The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Portugal published on 25 June 2008.
There has been a notable improvement in the fiscal position in Portugal over the past two years, with the fiscal deficit falling from 6.1% of GDP in 2005 to 2.6% in 2007. The government has introduced a deep and wide-ranging fiscal consolidation programme, which includes both short-term measures and in-depth reforms. The programme is particularly noteworthy for using medium-term measures to directly tackle the unsustainable current expenditure growth that was the ultimate cause of large fiscal deficits in the past. The programme’s success is clearly evident from the marked fall in current expenditure growth since 2005, while improvements in tax administration also helped to increase revenue. Going forward, the government should build on this very good progress and work towards securing a strong fiscal position in the medium-term.
At the core of the consolidation programme are efforts to control spending and improve efficiency of the public sector. The two key pillars of this strategy are the public administration reform and the reform of contributory pension schemes. The in-depth public administration reform is well underway. In particular, the control of admissions and recruitment has already made a large contribution to the consolidation efforts, while the reform of careers and remunerations of civil servants is intended to enhance efficiency in the public administration. A mobility pool was introduced as a mechanism for the reassignment of civil servants to other positions in the public sector or to the private sector, thereby helping adjustments in the public sector workforce. The government will need to maintain the reform momentum in order to lock in the gains, including ensuring the full implementation and acceptance by civil servants of the new performance based human resource management system. The government will need to take further measures to ensure that the mobility pool is effective and efficient, helping the reallocation of labour without imposing too high costs on future budgets. The pension reform has significantly reduced, although not eliminated, future gaps in the social security contributory system. It is important to monitor future developments and assess whether further measures are required to ensure the system’s sustainability.
The government should also continue to implement reforms to improve the efficiency of the health system, and it should directly tackle ageing-related pressures on the health budget, by taking offsetting expenditure, or revenue, measures. Greater efforts are also needed to improve the efficiency and profitability of the state-owned enterprises sector where some enterprises are making large losses. The government has introduced important reforms for state-owned enterprises (SOEs), including hospitals, imposing stricter reporting requirements and allowing the linking of senior managers’ pay to performance. Measures should be taken to build on this progress, in particular by increasing benchmarking and performance evaluation of SOEs and strengthening the transparency of information about their financial situation. It is also necessary to ensure a clear separation of ministerial ownership and regulatory responsibilities for all SOEs in order to reduce the risks of conflicts of interest.
The increase in transparency of fiscal accounts and steps toward performance budgeting are helping strengthen the budget framework. These initiatives provide a good basis for introducing a multi-year expenditure rule. International experience suggests that such a rule would further consolidate the overall budget framework and reduce reliance on more temporary expenditure control measures. For expenditure rules to be effective, they should be easy to understand and monitor, and flexible enough to deal with the business cycle. It is also important to employ prudent budget assumptions, particularly about economic growth. As elsewhere in the EU, forecasts in Portugal have been over optimistic in the past leading to deficit surprises. Although recent forecast performance has improved, it is important to enhance public scrutiny of the economic and financial forecasts used in the Budget.
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Portugal 2008 is available from:
For further information please contact the Portugal Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Bénédicte Larre, David Haugh and Claudia Cardoso under the supervision of Stefano Scarpetta. Research assistance was provided by Roselyn Jamin.