Portugal On Track To Correct Deficit, Says EC

by Ulrika Lomas, for LawAndTax-News.com, Brussels

23 June 2006

The European Commission on Wednesday stated that Portugal is on track to correct its excessive deficit by 2008 as recommended by the Council in September 2005, provided it strictly implements the 2006 budget and pursues a rigorous budgetary consolidation strategy in 2007 and following years.

At present, the EC explained, it "does not appear necessary to recommend any further steps under the excessive deficit procedure".

The Commission has stated, however, that it will continue to monitor the situation closely, particularly in light of the significant risks and uncertainties surrounding the evolution of the budget.

"Portugal has adopted a comprehensive and courageous package of measures since mid-2005 to reduce its excessive deficit, but there remain significant risks and uncertainties, especially as some important measures have yet to be implemented. The consolidation efforts need to be stepped up, particularly on the expenditure side to put the public finances back on a firm and sound ground as a pre-condition for more and stronger economic growth and for the creation of jobs," observed Joaquín Almunia, Commissioner for Economic and Monetary Affairs.

On 20 September 2005, the Council decided that an excessive deficit existed in Portugal and recommended that the government take measures, before 19 March 2006, to “limit the deterioration of the fiscal position in 2005”, “ensure a sustained and marked correction of the cyclically-adjusted deficit, excluding one-off and other temporary measures, by (reducing the deficit by) 1.5% of GDP in 2006, followed by a further significant decrease of, at least, 0.75% of GDP in each of the two subsequent years”.

The Council also called on Portugal to “contain and reduce expenditure over the coming years; seize any opportunity to accelerate the reduction of the budget deficit” and to “stand ready to adopt the additional measures which may be necessary to achieve the correction of the excessive deficit by 2008".

It additionally requested Portugal to "ensure that the government gross debt ratio is brought onto a firm downward path and approaches the reference value at a satisfactory pace".

Lastly, the Council invited the Portuguese authorities to "further improve the collection and processing of general government data" and to achieve a balanced budget in the medium term.

In response, the Portuguese government increased its standard VAT rate to 21% from 19%, raised taxes on oil and tobacco products and improved the collection of tax revenues, something which is already having an effect. The 2006 budget also aimed at stabilising expenditure in real terms, namely through a freeze of transfers to local governments, stricter hiring rules for civil servants as well as a freeze on automatic career promotions.

More permanent measures include the phasing out of the civil servants’ pension scheme and their integration into the general regime as well as health-expenditure cuts.

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