The 2012 budget does not pursue earlier plans of a 'fiscal devaluation'. This makes it all the more important to adopt rapidly additional structural reforms in the labour and product markets with a view to reducing unit labour costs, increasing flexibility and lowering entry barriers. Perseverance and resolve on the part of the Government will be required to overcome strong vested interests that stand in the way of reforms.
Overall, the third review of the Economic Adjustment Programme has concluded that Portugal's implementation of the conditionality set out in the Memorandum of Understanding of 17 May 2011 remains on track. Banks are on track to meet the capital requirements under the Economic Adjustment Programme by the end of 2012 but capital positions have to improve further in 2012 in line with the requirements of that Programme and as a result of the European Banking Authority's requirement to cater for sovereign exposures, the special on-site inspection programme and the planned transfer of banks' private pension plans. In early June 2012, the Government announced that it would provide public funds to three major banks that would allow the capital requirements under the Economic Adjustment Programme to be met. The fourth review at staff level of the Economic Adjustment Programme, which was concluded in early June 2012, confirmed the results of the third review that the Programme remains on track.
The 2012 budget includes consolidation measures amounting to more than 5 per cent of GDP, which are made up of permanent structural measures. Two thirds of the measures are on the expenditure side and include a significant cut of public sector wages and pensions, a reduction in the number of government employees by 2 per cent (full-time equivalent) and a rationalisation of state-owned enterprises. On the revenue side, the budget envisages a reduction in tax exemptions, an increase in the number of goods and services taxed at the standard VAT rate, higher personal income and corporate taxes, an increase in excise taxes and enhanced efforts to fight tax evasion and fraud. The deficit is expected to decrease further to 1.8 per cent of GDP in 2014 and to 1 per cent of GDP in 2015. The main risks to the budgetary targets are mainly related to the state-owned enterprise sector and local and regional governments. In terms of the structural balance, the fiscal structural adjustment is expected to be over 7 percentage points of GDP in 2011-2012.
Council Recommendation (6.7.12)