Economic Survey of Portugal 2012

 

OECD Economic Surveys: Portugal 2012 | OECD Free preview | Powered by Keepeek Digital Asset Management Solution

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Returning to a sustainable fiscal position is a pre-condition for restoring confidence, investment and growth. The authorities should therefore aim to meet the headline deficit targets in the EU‑IMF programme. However, the government may need to let automatic stabilisers play at least partially if risks materialise and growth turns out much lower than projected in the programme, while sticking to its structural fiscal targets to restore investors’ confidence. At the same time, credit to the economy should be supported by promoting swift recognition of bad loans, and ensuring that the banks maintain the required capital ratios and the pace of convergence towards the indicative target for the loan-to-deposit ratio does not thwart economic activity. Special attention should be paid to the financing conditions of small and medium-sized enterprises, notably by making firms more reliant on equity and less on debt, and by re-directing EU funds. Fundamental structural reforms are central to boosting potential growth and shifting economic activity from low-productivity domestically-orientated sectors to tradable goods and services. Vigorous reforms of the labour market would combat duality and boost competitiveness.

Structural fiscal reforms are required to return to fiscal sustainability. Still-high bond spreads indicate that the government faces additional challenges to regain full market access within the programme period. Structural measures are required to tackle a long history of excessive spending growth and substantial liabilities that have been built up non-transparently through payment arrears, state owned company losses and public-private partnerships.The introduction by the government of a medium-term budget framework, better financial management tools, a fiscal council and greater transparency in fiscal accounts are welcome. In addition, the fiscal framework would be significantly reinforced by introducing a clear, operational expenditure rule for general government, in line with the new European fiscal framework. Local and regional government finances have generated large negative surprises and reforms to their fiscal frameworks are also required, as envisaged.

A wide range of structural reforms is required to raise productivity and rebalance the economy towards international trade. Although legally liberalised, many markets remain concentrated due to significant barriers to entry, hampering competition and innovation. Streamlining business licensing procedures, as planned, would encourage firm entry, competition and employment. Portugal’s international trade is limited, considering the relatively small size of its economy, pointing to potential gains from increased participation in global value chains. It is important that the government follows through on efforts to improve the business environment, including in the markets concerned by privatisations, and reduces distorting incentives that have biased investment away from the tradable sector. This will help to attract foreign direct investment. Education levels in the workforce are still far below the European average and need to improve further, despite the significant progress in the younger generation, to enable firms to expand into more productive activities.

Further reforms of the labour market are necessary. Institutional settings have stifled employment and generated a dualistic labour market that undermines productivity growth, as workers with short-term contracts are less likely to invest in human capital and those with permanent contracts have insufficient mobility. Efforts are going in the right direction to reduce duality, with significant reforms legislated recently, such as the reduction of severance payments, following an agreement with social partners. However, dominant firms impose wage and working conditions on others via the administrative extension of collective agreements, reducing competition and entry, thereby hurting competitiveness. Dualism would be further eased by reducing severance pay and tackling delays and uncertainty in litigation over dismissals. Finally, cutting non-wage costs for the low-paid could help boost employment prospects of the less qualified.

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Additional information

For further information please contact the Portugal Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by David Haugh, Alvaro Pina, Stéphane Sorbe and Ildeberta Abreu under the supervision of Pierre Beynet. Research assistance was provided by Desney Erb.

 

 

 

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