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The report focuses on efficiency- and equity-enhancing reforms in selected spending areas. The Portuguese government seeks to enhance the efficiency of providing goods and services to the population (including by reducing costs and the need for debt financing); focus policies on achieving equitable outcomes; and stimulate economic activity and entrepreneurship. In this context, it intends to achieve by 2014 significant permanent annual expenditure savings. To identify these savings, it intends to carry out, by February, an indepth expenditure review, and it has already completed an initial benchmarking exercise (which the mission team broadly agrees with). Also, within the scope of the current constitution, the government is assessing the functions of the state to guide the expenditure review. Its goal is to increase spending efficiency and equity, while safeguarding social cohesion and strengthening the sustainability of the welfare state. This report complements the government’s analysis by discussing reform options that would improve equity and efficiency of spending, while supporting social cohesion and strengthening social safety nets.
The government’s spending reduction target can only be achieved by focusing on major budget items, particularly the government wage bill and pension spending. Together, these two items account for 24 per cent of GDP and 58 per cent of non-interest government spending. It would seem impossible to generate the government’s spending reduction goals without changes in these two areas, and relevant related reforms should take priority.
Reforms related to the wage bill should target areas that promise potentially large efficiency gains and budget savings. Over-employment is of concern in the education sector, the security forces, and with respect to workers with little formal training, while high overtime pay (for doctors) is of concern in the health sector. Other reforms are also important for modernising the state (e.g. compensation and contract structures to attract talent better, equity between public and private sector employment by reducing the public wage premium, and labour mobility in and out of the public sector), but can be given lower priority in the near term. Focusing on the key areas above allows pursuing a targeted adjustment strategy with a clear rationale and avoids across-the-board cuts.
The size of wage bill savings and related efficiency gains will depend on the tools used. To reduce employment, voluntary departures with financial incentives are the least adversarial but also the most costly option, and may cause the best-qualified to depart. In designing a strategy for employment reductions, the government should target specific areas of over-employment, and it will not have the luxury to choose reform options on the expensive end. This calls for creating targeted redundancies based on careful analysis. To limit overtime pay, remuneration packages in the health sector should be geared towards achieving greater comparability with other EU countries. These considerations make it important to embed employment and pay reductions into meaningful reform strategies for the relevant sectors. For example, reductions in education employment need to go hand in hand with a sector reform strategy that is clearly focused on improving education outcomes.