Downside risks to the forecast prevail over the short term. Accelerated deleveraging in the banking sector through lending restraint rather than raising capital would be detrimental to the prospective recovery in business investment, as would be a further worsening of the global economic outlook.
On the positive side, an earlier recovery of the world economy could lift export volumes in 2012. Recently implemented reforms on labour and product markets could unlock economic growth earlier than expected.
Medium-term prospects are affected by the plans to reduce sizeably the government deficit and put the public debt ratio on a downward path. Under the ongoing Economic Adjustment Programme, government targets are for a deficit of 5.9 per cent of GDP in 2011, 4.5 per cent in 2012 and 3 per cent of GDP in 2013. Taking into account the combined effect of the planned consolidation measures and the subdued GDP path over the period 2011-13, the reduction of the government deficit to 3 per cent of GDP in 2013 from 9.8 per cent of GDP in 2010 will largely be the result of a falling expenditure-to-GDP ratio, with an additional contribution of a slight rise in the revenue ratio. The improvement in the structural balance over the forecast period will amount to close to 8 pps of GDP.
A large fiscal consolidation effort has been implemented in 2011, encompassing a wide range of structural measures in various areas of the revenue and expenditure sides of the budget. On the expenditure side, these include an average cut of 5 per cent in government wages, reductions in government payroll lists, cuts in social transfers (such as unemployment benefits and family allowances), and a freeze of essentially all other social outlays. Measures have also aimed at reining in spending, in particular in the health sector, state-owned enterprises (SOEs) and public investment. Consolidation efforts on the revenue side consist mainly of a 2 pps increase in the standard VAT rate in January 2011. In addition, revenue inflows benefit from the carry-over effect of a number of tax hikes in mid-2010. Increases in non-tax revenues through higher prices, fees for services and through assets and concessions sales were also planned, the latter having only a temporary effect on the budget.
Nonetheless, the achievement of the government deficit target for 2011 would be at risk in the absence of further corrective measures. This is mainly due to expenditure overruns and shortfalls of non-tax revenue, also because some consolidation measures are not yielding the expected results. In addition, deficit-increasing events are hampering fiscal prospects for 2011, including notably the assumption of debts of about 0.3 per cent of GDP from a financially-troubled government enterprise and a failed public-private partnership, both in the remit of the Madeira regional government. Additional costs related to the sale of the troubled bank BPN will add another 0.2 per cent of GDP to the 2011 government deficit.
Against this backdrop, additional measures have been taken to counteract the emerging budgetary slippage. In particular a one-off tax surcharge in personal income has been introduced and the VAT rate on electricity and natural gas has been increased (with a substantial carry-over into 2012). Furthermore, the government will proceed with the transfer of bank pension funds to the state social security system, with the sizeable resulting up-front capital transfers contributing to a temporary reduction of the fiscal deficit.
In 2012, Portugal is expected to undertake additional consolidation efforts worth over 5 per cent of GDP, included in a comprehensive package of spending cuts and tax increases. Measures on the expenditure side notably include cuts of government wages and pensions, which can amount up to a reduction of income by 1/7 for those earning or receiving more than 1000 euro per month, as 2 of the 14 annual payments will be eliminated. In addition, reductions in public sector employment are also foreseen and access to some social transfers is to be tightened. Savings in the area of health are expected to come from a restructuring of health services and lower spending on medication. Rationalisation in the area of education and of public administration in general should yield additional savings. A sharp decline in capital expenditure is also targeted, including by state-owned enterprises. On the revenue side, the consolidation plans for 2012 rely considerably on higher indirect taxation: at the level of VAT the structure of taxation is set to change, with more goods and services being taxed at the higher intermediate and standard rates and some excise taxes will also be increased. Regarding direct taxation, the focus is mainly on a broadening of the tax base by reducing deductions and exemptions at personal and corporate income tax levels. Exemptions relating to real estate taxation are also set to be reduced.
For 2013, additional sizeable consolidation efforts of 2 per cent of GDP are foreseen, largely based on the deepening of previously implemented cost-cutting measures and a further broadening of tax bases. Government debt is projected to stabilise at 112 per cent of GDP in 2013, up from 72 per cent of GDP in 2008.
Full forecast (Portugal)
© European Commission
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