GUIDELINES ECONOMIC CHALLENGES

Note on policy guidelines and measures the Portuguese Government will adopt to address main economic challenges


In the light of the challenges currently faced by the Portuguese economy, namely related to the need to consolidate the public finances, to foster economic growth and correct macroeconomic imbalances and to stabilize and strengthen the financial sector
and to improve the financing conditions in the Portuguese economy, the Government is fully committed not only to the implementation of the measures already decided but also to take the additional measures outlined in this note and to pursue the structural
reform agenda.


A. Fiscal Policy The Portuguese government is committed to achieve a frontloaded multiyear fiscal adjustment

The government is taking measures to regain control over the debt dynamics, and thereby reassure creditors.


The fiscal strategy is anchored in placing the debt-GDP ratio on a declining path from 2013 onward and reducing the general government deficit to 4.6 percent of GDP in 2011, and 3 and 2 percent of GDP in 2012 and 2013 respectively.


A strong start has already been made by putting forward consolidation measures in May and in September 2010 and especially by taking a very substantial consolidation effort in the 2011 Budget Law, which foresees some 5 percent of
GDP of structural consolidation measures.


Major measures include an average cut by 5% in the wages of the public sector at large, reductions in government employment, cuts in several social transfers such as unemployment benefits and family
allowances, and a nominal freeze of all other social outlays. Other measures are targeted at reining in spending in a number of other areas, including, for instance, health, education, and transfers to State-owned enterprises or investment.


On the revenue side, measures include a hike in VAT rates, higher social contributions, higher prices for some government services, sales of concessions and ceilings on income tax deductions for high incomes and on income tax benefits.



To foster its budgetary plans, the Government is significantly strengthening the mechanisms for the monitoring and control of intra-annual budgetary execution.



In that context and as envisaged in the Council of Ministers Resolution of 27 December 2010, the government will publish quarterly budgetary targets for the central administration and social security (covering some 90% of total expenditure) starting in March 2011.


Deviations from targets will lead to corrective action in order to ensure the annual targets are met (targets will be announced for the whole year ahead).


In addition, a task force was created and internal monthly deficit targets are defined by budget programme.


The Government will consider extending the coverage of these
exercises in order to include other entities that are part of the general government perimeter. These mechanisms will be coordinated with regular monitoring of the budgetary results by the European Commission, in liaison with the ECB, in the context
of enhanced surveillance at the Euro area level.


As a further guarantee of its full commitment to the stated fiscal targets, for the
remainder of 2011 and the years to follow, the government will immediately 2 reinforce the current fiscal consolidation measures.


Notwithstanding very positive developments on the export side, there are clear downside risks to the macroeconomic prospects regarding domestic demand in 2011. In the current volatile market
environment, this justifies taking additional precautions in order to secure the achievement of the fiscal targets. This reinforcement includes five main areas of actions, namely additional savings in the health care sector; additional reduction of costs of State owned enterprises and related subsidies; further reductions in expenditure of other Public Entities and Bodies and in transfers from the State to other sectors of public administration; additional tightening of social expenditure; and further reduction in capital expenditure. These measures are expected to yield fiscal savings of around 0.8% of GDP in 2011.


�� Health care expenditures will be reduced by a further €100 million in 2011 beyond the originally targeted expenditure savings. This will be achieved by a mix of administrative savings and a cut of operational expenditure by 10%.


�� Reductions in the costs of state-owned enterprises lower the need for government transfers. To that end the global cost-reduction targets will be tightened by imposing higher cost reduction targets on the operating expenditures of specific companies, where further cost savings potential can be identified. The government will present firm-specific spending ceilings by end of March 2011. This measure is expected to yield a further savings of at least €150 million.


�� Further reduction in expenditure of other Public Entities and Bodies €100 million in 2011 beyond the originally targeted expenditure savings. This will be achieved by a mix of administrative savings and a cut of operational expenditure by 10%; and further reduction of the transfers to other sectors of public administration (0.1% GDP )


�� Additional reduction of social expenditure and increase in social security contributions: further tightening of inspection to be applied to all social benefits; contribution to social security compulsory for trainees (0.1% GDP)


�� Further reduction in capital expenditure: several projects foreseen to be implemented in 2011 in areas such as road construction, school construction, and other public works, are being re-scheduled (the overall amount of the projects adds up to 0.25% of GDP); Increase in other capital receipts with further concessions and sale of public real estate (max 0.2% GDP)


These measures are assessed as being sufficient to safely limit general government deficit in 2011 to 4.6 percent of GDP and to contribute to the adjustment in the following years. In the context of the reinforced mechanisms of intra-annual monitoring of budget execution and of enhanced surveillance at the Euro area level, if budgetary results turn out to be worse than expected, the government will take the necessary corrective actions.


Furthermore, the Government is fully committed to meet the fiscal targets of 2012 and 2013 (3% and 2% of GDP, respectively). To that end, the Stability programme will include all necessary measures to ensure the required fiscal adjustment, and taking into account the risks underlying the macroeconomic scenario.


As main measures it will include, in 2012, the reduction in costs in State-Owned Enterprises and Other Public Entities and Bodies, the reinforcement of cost control in health and education sectors, the suspension of the application of pension indexation rules and the creation of special contribution over pensions, and the revision of tax benefits code and tax deductions. Control of expenditure in State-Owned Enterprises will be further enforced by tightening the debt ceilings already defined. In 2013, savings in social benefits, further action in cost control in health and education sectors and the broadening VAT tax base will add to the structural measures taken in 2012 to ensure that the deficit reduction target is achieved.


(Enviado por um Amigo)