2003 OECD Economic Surveys: Portugal 2003

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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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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.

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