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How is the Portugal economy performing?
Portugal has the lowest per capita income in the euro area and until the recent enlargement, it also had the lowest in the EU. Brisk growth in the last years of the 20th century led to some convergence with living standards in the more advanced EU countries, largely thanks to the reforms that began some 15 to 20 years ago. Liberalisation of the financial sector, far-reaching privatisation and deregulation, high investment and improved human capital delivered notable results. Falling real and nominal interest rates in the run-up to euro entry fuelled private sector demand and weakened the government’s incentives to control primary spending. This also led to the build up of major imbalances, including a large external deficit and high household and corporate indebtedness. The structural budget deficit was also allowed to widen in the late 1990s, forcing the authorities to undertake a drastic corrective programme to reduce the excessive budget deficit during the economic slowdown. The adjustment process in the private sector, compounded by public sector retrenchment and a depressed international environment, led to a protracted period of weak activity for three years running, with real GDP actually falling in 2003. The recovery in activity is likely to be slow. Recent strong cyclical movements make it difficult to estimate potential GDP growth accurately, but it is likely that actual GDP will remain below potential for some years, postponing the catching-up process.
Standards of living in the OECD
Per capita, measured in purchasing power parity exchange rates
OECD = 100 (1)
1. Excluding the Czech Republic, Hungary, Poland and the Slovak Republic.
Source: OECD, National Accounts.
What are the main policy challenges?
Portugal’s key medium-term challenge is to raise income levels. Since employment rates are already high (and unemployment low) this will require sustained increases in labour and total factor productivity. Policies are required that enhance human capital, facilitate labour mobility, intensify the use of Information and Communication Technology (ICT), raise managerial efficiency and create a favourable climate for private investment.
Portugal also needs to address the chronic problem - recently in a more acute phase - of weak public finances to ensure that the catching-up process will not be jeopardised by fiscal difficulties. Fiscal consolidation in the upswing would have obviated the need for procyclical policies in the downswing. More fundamentally, severe difficulties lie on the spending side: rapid growth of primary spending over more than a decade has put Portugal among higher-spending countries, considering its income level, while the cost-effectiveness of service provision has been doubtful. Getting spending under better control, including via a more efficient public sector, would permit more resources to go to the development needs of Portugal. The ongoing reform in the health sector is a good example of the strategy to improve the quality of public services and meet the population needs, while seeking to limit pressures on public expenditure over the medium-term. Thus the government’s focus on curbing the fiscal deficit, engaging in public sector reforms and raising productivity growth is welcome.
Budget balances 1999-2004 (1)
Note: Budget balances are measured at end-year.
1. National accounts basis. 2003 and 2004 are OECD estimates, as prepared for Economic Outlook No. 75, released on 11 May 2004.
2. As a percentage of GDP.
3. Cyclically-adjusted budget balance as a percentage of potential GDP.
4. Budget balance excluding the cyclical effect and the impact of the non-cyclical factors, occurring only once in time, which as from 1997 have reduced the budget deficit, as a percentage of potential GDP.
Source: OECD.
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The full edition of the OECD Economic Survey for Portugal is available from:
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SourceOECD for subscribing institutions and many libraries
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Government officials with OLISnet accounts
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Return to the OECD Economic Survey - Portugal 2004 homepage
A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages
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