OECD Economic Surveys: Portugal

Every 18 months
1999-0405 (online)
1995-3348 (print)
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OECD’s periodic surveys of the Portuguese economy. Each edition surveys the major challenges faced by the country, evaluates the short-term outlook, and makes specific policy recommendations. Special chapters take a more detailed look at specific challenges. Extensive statistical information is included in charts and graphs.

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OECD Economic Surveys: Portugal 2003

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16 Jan 2003
9789264099845 (PDF) ;9789264099821(print)

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This 2003 edition of OECD's periodic review of Portugal's economy examines recent economic developments, policies and prospects and  includes special features on public expenditure and structural reform.

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  • Assessment and Recommendations

    A 5-year long economic boom ended in 2001, but not before major imbalances had built up. Falling real and nominal interest rates encouraged the private sector to incur high debt levels, and blunted the government’s incentive to rein back the growth of primary spending. The public sector debt-to-GDP ratio stopped falling, and prolonged high demand pressure widened the inflation differential with the euro area. Private demand started to weaken in 2001, but GDP growth was sustained that year by buoyant public spending on both investment and consumption, especially wages and salaries. By early 2002, it became evident that the 2001 budget deficit was going to exceed the Stability and Growth Pact 3 per cent limit by a substantial margin, and that public debt was on the rise. Retrenchment has had to begin in the public sector, and is still ongoing in the private sector. Domestic demand is expected to have stagnated in 2002, and there are no fundamental reasons for expecting it to stage a strong recovery soon. Hence the challenge for policy over the next few years will be the adjustment to weakened domestic demand in an international environment which has yet to regain strength, and with no demand-side help from fiscal policy. The adjustment will be eased, and gains in real incomes increased, to the extent that the supply side of the economy functions more efficiently, with resources moving to more productive uses.

  • Macroeconomic Developments and Prospects

    An extended period of real convergence in living standards towards the euro area average came to a halt in 2000 and the Portuguese economy continued to slow down in 2002 (Figure 1). The downturn reflected the international weakening of activity and, most of all, the adjustment process of private demand that had started mid-2000. These developments took place against a background of sizeable macroeconomic imbalances generated in the late 1990s, including a large external deficit and high household and corporate indebtedness. In 2001, these factors outweighed the positive stimulus associated with an expansionary fiscal policy and the relatively favourable monetary conditions that characterised the Portuguese economy. In 2002, the more restrictive policy stance, in particular the tight fiscal measures adopted, intensified the slowdown of domestic demand. The recovery of the Portuguese economy is projected to lag the euro area and will be heavily dependent on external demand, as domestic demand is expected to remain subdued for some time.

  • Fiscal Policy Issues

    A sustained consolidation of public finances is one of the most important challenges facing the authorities. During the latter part of the high growth period, between 1997 and 2000, the pace of fiscal consolidation slowed significantly from previous years, in the face of activity levels that would have permitted an acceleration of the process. The resources derived from the increase in receipts and the fall in interest payments on the public debt were used to increase primary current expenditure instead of reducing the deficit (Figure 12). After 1997, the general government deficit remained virtually unchanged during the following two years on a cyclically adjusted basis (Figure 13). The deficit was then reduced in 2000, though mainly via a temporary freeze on investment expenditure during the year17 and by exceptional proceeds from the sale of mobile phone licences (UMTS) that year. In 2001, the budget forecasts envisaged a slight reduction in the government deficit as a proportion of GDP. In fact, however, growth of primary expenditure was not curbed, while the weakness of economic activity resulted in substantial revenue losses. The general government deficit widened, overshooting the 3 per cent of GDP limit by more than 1 percentage point. The new government formed in April 2002 presented a set of emergency measures designed to bring the deficit back down under this limit. Past experience suggests that it is the fast growth of public spending that explains the lack of progress made. Therefore, if the government deficit is to be steadily reduced on a sustainable basis and brought back to equilibrium, reforms aimed primarily at restraining this buoyancy will have to be implemented. The question of public spending and the attendant recommendations are discussed in detail in Chapter III.

  • The Effectiveness of Public Expenditure in Portugal

    Over the past decade, OECD Economic Surveys have made frequent reference to problems of public expenditure control in Portugal. General government spending relative to GDP is still lower than the EU average. But a persistent reliance on contingency measures to meet planned spending objectives – often associated with emergency supplementary budgets – has been symptomatic of fundamental weaknesses in the budget process. Recent Surveys have identified unplanned shifts in the composition of public spending as a result of such short-term expedients, which have usually been based on intra-year spending freezes falling disproportionately on capital outlays. The overshooting of the general government deficit in 2001, and the need to create a sustainable budget balance path, has made it all the more critical to establish a viable medium-term profile for spending. This, in turn, requires substantial improvements to public expenditure management systems, so as to provide the authorities with the tools they need for effective planning and control.

  • Structural Reform for Sustaining High Growth

    The weak macroeconomic conditions, the urgency of budgetary consolidation and the need for improving the effectiveness of public expenditure which are described in the previous chapters should not divert the attention of policy makers from moving forward in structural reform. The new government, in place since April 2002, has also emphasised the need to advance on a wide front in order to foster growth and productivity. This chapter starts by reviewing Portugal’s economic performance. It then focuses on key areas of a comprehensive growthoriented strategy for Portugal: enhancing human capital and improving labour market adaptability; putting in place conditions conducive to the adoption of new technologies and to the dynamism of entrepreneurial activity; and strengthening competition in product markets. A summary of the OECD’s main recommendations for further structural reforms is included at the end (Box 11). The chapter concludes with the discussion of three environmental dimensions of sustainable development: air pollution, water pollution and the sustainable use of natural resources.

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