Since the early 2000s, Portugal has seen its convergence process towards more developed OECD economies come to a halt. Slow trend growth has mostly reflected the imbalances of the Portuguese economy. Over-reliance on consumption, weak labour productivity gains and insufficient wage moderation have led to a marked deterioration of competitiveness, especially until 2006, and sizeable external indebtedness. The economic crisis is likely to have worsened the situation as potential growth has probably taken a hit and fiscal sustainability has deteriorated, which has fuelled a rise in sovereign spreads. To rebalance the Portuguese economy and move towards a higher and sustainable growth path, rapid consolidation of the public finances is essential. Consolidation measures should continue to be strictly implemented, preferably through expenditure restraints, but the government should stand ready to curb tax expenditures and raise the least distortive taxes if needed. The opportunity to make the tax system more growth-friendly should be seized, as analysed in Chapter 2. Policies to boost potential growth should be pursued, in part because stronger growth will help to restore fiscal sustainability over the long run. To boost labour utilisation, the authorities should revise the unemployment benefit structure and reduce the dualism of the labour market. Raising labour productivity is also a challenge and is addressed in Chapter 3.