Chapter 1. Economic Performance and Key Challenges
Following a period of catching up between the mid 1980s and 2000, the process came to a sudden end. Output growth was weak in 2005. Although some recovery is expected in 2006, short-term prospects are subdued. At the same time the fiscal deficit remains at an unsustainably high level. To consolidate the budget and regain a higher growth path, a number of structural measures need to be taken. This chapter reviews four challenges: i) putting public finances on a sustainable path; ii) improving the performance of the education system; iii) modernizing the economy by enhancing tertiary education, training and innovation; and iv) creating a more dynamic business environment through structural reforms in product and labour markets.
Chapter 2: Putting Public Finances on a Sustainable Path
Fiscal policy has failed to durably reduce the deficit below the Stability and Growth Pact threshold of 3% of GDP. The 2005 consolidation programme designed to bring the fiscal deficit down from 6% to 1.5% of GDP between 2005 and 2009 is reviewed in this chapter. The consolidation efforts in the form of in-depth spending reforms go in the right direction but implementation of these reforms remains a challenge. Moreover, announced measures should be supplemented by additional steps with a view to long term fiscal sustainability, including a reform of the general pension system. Other measures that should be considered include the adoption of binding medium-term expenditure ceilings in major spending areas, and more systematic cost-benefit assessment of public investment. In addition, a simplification of the tax system – and less frequent changes – would help to both raise more revenue and economic growth.
Read also ECO Working Paper 489 The fiscal challenge in Portugal
Chapter 3: Improving the Performance of the Education System
This chapter discusses the performance of primary and secondary education and shows that improvements are needed to narrow the significant human capital gap with other OECD countries. Despite progress in the past decades, Portuguese children spend comparatively few years in formal education, and they do not perform as well as children from other OECD countries. This situation does not stem from a lack of resources but from inefficiencies and misallocation of spending and weaknesses in the training of teachers and school principals. There is also a gap between the autonomy that schools have received and the operations in practice. Besides, there is no tradition of systematic evaluation of reforms and the use of student and school assessments to improve the system is recent and has not yet been put in practice. The ongoing efforts of the authorities go in the right direction but implementation remains a challenge.
Chapter 4: Modernizing the Economy by Enhancing Tertiary Education, Adult Training and Innovation
This chapter examines tertiary education, adult training and research and development which are besides primary and secondary education essential for modernizing Portugal’s economy and increasing living standards. As returns on investment in these areas can be very high, private financing should be enhanced. The tertiary education system also needs in-depth reorganisation and rationalisation. Important synergy effects can be expected from reforms in these areas as increasing human capital of the workforce and the population at large facilitates the creation and diffusion of innovation and the use of information and communication technology. The chapter also examines the recent government plan to stimulate innovation and argues that policies should focus on ensuring the effectiveness of the existing tax incentives, strengthening the links between business and public research institutions and creating a competitive environment which is a main driver for the development of innovative firms.
Read also ECO Working Paper 505 Enhancing Portugal's human capital
Chapter 5: Creating a More Dynamic Business Environment and Improving the Functioning of the Labour Market
This chapter discusses structural reforms in product and labour markets that can help boost productivity growth and facilitate Portugal's adjustment to the new, more competitive, international environment. The business sector would benefit from a further reduction of regulatory and administrative burdens, which would encourage entry of innovative firms and exit of poorly performing ones, while attracting foreign direct investors. Further action to promote competition throughout the economy would also contribute to raising productivity growth by ensuring a better allocation of resources, encouraging managerial efforts and stimulating innovation. Network industries, especially electricity and telecommunications need pro-competitive measures to increase efficiency and put downward pressure on prices. Finally, measures that facilitate labour mobility and job creation are required to allow the reallocation of labour to its most productive use and ensure an appropriate return on human capital formation.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Portugal 2006 is available from:
For further information please contact the Portugal Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Bénédicte Larre, Stéphanie Guichard and David Haugh under the supervision of Wilhelm Leibfritz.