CELEX: 52013DC0394
Language: en
Date: 2013-05-29 00:00:00
Title: Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Portugal

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		52013DC0394
		
			Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Portugal /* COM/2013/0394 final */
			
				
		
		
			
			   	Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the
situation of an excessive government deficit in Portugal
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the
Treaty on the Functioning of the European Union, and in particular Article
126(7) thereof,
Having regard to the
recommendation from the European Commission,
Whereas:
(1)       According to Article 126
of the Treaty on the Functioning of the European Union
(TFEU) Member States are to avoid excessive government
deficits.
(2)       The Stability and Growth
Pact is based on the objective of sound government finances as a means of
strengthening the conditions for price stability and for strong sustainable
growth conducive to employment creation.
(3)       On
2 December 2009, the Council decided, in accordance with Article 126(6) of the TFEU,
that an excessive deficit existed in Portugal and issued a recommendation to
correct the excessive deficit by 2013 at the latest, in accordance with Article
126(7) TFEU and Article 3 of Council Regulation (EC) No 1467/97[1] of 7 July 1997 on speeding up
and clarifying the implementation of the excessive deficit procedure[2]. 
(4)       On
15 June 2010, the Commission concluded that Portugal had taken effective action
in compliance with the Council recommendation of 2 December 2009 to bring its
government deficit below the 3% of GDP reference value and considered that no
additional step in the excessive deficit procedure was therefore necessary at
that point in time.
(5)       On
9 October 2012, the Council concluded, in accordance with Article 3(5) of
Council Regulation (EC) No 1467/97, that effective action had been taken but
that unexpected adverse economic events with major unfavourable consequences
for government finances had occurred. The Council therefore adopted a revised
recommendation under Article 126(7) TFEU (the 'revised EDP recommendation') and
recommended Portugal to correct the excessive deficit by 2014 at the latest. In
order to bring the headline government deficit below the 3% of GDP reference
value by 2014, Portugal was recommended to deliver an improvement of the
structural balance of 2.3% of GDP in 2012, 1.6% of GDP in 2013 and 1.3% of GDP
in 2014. The headline deficit targets consistent with the requested
improvements of the structural budget balance were 5% of GDP for 2012, 4.5%
of GDP for 2013 and 2.5% of GDP for 2014. 
(6)       The
Portuguese authorities were also recommended to implement the measures adopted
in the 2012 budget and its March supplement and that they take additional
measures worth 0.3% of GDP. Portugal was recommended to adopt permanent
consolidation measures of at least 3% of GDP to be included in the 2013 budget,
adopting additional measures in case of slippages, and to define measures worth
1¾ % of GDP in 2014 following a comprehensive Public Expenditure Review (PER).
In addition, Portugal should implement the requirements of the Council
Implementing Decision 2011/344/EU on granting Union financial assistance to
Portugal of 17 May 2011 and its successive amendments. The Budget Framework Law
should be adapted to incorporate the EU fiscal governance rules and Portugal should
continue enhancing tranparency and control at all budgetary stages as well as
respecting the medium-term budgetary framework. 
(7)       According to Article 3(5)
of Regulation (EC) No 1467/97, the Council may decide, on a recommendation from
the Commission, to adopt a revised recommendation under Article 126(7) TFEU, if
effective action has been taken and unexpected adverse economic events with
major unfavourable consequences for government finances occur after the
adoption of the initial recommendation. The occurrence of unexpected adverse
economic events with major unfavourable budgetary effects is to be assessed
against the economic forecast underlying the Council recommendation. 
(8)       In accordance with Article
126(7) of the TFEU and Article 3 of Council Regulation (EC) No 1467/97, the
Council is required to make recommendations to the Member State concerned with
a view to bringing the situation of excessive deficit to an end within a given
period. The recommendation has to establish a maximum deadline of six months
for effective action to be taken by the Member State concerned to correct the
excessive deficit. Furthermore, in a recommendation to correct an excessive deficit
the Council should request the achievement of annual budgetary targets which,
on the basis of the forecast underpinning the recommendation, are consistent
with a minimum annual improvement in the structural balance, i.e. the
cyclically-adjusted balance excluding one-off and other temporary measures, of
at least 0.5% of GDP as a benchmark. 
(9)       In the forecast
underpinning the revised recommendation of October 2012, real GDP was expected
to contract by 3% and 1% in 2012 and 2013, respectively. Growth prospects have
deteriorated markedly since then, after the last quarter of 2012 turned out
significantly worse than expected for both economic activity and labour market
developments leading to a real GDP contraction of 3.2% in 2012. In view of the
negative carry-over from 2012 and the deterioration in the growth outlook for
Portugal's export markets, the Commission services' latest update of the
economic outlook for Portugal revised real GDP growth downwards to -2.3% in
2013. 
(10)     The general government deficit
in 2012 reached 6.4% of GDP, which is above the 5.0% EDP target. The headline
deficit was affected by a number of one-off operations which were not known at
the time of the EDP recommendation. These operations include: a capital
injection into the state-owned bank CGD (0.5% of GDP); the re-routing through
government of the conversion into equity of shareholder loans of Parpública to
SAGESTAMO, two companies outside the general government perimeter (0.5% of
GDP); the impairments associated with the transfer of assets from BPN (0.1% of
GDP). In addition, following an advice by Eurostat the sale of the operating
concession for the major airports in Portugal was treated as equity withdrawal
and hence not impacting the general government balance, contrary to what the
government had foreseen in the budget (0.7% of GDP). Excluding the impact of
these one-off factors from the headline balance, the general government deficit
would have amounted to 4.7% of GDP, below the target.
(11)     Tight expenditure control
compensated for the large macroeconomically-driven underperformance of revenues
in the last quarter of the year. Expenditure savings were achieved mostly in
the public wage bill, with the reduction in public employment proceeding ahead
of plans, by reducing intermediate consumption and freezing budgetary
appropriations for new investment projects. Regional and local budget execution
also turned out better than expected. On the whole, Portugal adopted permanent
consolidation measures amounting to nearly 6% of the GDP in 2012, above the
amount of measures required by the revised EDP recommendation. According to the
Commission services' May 2013 forecast, the improvement in the structural
balance in 2012 amounted to 2.4% of GDP compared with the 2.3% of GDP required by
the revised EDP recommendation. Taking into account the revision in potential
output growth since the revised EDP recommendation, the fiscal effort would
have been at least 0.2 pp. higher. In addition, the estimated change in the
structural balance was affected by revenue shortfalls compared with the
scenario underlying the EDP recommendation when applying standard revenue
elasticities. These shortfalls amounted to around 0.4 pp. Taking these effects
into account, the adjusted change in the structural balance amounted to 3.0% of
GDP, thus well above the effort required under the revised EDP recommendation.
(12)     For 2013, the Commission
services' May 2013 update of the economic outlook for Portugal projects the
general government deficit to reach 5.5% of GDP, compared with a target of 4.5%
of GDP in the revised EDP recommendation. Budgetary consolidation in 2013 needs
to compensate for a large negative primary balance drift which reflects more
subdued labour market and growth developments as well as the continued
rebalancing towards a more export-driven but also less tax-intensive economy
compared with the projections underlying the revised EDP recommendation. In
addition, on 5 April, the Constitutional Court ruled against various measures
worth 0.8% of GDP included in the 2013 budget, which needed to be compensated
for. In particular, the ruling concerned the cut of one of the two bonus
payments for public sector workers, the cut of 90% of one of the two bonus
payments for pension beneficiaries and the introduction of social security
contributions on unemployment and sick leave benefits. 
(13)     The Commission services'
May 2013 update of the economic outlook for Portugal foresees a structural
effort in 2013 of 0.6% of GDP. This falls short of the 1.6% of GDP effort recommended
by the Council. However, correcting for the downward revision of potential
output growth since the time of the revised EDP recommendation, the estimated
structural effort in 2013 would be about 0.2 pp. higher. In addition, the
change in the structural balance is also severely affected by revenue
shortfalls (i.e. relative to GDP developments using standard revenue elasticities)
which amount to around 0.5 pp. Overall, taking these factors into account, the
estimated structural effort would be 1.3% of GDP. The adjusted fiscal effort is
thus somewhat below the effort required by the revised EDP recommendation. 
(14)     The budgetary adjustment in
2013 is underpinned by permanent consolidation measures with a net worth of 3.5%
of GDP, which comprise the measures included in the 2013 budget law, to be
amended by a supplementary budget by end-May, the frontloading of expenditure
reducing measures identified in the context of the public expenditure review as
well as other measures to replace the budget measures that were ruled
unconstitutional. The amount of consolidation measures goes beyond that foreseen
at the time of the October 2012 revised EDP recommendation. The measures include,
inter alia, a restructuring of the personal income tax (PIT) and increases in
excise duties and property taxation. On the expenditure side, the measures
envisage a sizeable reduction in the public sector wage bill through employment
restraint and a reduction in overtime payments and compensations; increased
efficiency in the functioning of public administration; lower intermediate
public consumption including savings on PPPs; further rationalisation efforts
in the health sector and in SOEs; and the frontloading of revenues from EU Funds.

(15)     In 2014, according to the
Commission services' May 2013 update of the economic outlook for Portugal the
general government deficit is expected to fall to 4.0% of GDP, compared with
the 2.5% of GDP target of the October 2012 revised EDP recommendation. The
deviation reflects the higher headline deficits in the previous years as well
as a more muted economic recovery. The structural effort in 2014 is forecast to
be 1.4% of GDP, 0.1 pp. above the required effort in the revised EDP
recommendation. The evolution of potential output between the projections
underlying the revised EDP recommendations and the updated forecast would add
0.1 pp. to the estimated fiscal effort. In addition, adjusting for unexpected
revenue shortfalls, the effort would increase to 1.8% of GDP. The adjusted structural
effort in 2014 would thus be well above the amount required by the revised EDP
recommendation.
(16)     These projections are
underpinned by discretionary measures worth at least 2% of GDP. On the
expenditure side, these measures will draw on the results of the PER which aims
at streamlining and modernising the public administration, addressing
redundancies across the public sector functions and entities, improving the
sustainability of the pension system and achieving targeted cost savings in
individual line ministries. In the course of April and early May, the
government adopted a package of permanent expenditure-reducing measures with
cumulative yields of EUR 4.7 billion (2.8% of GDP) over 2013-2014. The
government has initiated a broad-based consultation with social and political
partners with a view to fully defining and implementing these reforms. On the
revenue side, the authorities foresee a comprehensive reform of the corporate
income tax in 2014. The goal is to boost investment and growth by simplifying
the corporate income tax system. Given the limited fiscal space, the reform
should be revenue-neutral.
(17)     Gross public debt rose from
108.3% in 2011 to 123.6% of GDP in 2012 and, according to the Commission
services' latest update of the economic outlook for Portugal, is expected to peak
at around 124.2% in 2014, thus exceeding the Treaty reference value in all
years. The upward shift in the projections for 2012 is mostly driven by the
statistical treatment of the transfer of privatisation receipts from Parpública
to the State as well as the effect of the lower GDP path and the revised
deficit projections. The government will put forward various measures to curb
the increase in the debt ratio such as the sale of foreign assets of a social
security fund and the completion of privatisation efforts. Albeit small, a
primary surplus is already expected in 2014 reflecting the strength of fiscal
consolidation and the more benign macroeconomic developments. 
(18)     Important
steps have been taken to improve public financial management in Portugal. Portugal was also asked to continue improving transparency and
control at all budgetary stages for all levels of government. In December 2012,
the Budget Framework Law was amended to incorporate the principles of the Treaty
on Stability, Coordination and Governance in the Economic and Monetary Union
(fiscal compact) and the six-pack. An additional revision is foreseen by the
end of 2013 to further enhance budgetary procedures and principles of budgetary
management, accountability, transparency and simplification. In addition, draft
Regional and Local Finance Laws were submitted to Parliament at the end of
December 2012. The laws set improved coordination mechanisms between the
central and the local and regional administrations, a multi-annual budgetary
framework and tighter fiscal rules as well as applying the principles of the amended
Budget Framework Law. Portugal has also strengthened efforts to limit
contingent liabilities by engaging in a far-reaching renegotiation process for
Public-Private-Parnerships with significant savings already foreseen in 2013
and State-Owned Enterprises restructuring is progressing at good pace. SOEs at
sectoral level reached operational balance by the end of 2012 and further
efficiency gains are expected going forward. The authorities are exploring ways
to manage the heavy debt load of SOEs. These reforms show an important
commitment towards fiscal sustainability over the medium term. 
(19)     According
to the Commission services' latest update of the economic outlook, Portugal
will not meet the nominal budgetary targets established in the Council
Recommendation of 9 October 2012. However, taking into account the changes in economic
developments when compared with the macro-economic scenario underlying the revised
Council recommendation, it appears that Portugal has taken effective action
that represents adequate progress towards correcting the excessive deficit in
2012 and 2013 within the limits specified by the Council on 9 October 2012. In
particular, Portugal has adopted sizeable consolidation measures amounting to nearly
6% of GDP in 2012 and to 3½ % of GDP in 2013. The structural effort delivered
in 2012, corrected for potential output growth and revenue shortfalls, was well
above the required effort in the revised EDP recommendation. In 2013, the
structural effort is expected to fall short of the required effort, primarily
due to unfavourable economic developments as well as the timing of the Constitutional
Court ruling well within the budgetary year, which made it difficult to find
substituting measures of equal structural quality. In 2014, the structural
effort is expected to be again above the required effort. Considering all these factors and in line with the flexibility provided by the Stability and
Growth Pact, an additional year for the correction of the excessive deficit appears
warranted. 
(20)     Granting an additional year
for the correction of the excessive deficit would require intermediate headline
deficit targets of 5.5% of GDP in 2013, 4.0. % of GDP in 2014 and 2.5% of GDP in
2015, which, based on the Commission services' latest update of the economic
outlook for Portugal, is consistent with an improvement of the structural
fiscal balance of 0.6% of GDP in 2013, 1.4% of GDP in 2014 and 0.5% of GDP in
2015, the last corresponding to the minimum improvement required by Article 5(1)
of Council Regulation (EC) No 1466/97 of 7 July 1997[3]. In
parallel to the regular reviews of the Economic Adjustment Programme for
Portugal as defined in Council Implementing Decision 2011/344/EU, monitoring of
progress on implementation of its EDP commitments will be carried out at an
interval of three months.
(21)     Portugal fulfils the
conditions for the extension of the deadline for correcting the excessive general
government deficit as laid out in Article 3(5) of Regulation (EC) No 1467/97 on
speeding up and clarifying the implementation of the excessive deficit
procedure,
HEREBY RECOMMENDS:
(1)                   
The Portuguese authorities should put an end to
the present situation of excessive deficit by 2015.
(2)                   
The Portuguese
authorities should bring the headline deficit targets to 5.5% of GDP in 2013,
4.0% of GDP in 2014 and 2.5% of GDP in 2015, which is consistent with an improvement in the structural balance of 0.6% of GDP in
2013, 1.4% of GDP in 2014 and 0.5% of GDP in 2015, based on the Commission
services' May 2013 update of the economic outlook for Portugal. 
(3)                   
The Portuguese
authorities should implement measures amounting to 3½% of GDP to confine the
2013 deficit to 5.5% of GDP. These include the measures defined in the 2013
budget law and additional reductions in the wage bill, increased efficiency in
the functioning of public administration, lower public consumption and better
use of EU funds. 
(4)                   
The Portuguese
authorities should, building on the PER, adopt permanent consolidation measures
worth at least 2% of GDP in view of attaining a headline deficit of 4.0% of GDP
in 2014. It should aim at streamlining and modernising of the public
administration, addressing redundancies across the public sector functions and
entities, improving the sustainability of the pension system and achieving
targeted cost savings in individual line ministries. 
(5)                   
The Portuguese
authorities should adopt the necessary permanent consolidation measures to achieve
the 2015 deficit target of 2.5% of GDP. 
(6)                   
The Portuguese government is to take effective
action to implement this recommendation by 1 October 2013 and, in accordance
with Article 10(2a) of Regulation (EC) No .../2013 of the European Parliament
and of the Council, to report in detail the consolidation strategy that is
envisaged to achieve the targets.
Portugal should also maintain reform momentum
in public financial management by revising the Budget Framework Law by the end
of 2013 to further enhance budgetary procedures and principles of budgetary
management, accountability, transparency and simplification; to continue
efforts to limit contingent liabilities stemming from SOEs and PPPs. 
Done at Brussels, 
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 6.
[2]               All documents related to the
excessive deficit procedure of Portugal can be found at:          
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/portugal_en.htm
[3]               OJ L 209, 2.8.1997, p. 5.