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The programme remains broadly on track. In 2012, despite headwinds from abroad, real GDP growth remains in line with projections, exports are performing better than expected, and the fast reduction in the external deficit is contributing to alleviating the external financing constraint. Nevertheless, higher unemployment, lower disposable incomes, and a shift in tax bases away from more highly-taxed activities are weighing on revenue collection. Against this backdrop, policy choices need to strike a balance between advancing the required fiscal adjustment and avoiding undue strains on the economy. Swift progress on structural reforms remains key to put the economy on a sustainable growth path. Maintaining broad political and social support for the revised adjustment programme will also be important.
The fiscal deficit path has been adjusted, particularly for 2013. While spending in 2012 performs somewhat better than budgeted, revenues are lagging significantly behind budget plans. To allow partial operation of automatic fiscal stabilisers, the deficit targets were revised upward to 5 per cent of GDP in 2012 and from 3 per cent to 4.5 per cent in 2013. The 2014 deficit target, at 2.5 per cent of GDP, remains below the threshold of the Stability and Growth Pact of 3 per cent. This revised path will allow the government to design and implement structurally sound fiscal measures, while easing the short-term economic and social cost of fiscal adjustment.
Reforms to raise competitiveness, employment and potential growth are also progressing. While the revised Labour Code entered into force in August this year, some further important reforms remain to be implemented to create a better functioning labour market. Active labour market policies are addressing the immediate challenges of high unemployment. The privatisation of the national air carrier and the airport concession are under preparation, and ports are becoming more competitive. Further reform steps are on their way, including a sweeping overhaul of licensing, to increase competition, strengthen the business environment, and improve efficiency and reduce rents in the services and network industries. The judiciary reforms in the areas of civil procedure and court organisation, which will speed up civil and commercial litigation and unclog the court system, are progressing well.
The public debt-to-GDP ratio will peak below 124 per cent, remains sustainable, and will be on a firm downward trajectory after 2014. Provided the authorities persevere with strict programme implementation, euro area Member States have declared they stand ready to support Portugal until full market access is regained.