph 4.4.3:  Regions in Portugal and factor endowments 

an  integrated,  multi-sectoral  approach  aiming  at 
targeting 
territories  and  crossing 
administrative  boundaries,  involving  citizens  and 
local communities as well. 

functional 

Portugal exhibited some divergence in terms of 
GDP  per  capita  with  the  EU  while  regional 
disparities  tended  to  narrow.  The  external 
divergence  in  GDP  per  inhabitant  in  purchasing 
power standard in the last decade coexisted with a 
reinforced 
regions. 
internal  cohesion  among 
However,  a  substantial  part  of  the  decrease  in 
regional  disparities  is  due  more  to  the  higher 
contraction of the capital region than to growth in 
the less developed regions (see Section 1).   

Despite  a  slow  recovery  since  2013,  investment 
levels in Portugal remain low in all regions (50). 
When  considering  the  period  2009-  2016  (latest 
year  available  in  national  statistics  at  regional 
level),  the  highest  decline  was  recorded  in  the 
autonomous  region  of  Madeira  (-58 %)  while  the 
region of Norte, which stands out for the openness 
of its economy, showed a relative better resilience 
(-24 %).  Since  2013, 
during 
investment level is overall recovering in particular 
in the capital region. 

recession 

the 

Key  labour  market  indicators  reveal  moderate 
regional  differences,  while  disparities  are  more 
marked  in  terms  of  productivity.  Portugal's 
unemployment rate varied from 10.6 % in Madeira 
to  7.1 %  in  the  Centro  region  in  2017,  while  the 
capital region (9.3 %) is slightly above the national 
average, suggesting that different regional markets 
have  different  efficiency  levels  for  absorbing 
available  labour  resources.  Labour  productivity 
dynamics  remain  weak  (see  Section  4.4.1),  with 
significant  differences  across  the  country.  The 
most productive region is the Lisbon Metropolitan 
Area, at 95 % of the EU average, while Norte is at 
the  other  end,  at  65 %.  The  availability  of  skilled 
labour  force  also  varies  across  regions.  For 
instance,  Lisbon  is  the  best  performing  region 
regarding 
tertiary  education  attainment,  while 
Alentejo  and  the  Algarve  are  lagging  behind  (see 
Graph  4.4.3).  The  rate  of  school/training  leavers 
decreased in all the regions, but remains relatively 

(50)  Gross  Fixed  capital  formation  at  current  prices  (2011), 

INE.Statistics Portugal. 

Innovation Scoreboard 2017, Tertiary educated: % of 
population aged 30-34 (2017);Employment rate 2015-2017, 
Unemployment 2017, road accessibility: ratio population 
within 120km to population accessible with a 90 minute drive 
(2016) 
Source: Eurostat, European Commission 

57 

 
 
                                                           
 
4.4. Competitiveness reforms and investment 

EUR 1 to 1.2 billion and are to be implemented in 
a budget-neutral way.  

Business  environment  and  administrative 
burden 

business 

environment 

The 
improved 
considerably  but  challenges  holding  back 
investment remain.  Portugal is ranked 34th in the 
Ease  of  Doing  Business  Ranking  (World  Bank 
2018b),  ahead  of  several  EU  economies.  In  some 
cases,  Portugal  exhibits  a  particularly  business-
friendly  environment  (for  example,  for  creating  a 
business  or  registering  property).  Yet,  challenges 
like  late  payments  from  the  public  sector  remain 
critical.  Delays  are  particularly  long  in  the  health 
sector  and  for  regional  and  some  autonomous 
authorities (see Section 4.1). Since 2017, Portugal 
has been running the Custa Quanto? programme to 
assess the impact of new laws on firms. According 
to  the  unit  in  charge  of  the  programme,  which  is 
carrying  out  an  extensive  training  programme 
across  ministries  on 
to  be 
applied,  a  consistent  number  of  new  laws  has 
shown  no  extra  costs  for  firms.  However,  at  this 
stage  firms  and  stakeholders  have  had  limited 
involvement  in  the  assessment  work,  which  is 
being  performed,  for  each  law,  by  the  ministries 
concerned.  Excessive  regulatory  footprint  and 
uncertainty  remain  among 
the  most  relevant 
obstacles  to  invest  for  the  majority  of  firms 
(European Investment Bank, 2018). According to a 
recent  survey  by  the  Portuguese  Statistical  Office 
(51),  the  burden  associated  with  licensing  (along 
with the judicial system) remains one  of the  main 
barriers  to  investment,  as  per  its  indicator  of 
framework regulation costs. 

the  methodology 

under 

burden 

administrative 

New  measures  have  been  introduced  to  reduce 
the 
the 
SIMPLEX+  programme.  SIMPLEX+  remains 
the  most  relevant  simplification  programme  to 
reduce  administrative  burden  and  to  simplify 
business-government 
citizens-government 
and 
relations.  Past  and  ongoing  assessments  of  the 
measures  implemented  have  shown  significant 
savings  (i.e.  the  Fatura  Sem  Papel  measure 
launched  in  2017  that  allows  firms  not  to  print 
invoices has led to EUR 6 million in savings).  In 
June  2018,  following  a  participative  approach  to 
collect new ideas, a set of 175 new  measures  was 

transport 

exacerbates 

Personal 
seasonal 
problems with air quality and traffic congestion 
in  the  major  metropolitan  areas  in  Portugal, 
namely  Lisbon  and  Porto.    According  to  the 
Portuguese  Statistical  Office’s  2017  Mobility 
Survey, around 80 % of the population travel every 
day  and  car  journeys  account  for  68 %  of  all 
journeys in the Porto Metropolitan Area and 59 % 
in  the  Lisbon  Metropolitan  Area.  Investments  to 
and 
improve 
interconnectivity  of  urban  public 
transport, 
together  with  increased  support  for  soft  mobility 
measures are necessary to promote a shift towards 
more 
transport 
environmentally 
alternatives in urban areas. 

attractiveness 

capacity, 

friendly 

the 

and 

location, 

insularity 

The  outermost  regions  of  Madeira  and  Azores 
have  unique  geographical  characteristics.  Their 
remote 
specific 
topography,  as  well  as  higher  vulnerability  to 
transport  and 
impose  higher 
climate  change 
communication  costs,  limited  economies  of  scale 
and  dependence  on  a  few  economic  activities, 
which  constrain  their  socio-economic  growth  and 
convergence  with  national  indicators  in  several 
economic  areas.  Territorial  strategies  and  specific 
investments 
and 
enhance 
interconnectivity  between  the  islands  of  each 
archipelago and strengthen the territorial cohesion 
of these regions are required. 

accessibility 

to 

4.4.4.  INSTITUTIONAL QUALITY AND 

GOVERNANCE* 

Public administration   

A  new  decentralisation  programme  is  to  be 
gradually implemented over 3 years, starting in 
2019. It envisages new transfers of responsibilities 
in a wide range of domains, in particular transport, 
education  and  healthcare.  The  purpose  is  to 
increase the share of resources spent at local level, 
inter-municipal  cooperation, 
while 
increasing 
including  at  metropolitan 
that 
framework  agreement  and  a 
background,  a 
revision  of  the  local  finance  law  to  adjust  human 
resources  and  local  finances  were  adopted  on  16 
August 2018. These are to be complemented later 
on by a series of sectoral decree-laws. The volume 
of  financial  transfers  to  the  municipalities  to 
compensate  for  the  new  tasks  should  total  around 

level.  Against 

(51)  Inquérito aos Custos de Contexto 2017, INE, July 2018 

58 

 
                                                           
4.4. Competitiveness reforms and investment 

when it becomes clear it will not win the cause on 
the  basis  of  the  case  law.  The  Decree-law  also 
establishes  the  increased  use  of  arbitration.  This 
means that all cases that entered the regular courts 
the  arbitration 
‘migrate’ 
before  2016  can 
mechanism  — 
Arbitragem 
Centro 
Administrativa  —  with  no  costs  associated;  on 
average, the  Centro de Arbitragem Administrativa 
takes 4.5 months to solve the case, in contrast with 
the  10-year  average  of  the  regular  courts,  which 
makes  it  a  solution  that  the  corporate  sector 
praises. 

de 

for 

filing 

electronic 

Additional  measures  promoted  more  e-justice 
and  the  specialisation  of  courts.  Ordinance 
267/2018  on  electronic  proceedings  introduced 
judicial 
mandatory 
proceedings  in  the  administrative  and  tax  courts. 
The  Ordinance  introduces  measures  to  simplify 
and  group  together  procedures  (mainly  in  tax 
procedures).  In  September  2018,  the  government 
approved amendments to the legislative framework 
(Status)  for  the  administrative  and  tax  courts 
promoting further specialisation of the courts. The 
government’s  proposal,  not  yet  approved  by  the 
Parliament,  is  to  create  2  public  procurement 
chambers  with  wide  territorial  jurisdiction,  10 
administrative  social  chambers  competent  for 
public  employment  and  social  benefits  disputes, 
and  11  tax  enforcement  and  infraction  review 
chambers  competent  for  all  claims  involving  tax 
enforcement/readdressing tax infractions. 

for 

the  debtor.  The  mediator 

There  are  new  measures 
insolvency 
proceedings,  but  the  average  duration  of 
proceedings continues its increasing trend. Law 
6/2018 introduced the business recovery mediator, 
who is a skilled and experienced professional who 
aids 
is  especially 
designed  for  medium  and  small  enterprises, 
making an objective diagnosis and advising on the 
possible  legal  instruments  tailored  for  company’s 
the  extrajudicial 
situation.  Law  8/2018  on 
restructuring 
further 
includes 
firms 
improvements  on  this  proceeding.  Additionally, 
Law 7/2018 introduced a legal regime for debt-to-
equity swaps. This legislation applies in a situation 
of  default  and  negative  equity  and  concerns  the 
restructuring  of 
the 
conversion of credits into equity by simplifying the 
existing  procedures.  Quarterly  data  show  that 
between June 2017 and June 2018, the average full 

the  balance  sheet  with 

of 

introduced. These measures are combined with 93 
multiannual  measures  initiated  under  SIMPLEX+ 
2017.  

to 

initiatives 

in  reducing 

Sector-specific 

licensing.  With 

However,  simplification  measures  showed  a 
limited  sector-specific  impact  in  addressing  the 
main  barriers 
some 
exceptions,  such  as  the  licensing  of  aquaculture 
touristic  activities,  SIMPLEX+  showed 
and 
limited  achievements 
the  burden 
stemming  from  complex  procedural  rules  for 
licensing. 
under 
SIMPLEX+ remain often limited to the digitisation 
of  control  procedures  that,  although  important, 
does  not  address  the  persistence  of  restrictive 
barriers in licensing. The reduction in the  number 
of  competent  authorities  involved,  the  widespread 
replacement 
by 
responsible statements in advance (without a need 
to  submit  multiple  documents  as  supporting 
evidence), the shortening of long decision-making 
deadlines for the authorisation schemes and a more 
widespread  use  of  tacit  approval  (“silence  is 
consensus”  rule)  remain  among  the  most  critical 
challenges. 

authorisation 

schemes 

of 

Justice system  

still 

The  justice  system  in  Portugal  continues  to 
become  more  efficient  while 
facing 
challenges  mainly  with  the  disposition  time  in 
Administrative  and  Tax  Courts.  According  to 
data  collected through the EU Justice  Scoreboard, 
the  clearance 
for  administrative  cases 
decreased  in  2017  to  105 %  from  112 %  in  2016, 
while disposition time increased from 911 days  in 
2016 to 988 days in 2017. 

rate 

Portugal introduced a set of measures to reduce 
case-backlogs,  which  remain  a  challenge. 
Decree-Law  81/2018  introduced  rapid  reaction 
teams,  setting  up  teams  of  judges  under  the 
monitoring  of  the  president  of  each  court  and  of 
the High Council of the Administrative and Fiscal 
Courts, and  the task of accelerating the resolution 
of  pending  cases  in  administrative  and  tax  courts. 
Furthermore,  incentives  have  been  introduced  for 
dropping cases or for bringing cases to arbitration. 
The  decree-law  provides 
that  citizens  and 
companies  who  give  up  their  cases  voluntarily 
against  the  State  before  the  end  of  2019  will  be 
forgiven 
justice  (court-related)  costs.  In 
addition,  the  Tax  Authority  has  to  give  up  a  case 

the 

59 

 
4.4. Competitiveness reforms and investment 

the attorney general (55), but enforcement has been 
ridden  with  problems.  The  capacity  of  the  Public 
Prosecutor’s  Office  attached  to  the  Constitutional 
Court is extremely limited and acts as an obstacle 
to  carrying  out  effective,  timely  and  periodic 
verification  of  assets  (56).  To  improve  efficiency, 
there  is  a  need  to  strengthen  the  Constitutional 
Court’s capacity and to improve inter-institutional 
cooperation  and  exchange  of  information  (2011 
Annual Activity Report of the Attorney General).   

There is little transparency around the work of 
the ad-hoc parliamentary committee created to 
streamline  anti-corruption 
legislation.  The 
committee is currently holding public hearings and 
aiming  to  finalise  its  work  in  2019.    Many  of  the 
the 
anticorruption 
government programme of 2015 are therefore still 
pending (57). 
a 
comprehensive 
anti-corruption 
legislation  will  be  adopted  and  there  is  no  clear 
strategy steering this important legislative process. 

clear  whether 
to 

is  not 
approach 

introduced 

pledges 

in 

It 

Public procurement  

There  have  been  fewer  direct  awards  since  the 
entry into force of the new procurement code in 
January  2018  (Código  dos  Contratos  Públicos, 
Decree-Law 111-B/2017). Data from the dedicated 
online public procurement platform show a decline 
of about 24 % year-on-year (value) and 36 % year-
on-year (number of procedures) in the first quarter 
of  2018.  This  reduction  stems  from  the  stricter 
restrictions  on  the  use  of  direct  awards  and  the 
inclusion of  mandatory prior consultation of three 

(55)  Legislative  amendments  introduced  through  Law  19/2008 
allowed for an enhanced cooperation between the Attorney 
General and the Constitutional Court as far as verification 
of asset declarations is concerned. 

(56)  The  Office  employs  only  four  prosecutors  who  must 
scrutinise  the  asset  declarations  of  15 000  to  16 000 
political  office  holders  and  are  also  in  charge  of  ensuring 
compliance  with  the  incompatibility  and  disqualification 
rules.  The  Office  does  not  cross-check  the  information 
entered by declarants with other official databases such as 
population  and  trade  registries  or  with  bank  account 
information.  The  Office  does  not  have  a  system  for 
prioritising cases except when there is a specific complaint, 
otherwise  declarations  being  examined  by  chronological 
order, which leads to significant delays.  

(57)  These  include  dedicated  lobbying  regulation,  a  code  of 
conduct  to  political  offices  holders,  senior  public  officials 
and  civil  servants,  a  public  registry  of  interests  for  local 
government  officials  and  a  ban  on  the  acceptance  of 
judicial  cases  against  public  bodies  for  Members  of 
Parliament’s work as lawyers 

duration  of  insolvency  and  recovery  proceedings 
increased from 45 to 53 months (52). 

Fight against corruption 

Efforts  to  crack  down  on  corruption  continue, 
but local prosecution offices could benefit from 
better  resources.  The  specialised  anti-corruption 
prosecution  service  Departamento  Central  de 
Investigação  e  Acção  Penal  (DCIAP)  continued 
building  a  positive  track  record  of  investigations, 
including securing the first indictments for foreign 
bribery.  It  is  expected  that  the  office  will  become 
more  effective  thanks  to  anti-money  laundering 
legislation granting the prosecution direct access to 
a  series  of  databases  and  thanks  to  a  recent 
protocol  signed  with  the  Institute  for  Monitoring 
Public  Procurement  (September  2018)  which 
grants  Departamento  Central  de  Investigação  e 
Acção  Penal  direct  access  to  the  procurement 
database  of  each  contacting  authority.  The 
analytical 
of 
technical 
Departamento  Central  de  Investigação  e  Acção 
Penal  and  the  judicial  police  are  also  improving,  
but  regional  departments  for  penal  actions  and 
investigations  remain  poorly  equipped,  despite 
being in charge of investigating similarly complex 
cases (53). 

capacities 

and 

Preventing  corruption  remains  an  issue  due  to 
the 
lack  of  a  coordinated  strategy  and 
fragmented  responsibilities  (54).  The  council  for 
the prevention of corruption has a limited mandate 
and  few  resources,  focusing  mainly  on  providing 
guidance  for  corruption  risks  and  carrying  out 
awareness campaigns in schools. The council also 
cooperates  with  various  ministries  to  integrate 
corruption plans in audit exercises. The parliament 
is  debating  on  creating  a  new  entity  for  the 
transparency  of  political  office  within 
the 
Constitutional  Court  that  would  be  in  charge  of 
this 
verifying  asset  declarations.  Currently, 
competence belongs to the constitutional court and 

(52)  Quarterly  Statistical  Bulletin  Q2-2018  of  the  Ministry  of 
Justice  on  insolvency,  recovery  and  creditors  agreements 
(2007-2018).    

(53)  As  a  rule,  corruption  cases  are  attributed  to  the  relevant 
regional  department,  unless  they  involve  more  than  one 
judicial  district,  in  which  case  the  Prosecutor  General  can 
attribute the case to DCIAP. 

(54)  Legislative  amendments  introduced  through  Law  19/2008 
allowed for an enhanced cooperation between the Attorney 
General and the Constitutional Court as far as verification 
of asset declarations is concerned. 

60 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

tenders 
procedures. 

for 

higher 

value 

non-competitive 

Verification by the Portuguese audit authorities 
of  public  procurement  procedures  has 
identified  shortcomings  in  planning  and  in  the 
monitoring  and  control  capacities  at 
the 
 The  lack  of 
execution  phase  of  contracts. 
appropriate,  structured  and  quantified  plans  leads 
to  a  sometimes  too  broad  interpretation  of  the 
notion of extreme urgency and undue use of direct 
awards.  The  contract  manager  figure  was  set  to 
give support in technically and financially complex 
contracts  and  could 
insufficient 
supervision of the execution phase of contracts.  

improve 

the 

competition 

The  transparency  and  reliability  of  public 
procurement data are improving, but efficiency 
and 
in  public  procurement 
procedures  leave  scope  for  improvement.  The 
is  making 
Portuguese  Competition  Authority 
efforts  to  raise  awareness  of  public  procurement 
issues.  Since  January  2018, 
the  Competition 
Authority, the General Inspection of Finances, the 
Court  of  Auditors  and  the  Attorney  General’s 
Office  have  direct  access  to  the  Portal  Base 
database,  which  will  allow  them  to  download 
relevant  information  for  statistical  analysis  and  to 
develop  and  prevent  non-competitive  practices. 
The  Institute  for  Monitoring  Public  Procurement 
and  the  Central  Purchasing  Body  are  training 
contracting 
their 
professionalism. The Ministry of Finance’s unit for 
public-private  partnerships  is  providing  technical 
support 
for  public-private  partnerships.  The 
national public suppliers portal has been set up for 
the  SIMPLEX+  programme  and  introduced  some 
administrative simplification. 

authorities 

ensure 

to 

61 

 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (58) 

2018 country-specific recommendations (CSRs)  

Portugal  has  made  Limited  Progress  in  addressing 
CSR 1  

CSR  1:  Ensure  that  the  nominal  growth  rate  of  net 
primary  government  expenditure  does  not  exceed 
0.7 % in 2019, corresponding to an annual structural 
adjustment  of  0.6 %  of  GDP.  Use  windfall  gains  to 
accelerate  the  reduction  of  the  general  government 
debt  ratio.  Strengthen  expenditure  control,  cost 
effectiveness and adequate budgeting, in particular in 
the  health  sector  with  a  focus  on  the  reduction  of 
arrears 
financial 
sustainability of state-owned enterprises, in particular 
by  increasing  their  overall  net  income  and  by 
reducing debt.  

in  hospitals. 

Improve 

the 

Ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  0.7 %  in 
2019,  corresponding 
structural 
adjustment  of  0.6 %  of  GDP.  Use  windfall  gains  to 
accelerate  the  reduction  of  the  general  government 
debt ratio.  

to  an  annual 

This overall assessment of CSR 1 does not include 
an  assessment  of  compliance  with  the  Stability 
and Growth Pact. 

Strengthen  expenditure  control,  cost  effectiveness 
and  adequate  budgeting,  in  particular  in  the  health 
sector  with  a  focus  on  the  reduction  of  arrears  in 
hospitals.  

Limited  Progress  Limited  progress  has  been 
achieved in putting persistently high hospital arrears 
on  a  steadily  declining  path.  Cost  effectiveness 
continued  to  be  promoted  in  the  health  sector  in 
2018,  including  through  an  increased  reliance  on 
centralised purchasing, and a greater use of generics 
substantial 
and  biosimilars.  However,  despite 

(58)  The  following  categories  are  used  to  assess  progress  in  implementing  the  country-specific  recommendations  (CSRs):  
No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  This  category 
covers a number of typical situations to be interpreted on a case by case basis taking into account country-specific conditions. 
They include the following:  

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission, 
publicly (e.g. in a press statement or on the government's website); 
no non-legislative acts have been presented by the governing or legislative body; 
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has:  
announced certain measures but these address the CSR only to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented; 

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a few of the measures have 
been implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision 
but no implementing decisions are in place.  

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented.  

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately.  

62 

 
 
                                                           
 
A. Overview Table 

clearance measures, hospital arrears remain elevated 
and  have  not  decreased  in  a  steady  and  durable 
manner;  after  achieving  an  intra-annual  minimum 
level  in  April  2018,  hospital  arrears  have  resumed 
their  gradual  increase  in  the  following  months.  A 
mission structure was set up in 2018, on the basis of 
whose  recommendations  a  new  programme 
to 
address hospital arrears is to move forward in 2019. 
Although the programme is a promising first step in 
the  right  direction,  it  remains  to  be  seen  whether  it 
will lead to a sizeable reduction in the short term.  

Improve  the  financial  sustainability  of  state-owned 
enterprises,  in  particular  by  increasing  their  overall 
net income and by reducing debt.  

Limited  Progress  Limited  progress  has  been 
achieved in improving the  financial sustainability of 
state-owned  enterprises  (SOEs).  The  previous  goal 
for SOEs as a whole to achieve a net income close to, 
but  still  below,  equilibrium  in  2018  was  postponed 
until  2019.  Overall,  planned  rationalisation  efforts 
and enhanced monitoring were delayed and lagged to 
translate into corrective action where needed in 2018. 
Measures to enhance the monitoring of SOEs and to 
ensure closer adherence to their initial budgetary are 
to be implemented in 2019.  

Portugal  has  made  Some  Progress  in  addressing 
CSR 2  

CSR 2: Promote an environment conducive to hiring 
on open-ended contracts, including by reviewing the 
legal framework in consultation with social partners. 
Increase  the  skills  level  of  the  adult  population, 
literacy,  by  strengthening  and 
including  digital 
broadening the coverage of the training component in 
adult  qualification  programmes.  Improve  higher 
education  uptake,  namely  in  science  and  technology 
fields.  

Promote  an  environment  conducive  to  hiring  on 
open-ended  contracts,  including  by  reviewing  the 
legal framework in consultation with social partners.  

reduce 

subject 

Some  Progress  New  measures  are  on  the  pipeline 
following the new tripartite agreement signed in June 
2018.  The  aim  of  the  agreement  is  to  tackle 
labour  market 
precarious  employment, 
segmentation  and  promote  more  dynamism 
in 
collective bargaining. The  measures proposed in the 
agreement, 
to  parliamentary  approval 
(expected  in  2019)  seek  to  introduce  changes  in  the 
labour  code,  the  code  of  contributory  schemes,  the 
legal  framework  for  protection  of  employees,  the 
framework of active labour market policies and other 
complementary  legislation.  Other  initiatives  include 
the reinforcement of human resources of the  Labour 
Inspection  Authority  (aiming  to  reduce  the  abusive 
and  illegal  use  of  temporary  contracts  and  other 
atypical  forms  of  work)  and  a  new  programme 
of 
towards 

regularization 

extraordinary 

the 

63 

 
A. Overview Table 

precarious employment contracts in civil service.  

Increase  the  skills  level  of  the  adult  population, 
literacy,  by  strengthening  and 
including  digital 
broadening the coverage of the training component in 
adult qualification programmes.  

Some  Progress  The  qualification  level  of  the  adult 
population  is  low,  which  is  a  challenge  in  a  context 
of ageing population. The Qualifica programme is an 
important tool to tackle  the challenge of low-skilled 
adult population. Insufficient digital skills can hinder 
inclusion, employability and competitiveness  

Improve higher education  uptake,  namely in science 
and technology fields.  

Some Progress  Measures are being implemented to 
strengthen  the  attractiveness  and  completion  rate  in 
higher  education.  The 
the  Higher 
Education  System  is  ongoing.  Graduate  numbers  in 
information  and  communication  technologies  are 
low.  

review  of 

Portugal  has  made  Some  Progress  in  addressing 
CSR 3  

to  finance  for  businesses.  Reduce 

CSR  3:  Increase  the  efficiency  of  insolvency  and 
recovery proceedings and reduce impediments to the 
secondary market for non-performing loans. Improve 
access 
the 
administrative  burden  by  shortening  procedural 
deadlines,  using  more  tacit  approval  and  reducing 
document 
requirements.  Remove 
persistent regulatory restrictions by ensuring a proper 
implementation  of  the  framework  law  for  highly 
regulated  professions.  Increase  the  efficiency  of 
administrative  courts,  inter  alia  by  decreasing  the 
length of proceedings.  

submission 

Increase  the  efficiency  of  insolvency  and  recovery 
proceedings  and 
the 
secondary market for non-performing loans.  

impediments 

reduce 

to 

Some  Progress  Portugal  has  adopted  plans  to 
introduce an early  warning system  for companies  in 
difficulties,  which  will  help  identify  companies  in 
financial  difficulties  at  an  early  stage.  Some 
measures  aimed  at  shortening  the  long  proceedings 
and  improving  the  efficiency  of  the  court  system 
were implemented in 2018.  

Improve access to finance for businesses.  

Some  Progress  Some  progress  has  been  made  to 
improve access to finance. Several programmes, such 
as  Capitalizar  or  Internacionalizar,  have  included  in 
2018  credit  lines  to  ease  access  to  finance  (notably 
the  credit  lines  of  Capitalizar  have  been  increased 
compared  to  2017).  Other  programmes,  including 
those  initiated  in  previous  years,  have  targeted 
specific  sectors.  However,  alternative  sources  of 
finance  showed  limited  improvement  (also  due  to 
limited  awareness  of  available  opportnities)  and, 
although  improvements,  equity  capital  remains  low, 
and  venture  capital  investments  (expressed  as  share 
of  GDP)  are  among  the  lowest  in  OECD  countries 
and still below pre-crisis levels.  

64 

 
A. Overview Table 

Reduce  the  administrative  burden  by  shortening 
procedural  deadlines,  using  more  tacit  approval  and 
reducing document submission requirements.  

and 

simplification 

Some  Progress  Some  progress  has  been  made  in 
reducing  administrative  burden.  The  SIMPLEX 
programme  introduced  further  measures  introducing 
the 
horizontal 
some 
implementation  of 
the  once-only  principle  has 
reduced  some  document  submission  obligations, 
however  few  sector-specific  simplification  has  been 
the 
achieved.  The  production  of  evidence  by 
applicant  is  still  the  norm  rather  than  the  exception; 
responsible declarations is a form of control seldom 
taken  up  by 
the  Portuguese  administration. 
Burdensome  authorisation  procedures  remain  the 
preferred  manner  of  entry  control  for  service 
providers,  with 
for 
decision  and  absence  of  tacit  approval  persisting  in 
too many instances.  

long  procedural  deadlines 

Remove persistent regulatory restrictions by ensuring 
a  proper  implementation  of  the  framework  law  for 
highly regulated professions.  

No  Progress  No  progress  has  been  made 
in 
removing persistent regulatory restrictions for highly 
regulated  professions,  however  some  preliminary 
steps  in  the  right  direction  have  been  taken.  In  July 
2018 a study conducted jointly by the OECD and the 
Portuguese  Competition  Authority  was  published.  It 
identified  restrictions  to  competition  in  the  legal 
framework  of  highly  regulated  professions  and 
presented a number of reform recommendations. It is 
expected that the Portuguese Government will follow 
up  on  the  reform  recommendations,  however  the 
extent of the action as well as the timeframe are yet 
to be defined.  

Increase the efficiency of administrative courts, inter 
alia by decreasing the length of proceedings.  

Some  Progress  According  to  data  provided  by  the 
the  overall  evolution  as 
Portuguese  authorities 
regards  clearance  rates  in  Administrative  and  Tax 
Courts  between  2015  and  2017  showed  a  sustained 
improvement (79.9 % in 2015 and 105 % 2017 [1]). 
Disposition  time  remains  high  and  its  reduction  for 
the same period is slow (2015: 992 days, 2016: 911 
days,  2017:  988).  Portugal  introduced  a  set  of 
measures  to  reduce  case-backlogs  and  additional 
measures 
to  promote  further  e-justice  and  the 
insolvency 
specialization  of  courts.  As  regards 
proceedings,  new  measures  have  been  taken.  All 
these  measures  are  expected  to  have  a  positive 
impact on the efficiency of the PT Justice system in 
the near future.  

Europe 2020 (national targets and progress)  

65 

 
 
A. Overview Table 

Employment rate target set in the NRP: 75 %.  

R&D target set in the NRP: 2.7 % of GDP  

Key  labour  market  indicators  are  close  to  pre-crisis 
levels  as  the  labour  market  situation  continues  to 
improve.  The  employment  rate  (age  group  20-64) 
kept  growing  steadily  up  to  75.3 %  in  Q2-2018 
(above the Europe 2020 target of 75 %).  

R&D  intensity  had  been  on  decline  since  2010,  but 
the negative trend was reversed in 2016. However, at 
1.3 % of GDP in 2017, R&D intensity remains  well 
below  both  the  national  and  the  EU  R&D  intensity 
targets. 

intensity  of  Portugal  was 
In  2017, 
the  R&D 
composed  of  51% 
(0.67%  of  GDP)  private 
investment  and  48%  (0.63%  of  GDP)  public 
investment. 

National  greenhouse  gas  (GHG)  emissions  target:  
-  1 %  in  2020  compared  with  2005  (in  sectors  not 
included in the EU emissions trading scheme)  

Portugal  non-ETS  emission  decreased  by  14 % 
between  2005  and  2017,  and  has  achieved  its  2017 
target  (an  emissions  decrease  of  1 %)  by  a  13 
percentage point gap. According to the latest national 
projections  based  on  existing  measures,  non-ETS 
emissions  will  decrease  by  17 %  between  2005  and 
2020. The 2020 target is consequently expected to be 
met by 18 percentage points. 

2020 renewable energy target: 31 %  

Energy efficiency target: 

Portugal  has  set  an  indicative  national  energy 
efficiency  target  of  25 %  reduction  of  final  energy 
consumption in 2020, which implies reaching a 2020 

66 

in  final  energy  consumption  and 

Provisional Eurostat data show that in 2017 Portugal 
achieved an overall renewables share in final energy 
consumption  of  28.1 %,  which  is  0.32  percentage 
points  below  the  share  achieved  in  2016  (28.42 %).  
This  negative  progress  is  due  to  both  the  annual 
increase 
the 
performance in the heating and cooling sector where 
the  share  of  renewables  decreased  0.7  percentage 
points  to  34.39 %.  In  both  the  electricity  and 
transport sectors the data show a slight increase in the 
to  respectively  54.17 %  and 
renewables  share 
7.93 %.  Although  Portugal 
the 
indicative  trajectory  to  meet  the  31 %  national 
binding target in 2020, further efforts seem necessary 
to  ensure  that  this  target  is  timely  met,  taking  also 
into  account  that  Portugal  is  lagging  behind  the 
indicative trajectories established in their renewables 
national plan. 

is  still  above 

Whereas 2016 figures showed that Portugal seems to 
be on track to meet its national target, the recent data 
for  2017  show  that  the  energy  consumption  in 
Portugal is increasing. Based on provisional Eurostat 
data  for  2017,  the  primary  energy  consumption  was 

 
 
A. Overview Table 

level  of  22.5  Mtoe  primary  consumption  and  17.4 
Mtoe final energy consumption. 

1.3 %  higher  than  the  target  level  (22.8  Mtoe  while 
the  target  (2020)  is  22.5  Mtoe).  Regarding  the  final 
energy  consumption,  Portugal  seems  to  be  4.9 % 
below the target for 2020 (16.6 Mtoe while the target 
(2020)  is  17.4  Mtoe).  Portugal  still  need  efforts  to 
keep  energy  consumption  in  check  in  the  coming 
years and ensure that the levels of primary and final 
energy  consumption  remain  below  the  indicative 
national 2020 targets. 

Early school/training leaving target: 10 %.  

Considerable progress was made in the last decade in 
reducing  the  early  school  leaving  rate  (from  28.3 % 
in  2010  to  12.6 %  in  2017;  rates  are,  however,  over 
20 %  in  the  autonomous  regions  of  Madeira  and 
Azores).  The  early  school  leaving  rate  for  people 
with  disabilities  remains  at  (27.4 %)  much  higher 
than the EU average of (23.6 %). 

Tertiary  education  target:  40 %  of  population  aged 
30-34.  

tertiary  educational  attainment 

Portugal's 
level 
among  the  30-34  years  old  cohort  (33.5 %)  is  still 
tertiary 
the  EU  average  (39.9 %).  The 
below 
education  attainment  rate  of  people  with  disabilities 
is  below  the  EU  average  (25.5 %  vs.  30.3 %  in  the 
EU) 

Risk of poverty or social exclusion target: the target 
envisages reducing the number of person in or at risk 
of  poverty  and  social  exclusion  by  200  000  persons 
in 2020. (base year 2008).  

The  number  of  people  at  risk  of  poverty  or  social 
exclusion reduced in [-359.000 persons] meaning that 
Portugal  has  already  surpassed  the  target  towards 
achieving 200 000 persons in 2020. 

67 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

68 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio124.8121.5119.2116.8114.6113.0111.7110.1108.8107.8107.1106.8106.7Changes in the ratio (-1+2+3)-4.5-3.3-2.3-2.4-2.2-1.6-1.3-1.6-1.3-1.0-0.7-0.3-0.1of which(1) Primary balance (1.1+1.2+1.3)0.92.72.73.02.72.42.12.01.91.91.81.61.5(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)2.52.52.42.32.22.12.12.01.91.91.81.61.5(1.1.1) Structural primary balance (bef. CoA)2.52.52.42.32.32.32.32.32.32.32.32.32.3(1.1.2) Cost of ageing0.10.10.20.20.30.40.50.60.7(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component0.40.60.70.70.50.20.00.00.00.00.00.00.0(1.3) One-off and other temporary measures-2.0-0.4-0.40.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-1.6-0.9-0.7-0.60.50.70.80.40.60.81.11.41.4(2.1) Interest expenditure3.83.53.33.23.33.33.43.53.63.83.94.14.2(2.2) Growth effect-3.5-2.6-2.2-2.0-0.9-0.5-0.4-0.9-0.8-0.8-0.7-0.7-0.7(2.3) Inflation effect-1.9-1.7-1.8-1.8-1.9-2.1-2.2-2.2-2.2-2.1-2.1-2.1-2.1(3) Stock-flow adjustments-2.00.31.11.20.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.PT - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 70809010011012013014020162017201820192020202120222023202420252026202720282029Debt as % of GDP -PTBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario70809010011012013014020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -PTp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline70809010011012013014020162017201820192020202120222023202420252026202720282029Debt as % of GDP -PTBaselineHistorical SPB scenarioSGP scenario70809010011012013014020162017201820192020202120222023202420252026202720282029Debt as % of GDP -PTBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryHIGHHIGHHIGHHIGHHIGHMEDIUMDebt level (2029)106.7126.0113.4112.4108.2Debt peak year20182029201820182018Percentile rank22.0%55.0%Probability debt higher25.6%Dif. between percentiles41.7MEDIUMLong termDSAHIGHDebt sustainability analysis (detail)Medium termHIGHHIGHShort termLOW(S0 = 0.3)(S1 = 4.3)S2LOW(S2 = 0.7)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
2) Latest data Q2 2018. 
3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

69 

201320142015201620172018Total assets of the banking sector (% of GDP)1)302,5271,4250,3229,6202,3197,5Share of assets of the five largest banks (% of total assets)70,369,272,371,273,1-Foreign ownership of banking system (% of total assets)2)20,320,523,322,530,331,3Financial soundness indicators:2)              - non-performing loans (% of total loans)-16,617,517,213,311,7              - capital adequacy ratio (%)13,712,313,312,315,215,2              - return on equity (%)3)-9,3-3,50,9-5,5-0,86,3Bank loans to the private sector (year-on-year % change)1)-5,0-5,2-2,6-2,1-0,80,9Lending for house purchase (year-on-year % change)1)-3,5-3,8-3,8-2,3-1,2-0,3Loan to deposit ratio2)-84,981,580,878,976,1Central Bank liquidity as % of liabilities1)-8,17,16,36,95,8Private debt (% of GDP)202,4190,5179,4169,3162,2-Gross external debt (% of GDP)2) - public86,498,591,978,372,570,3    - private43,946,645,649,951,249,3Long-term interest rate spread versus Bund (basis points)*472,4259,1192,8308,3273,4143,7Credit default swap spreads for sovereign securities (5-year)*355,9173,0137,4216,7136,154,3 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within two weeks.       
3) Long-term unemployed are people who have been unemployed for at least 12 months.       
4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
5) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is seasonally adjusted (annual series, for EE, EL, HU, IT and UK data based on first three 
quarters of 2018).       
Source: Eurostat 

70 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)18.917.413.714.012.6:Gender employment gap (pps)6.47.16.76.87.56.7Income inequality, measured as quintile share ratio (S80/S20)6.06.26.05.95.7:At-risk-of-poverty or social exclusion rate1 (AROPE)27.527.526.625.123.3:Young people neither in employment nor in education and training (% of population aged 15-24)14.112.311.310.69.3:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)65.467.669.170.673.475.2Unemployment rate2 (15-74 years)16.414.112.611.29.07.0Long-term unemployment rate3 (as % of active population)9.38.47.26.24.53.2Gross disposable income of households in real terms per capita4 (Index 2008=100) 92.092.094.797.099.3:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)15865162071604315984::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)-2.3-0.5-2.2-0.6::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction526.727.026.124.022.5:Children aged less than 3 years in formal childcare38.045.047.249.947.5:Self-reported unmet need for medical care3.03.53.02.42.3:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::48.048.050.0: 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
1) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
2) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
4) Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted (annual series, for EE, EL, 
HU, IT and UK data based on first three quarters of 2018).       
Source: Eurostat, OECD       

71 

Labour market indicators201320142015201620172018 4Activity rate (15-64)73.073.273.473.774.7:Employment in current job by durationFrom 0 to 11 months11.913.214.214.414.7:From 12 to 23 months6.26.26.97.67.8:From 24 to 59 months14.213.111.912.913.9:60 months or over67.867.566.965.163.5:Employment growth* (% change from previous year)-2.91.41.41.63.32.5Employment rate of women(% of female population aged 20-64)62.364.265.967.469.872.1Employment rate of men (% of male population aged 20-64)68.771.372.674.277.378.8Employment rate of older workers* (% of population aged 55-64)46.947.849.952.156.259.1Part-time employment* (% of total employment, aged 15-64)11.110.19.89.58.98.1Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)21.421.422.022.322.022.0Participation in activation labour market policies(per 100 persons wanting to work)16.524.628.523.4::Transition rate from temporary to permanent employment(3-year average)26.425.826.228.230.3:Youth unemployment rate (% active population aged 15-24)38.134.732.028.223.820.2Gender gap in part-time employment5.85.05.45.35.64.7Gender pay gap1 (in undadjusted form)13.314.917.817.5::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)9.79.69.79.69.8:Underachievement in education2::23.8:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)30.031.331.934.633.5:Variation in performance explained by students' socio-economic status3::14.9::: 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation.       
4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.       
6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.       
Source: Eurostat, OECD       

72 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare6.26.26.16.06.1:Disability1.82.01.91.81.7:Old age and survivors13.714.614.714.414.0:Family/children1.21.21.21.21.2:Unemployment1.71.81.51.10.9:Housing0.00.00.00.00.0:Social exclusion n.e.c.0.30.20.20.20.2:Total24.926.125.524.724.1:of which: means-tested benefits2.22.22.12.01.9:General government expenditure by function (% of GDP, COFOG)Social protection18.319.218.818.418.0:Health6.56.46.26.15.9:Education5.85.95.75.14.9:Out-of-pocket expenditure on healthcare (% of total health expenditure)28.227.027.727.727.8:Children at risk of poverty or social exclusion (% of people aged 0-17)*27.831.731.429.627.024.2At-risk-of-poverty  rate1 (% of total population)17.918.719.519.519.018.3In-work at-risk-of-poverty rate (% of persons employed)9.910.510.710.910.910.8Severe material deprivation rate2  (% of total population)8.610.910.69.68.46.9Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan2.53.54.03.23.43.1Tenant, rent at market price10.610.510.18.09.06.5Proportion of people living in low work intensity households4 (% of people aged 0-59)10.112.212.210.99.18.0Poverty thresholds, expressed in national currency at constant prices*456543644372448946504773Healthy life years (at the age of 65)Females9.09.35.65.46.4:Males9.99.66.97.07.7:Aggregate replacement ratio for pensions5 (at the age of 65)0.60.60.60.60.60.7Connectivity dimension of the Digital Economy and Society Index (DESI)6::54.457.363.067.4GINI coefficient before taxes and transfers*54.454.856.355.554.754.0GINI coefficient after taxes and transfers*34.134.234.534.033.933.5 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

1) Value added in constant prices divided by the number of persons employed.       
2) Compensation of employees in current prices divided by value added in constant prices.       
3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
4) Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know.       
5) Percentage population aged 15-64 having completed tertiary education.       
6) Percentage population aged 20-24 having attained at least upper secondary education.       
7) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
8) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation 
indicators); SAFE (for outcome of SMEs' applications for bank loans). 

73 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry0.741.100.380.070.38-1.06Labour productivity growth in construction6.423.63-3.89-1.28-1.680.42Labour productivity growth in market services1.532.32-3.38-2.13-1.03-2.03Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry-1.310.250.100.671.904.01ULC growth in construction-3.98-1.982.812.473.890.53ULC growth in market services-2.56-0.510.723.742.333.14Business environment201220132014201520162017Time needed to enforce contracts3 (days)870870870755755755Time needed to start a business3 (days)7.06.06.06.06.06.5Outcome of applications by SMEs for bank loans41.240.710.680.550.600.54Research and innovation201220132014201520162017R&D intensity1.381.331.291.241.281.32General government expenditure on education as % of GDP5.805.905.705.104.90:Employed people with tertiary education and/or people employed in science and technology as % of total employment293033343536Population having completed tertiary education5171820212222Young people with upper secondary education6687072777879Trade balance of high technology products as % of GDP-1.60-1.56-1.61-1.56-1.76-1.83Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall2.121.691.29OECD PMR7, retail3.293.971.83OECD PMR7, professional services:3.082.92OECD PMR7, network industries83.092.552.18 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR)  
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP    
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as % of total value added for the economy  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)   
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors  
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP  
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP  
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions  
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency.  
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR)  
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport industry  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels  
* European Commission and European Environment Agency  
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

74 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.130.130.130.130.130.13Carbon intensity kg / €0.390.390.380.400.39-Resource intensity (reciprocal of resource productivity)kg / €0.990.870.910.900.870.87Waste intensity kg / €0.08-0.09-0.08-Energy balance of trade % GDP-4.7-3.7-3.6-2.3-1.6-2.1Weighting of energy in HICP%13.798.597.868.258.118.30Difference between energy price change and inflation %10.92.61.7-1.9-2.1-1.9Real unit of energy cost% of value added20.419.920.421.121.9-Ratio of environmental taxes to labour taxesratio0.170.150.150.160.18-Environmental taxes% GDP2.22.22.32.42.62.6Sectoral Industry energy intensity kgoe / € 0.140.140.140.130.130.13Real unit energy cost for manufacturing industry excl. refining% of value added16.115.415.816.316.9-Share of energy-intensive industries in the economy% GDP7.77.67.87.97.9-Electricity prices for medium-sized industrial users€ / kWh0.110.110.120.110.110.11Gas prices for medium-sized industrial users€ / kWh0.040.040.040.040.030.03Public R&D for energy % GDP0.000.010.010.010.010.01Public R&D for environmental protection% GDP0.010.010.010.020.020.02Municipal waste recycling rate%26.125.830.429.830.928.4Share of GHG emissions covered by ETS*%38.938.237.741.838.2-Transport energy intensitykgoe / €0.890.900.940.951.000.99Transport carbon intensitykg / €2.242.232.372.362.44-Security of energy supplyEnergy import dependency%79.573.372.178.274.079.9Aggregated supplier concentration indexHHI26.728.128.232.129.9-Diversification of energy mixHHI0.300.310.310.300.320.30 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR PORTUGAL 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027 of 2 May 2018 (COM (2018) 321), this Annex presents the  preliminary Commission services 
views  on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027 
Cohesion Policy (59). These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis for a  dialogue between  Portugal and the  Commission services in view of the programming of the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Portugal remains a "moderate" innovator and overall low research and development intensity hinders the 
upgrade of the economic productive structure. The implementation of smart specialisation areas, based 
on national and regional potential, strengthens innovation performance and fosters productivity growth. 
High  priority  investment  needs (60)  have  been  identified  to  enhance  research  and  innovation 
capacities  and  the  uptake  of  advanced  technologies,  aiming  at  complementarity  and  compatibility 
with Horizon Europe instruments, in particular to promote: 

  public and private investment in research and innovation, as a tool to move up the value added chain 
and to increase innovation in firms across sectors, and develop technologies for transition to a carbon 
neutral economy; 

  collaboration  between  public  and  private  research  and  support  technology  transfers  in  a  few 

specialisation identified areas; 

  mobility of qualified human resources  between universities, research and development institutions, 

tech centres and companies. 

Digital  skills  and  uptake  of  digital  technologies  by  firms  and  people  remain  low.  Priority  investment 
needs have been identified to increase uptake to reap digitisation benefits for citizens, companies and 
governmental bodies and promote digital inclusion, and in particular to: 

  promote  the  acquisition  and  development  of  digital  skills  and  market-driven  information  and 

communication technology skills; 

  support the integration of digital technologies into businesses and production processes of micro and 
small and medium-sized enterprises, including by developing infrastructures and services like digital 
innovation hubs; 

 

increase the range of digital services provided (e-government, e-procurement, e-inclusion, e-health, 
e-learning, e-skilling, e-commerce) and taken up by citizens, with special focus on rural, remote and 
outermost regions and on vulnerable groups of the population. 

(59)  This Annex is to be considered in conjunction with the EC Proposal for a Regulation of the European Parliament and of the 
Council on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the EC Proposal for a 
Regulation of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382, in particular as 
regards the requirements for thematic concentration and urban earmarking outlined in these proposals. 

(60)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

75 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Portugal 

A  predominance  of  micro  and  small  companies  affects  innovation  capacity  and  productivity.  
Internationalisation  levels  are  relatively  weak,  with  the  share  in  medium-high  and  high-tech  exports 
substantially  lower  than  the  EU  average.  High  priority  investment  needs  have  been  identified  to 
enhance small and medium-sized enterprises growth and competitiveness, and in particular to: 

  enable  firms  to  scale  up,  create  jobs,  internationalise  and  promote  a  climate  neutral  industrial 

transformation; 

  encourage  the  entrepreneurial  ecosystem,  networking,  new  marketing  tools,  strengthening  of 
managerial skills and financial literacy, knowledge-sharing across sectors and national borders; 

 

facilitate  access  to  credit  and  to  equity  capital  and  improve  awareness  of  the  available  funding 
opportunities and advanced business services for small and medium-sized enterprises. 

Skills  gaps  hinder  productivity,  technological  diffusion  and  affect  the  development  of  innovative 
competences. Priority investment needs have been identified to develop skills for smart specialisation, 
industrial transition and entrepreneurship, and in particular to: 

  stimulate  training  and  re-skilling  in  smart  specialisation  areas,  in  particular  in  key  enabling 

technologies and related skills and in the new emerging fields. 

Policy Objective 2: A low carbon and greener Europe  – Clean and fair energy transition, green 
and blue investment, circular economy, climate adaptation and risk prevention (61) (62)  

Additional effort is needed to focus on the long-term decarbonisation targets for 2030 and 2050. Priority 
investment needs have been identified to promote energy efficiency measures and renewable energy, 
and in particular to:  

 

improve  energy  efficiency  in  public  buildings  and  renovation  of  residential  buildings,  focusing  on 
“energy poverty”; also in small and medium-sized enterprises, including their premises, installations 
and processes; 

  support the transition to renewable energy in heating and cooling;  

  support  the  integration  of  higher  shares  of  renewables  in  the  energy  system  through:  support  of 
renewable energy technologies, including decentralised energy production; smart energy systems at 
local level, including smart electricity distribution grids and storage solutions;  joint production sites 
for  renewable  energy  sources,  joint  access  to  small  grids  with  neighbouring  regions  across  the 
border, including blue investment in the Atlantic Strategy. 

Portugal is one of the areas in Europe most vulnerable to climate change. High priority investment needs 
have  therefore been identified to  promote climate change  adaptation, risk  prevention  and disaster 
resilience, and in particular to: 

  support  prevention  and  climate-change  adaptation  cross-sectoral  measures,  to  face  multiplicity  of 
impacts  and  vulnerabilities,  wherever  possible  with  a  focus  on  ecosystem-based  approaches  and 

(61)  Specific  support  to help  islands  generate  their  own  sustainable,  low-cost  energy  should  be  provided  in  the  framework  of  the 

EU's Clean Energy for EU Islands initiative. 

(62)  While  outside  of  the  scope  of  the  ERDF  and  the  Cohesion  Fund  (art.  6,  paragraph  1(h),  COM  (2018)372),  energy 
interconnectors could be financed by the Connecting Europe Facility in line with its objectives (art. 3, paragraphs 1 and 2 (b), 
COM(2018) 438). 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Portugal 

biodiversity protection, also in a cross-border and transnational context; 

  strengthen  management  preparedness  and  response  capacity,  including  early  warning  systems, 
equipment  and  awareness  raising  campaigns,  including  joint  actions  in  a  cross-border  and 
transnational context. 

Portugal  still  faces  considerable  challenges  with  water  management.  Investments  needs  have  been 
identified to promote sustainable water management, and in particular to: 

  promote an efficient use of water resources throughout the whole water cycle; support the collection 
and treatment of waste water; support water body rehabilitation; support ecosystem-based measures 
to  promote  natural  water  storage  and  purification,  including  in  a  cross  border  and  transnational 
context. 

Portugal  still  faces  considerable  challenges  with  waste  management.  Priority  investment  needs  have 
been identified to promote the transition to circular economy, and in particular to: 

  support  shifting  towards  the  highest  steps  of  the  waste  management  hierarchy,  in  order  to  reduce 
landfilling;  develop  separate  correction  of  waste,  namely  for  bio-waste;  develop  and  modernise 
waste  recycling  and  treatment  facilities,  taking  into  account  waste  management  capacities  in 
neighbouring  regions  and  promote  capacity-building  and  awareness  for  stakeholders,  favouring 
sustainable consumption practices, actions and behaviour to increase resource efficiency in small and 
medium-sized enterprises. 

Policy  Objective  3:  A  more  connected  Europe  –  Mobility  and  regional  Information  and 
Communication Technology connectivity 

Portugal's geographical position requires well-functioning and well-connected network infrastructure. It 
ranks  19th  in  the  2016  EU  Transport  Scoreboard,  scoring  lower  on  private  research  and  development 
investments  and  low  carbon  aspects.  Railways  are  widely  underused  for  connections  to  Spain  and 
interoperability  is  a  major  bottleneck.  Priority  investment  needs  have  been  identified  to  develop 
sustainable, climate resilient, intelligent, secure and intermodal mobility, and in particular to: 

  complete the Trans-European Transport Network - core and comprehensive rail networks, including 

cross border connections;   

  upgrade  port  infrastructure  and  support  inter-modality  for  passengers  and  freight,  including  rail 

connections to Trans-European Transport Network ports and to logistic platforms; 

  support digitisation for more intelligent, cleaner, intermodal and safer transport systems; 

  upgrade and modernise other rail corridors; 

 

improve accessibility and interconnectivity of the outermost Regions of Madeira and the Azores. 

Personal  transport  exacerbates  seasonal  problems  with  air  quality  and  traffic  congestion  in  the  major 
metropolitan  areas,  leading  to  health  and  economic  costs.  Portugal  has  one  of  the  highest  rates  of  car 
passenger transport in the EU. Priority investment needs have been identified to  promote sustainable 
multimodal urban mobility, in particular aiming to promote: 

  a  shift  towards  sustainable  and  accessible  modes  of  transport,  such  as  low-carbon  public  transport 

77 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Portugal 

(including support to urban rail rolling stock) and active modes of transport; 

 

 

investments  reducing  the  negative  externalities  of  transport,  in  particular  congestion,  emissions 
(pollutants, Greenhouse gas, noise), and traffic accidents; 

Intelligent Transportation System, digitisation and innovative solutions for Smart Cities, improving 
infrastructure use and service quality. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

Youth unemployment is high and labour market segmentation persistent. Priority investment needs have 
been identified to improve access to employment for all jobseekers and to modernise labour market 
institutions and services, and in particular to: 

 

 

implement  active  and  preventive  labour  market  measures,  well-designed  recruitment  subsidies, 
provide  job  and  training  mobility  measures  and  engage  with  local  communities  with  a  view  to 
enhancing outreach measures; 

improve  the  capacity  of  public  employment  services  by  upgrading  their  IT  equipment;  increase 
collaboration with employers; establish relevant partnerships and provide lifelong guidance services 
and learning opportunities. 

Overall  participation  in  childcare  (children  under  age  of  3)  is  adequate,  but  poor  households  have 
limited access and supply is insufficient in some areas. Provision of early childhood education and care 
(4-6  years  old)  is  below  average  especially  in  metropolitan  areas.  Priority  investments  have  been 
identified to promote an equal access and better work/life balance, including access to: 

  affordable, sustainable and high-quality care services such as childcare and out-of-school care. 

Early school leaving represents a serious challenge notably in Azores and Madeira; a large share of the 
adult  workforce  lacks  basic  skills.  High  priority  investment  needs  have  been  identified  to  improve 
education and training systems, promote equal access  to, and completion of, adult education and 
learning and promote lifelong learning for all, and in particular to: 

  promote  early  intervention  and  prevent  early  school  leaving;  invest  in  school  education,  including 

infrastructure, and enhance quality education for persons with disabilities;  

  promote vocational education and training, modernise education and training sectors and upgrade the 

basic skills of the adult population, in particular digital skills.   

Demographic  ageing  is  a  pressing  challenge  and  inequalities  in  access  to  healthcare  remain.  Priority 
investment needs have been identified to promote equal and timely access to quality, sustainable and 
affordable  healthcare,  including  long-term  care,  and  active  and  healthy  ageing  policies,  and  in 
particular to: 

  support  re-skilling  and  upskilling  of  healthcare  and  long-term  care  workforce,  contributing  to  its 

retention, thus ensuring adequate provision of services; 

  support the implementation of national active ageing strategies;  

  undertake  infrastructure  investments  in  health,  social  and  long-term  care,  including  community-
based  services  and  medical  equipment  in  the  health  sector,  with  a  view  to  reducing  health 

78 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Portugal 

inequalities. Support strengthened provision of integrated care. 

Inequalities, child poverty risks and in-work poverty risks persist, while access to services is in need of 
improvement.  Priority  investment  needs  have  been  identified  to  foster  active  inclusion  and  address 
material  deprivation;  enhance  equal  and  timely  access  to  quality,  sustainable  and  affordable 
services and modernise social protection systems, and in particular to: 

  support  the  activation  and  rehabilitation  of  disadvantaged  and  people  with  disabilities  through 

integrated and personalised service provision; 

  promote the social integration of children at risk of poverty and social exclusion; 

 

 

tackle  in-work  poverty,  promote  inclusive  working  environments,  skills  development,  training  and 
life-long learning for all; 

increase  the  socioeconomic  integration  of  marginalised  communities,  migrants  and  disadvantaged 
groups; 

  support food provision and assistance to the most deprived. 

Policy Objective 5 –  A Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated  
development  of urban, rural and coastal areas and local initiatives 

Population  concentration  in  most  of  the  coastal  urban  areas  increased  the  pressure  on  the  natural 
resources  and  land  use,  with  effect  on  mobility,  pollution,  social  inclusion  and  access  to  services. 
Priority investment needs have therefore been identified to foster the integrated social, economic and 
environmental development of the urban areas, and in particular to: 

  address  urban  challenges  at  functional  area  level  in  particular  in  deprived  neighbourhoods  and 
disadvantaged  or  de-industrialised  areas,  taking  into  account  the  different  needs,  according  to  the 
size, specialization and function of each area. 

Depopulation and ageing lead to a reduction in the quality of basic services in low-density internal and 
rural areas. The geographical and socio-economic characteristics of the outermost regions pose as well 
specific challenges to be taken into account. Priority investment needs have therefore been identified to 
foster  the  integrated  social,  economic  and  environmental  local  development  of  the  rural  and 
coastal areas,  and in particular to: 

  support  sustainable  integrated  territorial  strategies,  focusing  on  enhancing  access  to  basic  services, 
favour urban-rural linkages and  innovative solutions to enhance the endogenous potential of these 
areas  and  favour  the  sustainable  attractiveness  of  the  territories,  taking  into  account  the  different 
needs at functional area level; 

  encourage joint actions with neighbouring regions and in sea-basin or functional areas with similar 

challenges. 

Factors for effective delivery of Cohesion policy 

  adoption of a national strategy to tackle inequalities and ageing (integrated care); 

 

improved  measures to prevent and address conflict of interest, fraud and corruption; 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Portugal 

 

improved  performance  on  public  procurement  by  tackling  the  weaknesses  identified  in  the  Single 
Market Scoreboard; 

  development and implementation of a roadmap on administrative capacity building necessary for the 
effective administration and implementation of the Funds, in particular to increase local management 
capacities, providing assistance to local authorities and beneficiaries, and to eliminate overlaps and 
excessive documentation requirements;  

 

foster  adequate  participation  and  strengthened  capacity  of  social  partners,  civil  society  and  other 
relevant stakeholders in the delivery of policy objectives; 

  enhancement of the delivery capacity of Public Employment Services; 

  broader  use  of  financial  instruments,  as  well  as  exploiting  synergies  with  InvestEU  for  revenue-

generating and cost-saving activities. 

80 

 
 
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