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TABLEOFCONTENTS Table of contents Executivesummary......................................................... 8 Keyrecommendations ...................................................... 10 Assessmentandrecommendations........................................... 11 ChallengesfacingPortugal ............................................... 11 Financialstability....................................................... 16 Fiscalpolicy............................................................ 20 Education,labourandsocialpolicies....................................... 28 Progressinimprovingthebusinessenvironmentandproductmarkets......... 34 Bibliography............................................................ 42 AnnexA1. Progressinmainstructuralreforms.............................. 45 Chapter1. Solidfoundationsforasustainablefiscalconsolidation................ 47 Introduction............................................................ 48 Theconsolidationprogramme:howfastandwithwhichinstruments?......... 48 Improvingthefiscalframework........................................... 52 Publicsectorefficiencyandoff-balancesheetliabilities ...................... 60 Notes.................................................................. 77 Bibliography............................................................ 77 Annex1.A1. Sensitivityofstochasticsimulationresults ...................... 80 Chapter2. Rebalancingtheeconomyandreturningtogrowththroughjobcreation andbettercapitalallocation ........................................ 83 Thecrisismadeimbalancesunsustainable ................................. 84 Unwindingmacro-financialimbalances.................................... 88 Removingdistortionstoinvestmentallocation.............................. 94 Reformingthelabourmarkettocreatejobsandhelprebalancetheeconomy.... 101 Bibliography............................................................ 111 Glossary................................................................... 115 Boxes 1. TheEU-IMFAdjustmentProgramme.................................... 11 2. Corerecommendationsonfinancialstability............................ 19 3. Corerecommendationstoimprovefiscalperformance.................... 28 4. Corerecommendationstoimproveeducation,labourmarket andsocialcohesion.................................................. 34 5. Corerecommendationsonthebusinessenvironment andproductmarkets................................................. 42 1.1. ThestructureofPortuguesesubnationalgovernment..................... 68 OECDECONOMICSURVEYS:PORTUGAL©OECD2012 3 TABLEOFCONTENTS 1.2. ThefinancialassistanceplantoMadeira................................ 69 1.3. Municipalitieshavecyclicalresourcesandlittlefiscalautonomy........... 72 1.4. EUstructuralandcohesionfundsinPortugal............................ 74 1.5. Summaryofrecommendationsforrestoringfiscalsustainability andliftingpublicsectorefficiency ..................................... 76 2.1. Supporttoelectricitygenerators....................................... 98 2.2. TheProgrammeforPESReform........................................ 108 2.3. Summaryofrecommendationstorebalancetheeconomyandreturn togrowth........................................................... 110 Tables 1. Short-termoutlook .................................................. 14 2. Generalgovernmentrevenueandexpenditure........................... 20 3. StabilityProgrammetargetsandassumptions........................... 21 1.1. Stabilityprogrammetargetsandassumptions........................... 49 1.2. Roadsectorpublic-privatepartnershipmodels .......................... 65 2.1. Dataonbankrecapitalisationfortheeightlargestgroups................. 89 2.2. Spendingonactivelabourmarketprogrammes.......................... 108 Figures 1. Keyindicators....................................................... 13 2. Potentialgrowth..................................................... 15 3. Bankingsectorindicators............................................. 18 4. Loansoffinancialinstitutionstohouseholdsandnon-financialcorporations. 19 5. Fiscalconsolidationininternationalcomparison......................... 21 6. Assessingtherisksaroundthefiscalconsolidationprogramme............ 22 7. Forecastsforgeneralgovernmentnetlendingandexpenditure ............ 23 8. State-ownedenterpriseperformance................................... 25 9. Inequalityandlevelofeducationalattainment .......................... 29 10. Unemploymentdevelopmentsoverthepastdecade...................... 30 11. Strictnessofemploymentprotectionlegislation ......................... 32 12. Durationofunemploymentbenefits.................................... 33 13. Productivitygrowthbysector.......................................... 35 14. Greenhousegasemissions............................................ 38 15. Evolutionofelectricityprices.......................................... 39 16. Gaspricesininternationalcomparison................................. 40 17. Mobiletelephonepricesininternationalcomparison..................... 41 1.1. Long-runfiscalindicators............................................. 48 1.2. Stochasticsimulationresults.......................................... 50 1.3. Fiscalpolicyphasesandbreakdownofcurrentexpenditure ............... 53 1.4. ForecasterrorsforrealGDPandgeneralgovernmentrevenue.............. 54 1.5. Expendituregrowthforecasterrors..................................... 55 1.6. Employmentinstate-ownedenterprises................................ 60 1.7. State-ownedenterpriseperformance................................... 61 1.8. Railinfrastructureaccesscharges...................................... 63 1.9. Public-privatepartnershipcontractsreachingfinancialclose .............. 64 1.10. Netpublic-privatepartnershippaymentsbythegovernment.............. 66 4 OECDECONOMICSURVEYS:PORTUGAL©OECD2012 TABLEOFCONTENTS 1.11. Indicatorofefficiencyconstrainingfeaturesofpublic-privatepartnership frameworks......................................................... 67 1.12. Localgovernmentrevenueandexpenditure............................. 68 1.13. Localgovernmentdebt ............................................... 69 1.14. LocalgovernmenttaxrevenueinPortugal............................... 72 1.15. AbsorptionofEUstructuralandcohesionfundsbyend2011............... 74 1.A1.1. Sensitivityanalysis:Fiscalmultiplierof0.5(insteadof1).................. 80 1.A1.2. Sensitivityanalysis:Averagepotentialgrowthover2012-16of+1% (insteadof+0.3%).................................................... 81 2.1. Financialdebt....................................................... 85 2.2. Privateconsumptionandgrossfixedcapitalformation ................... 85 2.3. Developmentsincostcompetitiveness ................................. 86 2.4. Investmentallocationbyassetsandsectors............................. 87 2.5. Bankingsectordevelopments ......................................... 87 2.6. Recentdevelopmentsinbanks’loan-to-depositratio ..................... 90 2.7. Credittonon-financialfirms.......................................... 91 2.8. ProvisionofEurosystemliquiditytoPortuguesebanks.................... 92 2.9. Housingstructureininternationalcomparison .......................... 94 2.10. Shareofrenewablesinelectricityproduction ........................... 97 2.11. Unitrevenuepaidtoelectricitygenerators .............................. 99 2.12. Averageelectricitypricestructure...................................... 99 2.13. Strictnessofemploymentprotectionlegislation ......................... 105 2.14. Ratioofunemploymentbenefitrecipientstothenumberofunemployed.... 107 OECDECONOMICSURVEYS:PORTUGAL©OECD2012 5 This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examinationoftheeconomicsituationofmembercountries. The economic situation and policies of Portugal were reviewed by the Committee on 3July2012. The draft report was then revised in the light of the discussionsandgivenfinalapprovalastheagreedreportofthewholeCommitteeon 16July2012. TheSecretariat’sdraftreportwaspreparedfortheCommitteebyDavidHaugh, Álvaro Pina, Stéphane Sorbe and Ildeberta Abreu under the supervision of PierreBeynet.StatisticalassistancewasprovidedbyDesneyErb. ThepreviousSurveyofPortugalwasissuedinSeptember2010. This book has... StatLinks2 A service that delivers Excel® files from the printed page! Look for the StatLinks at the bottom right-hand corner of the tables or graphs in this book. To download the matching Excel® spreadsheet, just type the link into your Internet browser, starting with the http://dx.doi.org prefix. If you’re reading the PDF e-book edition, and your PC is connected to the Internet, simply click on the link. You’ll find StatLinks appearing in more OECD books. BASICSTATISTICSOFPORTUGAL,2011 LAND(2010) Totalarea(1000km2) 92.2 Majorcities,residentpopulation(thousand) Agriculture(%oftotal) 39.9 GreaterLisbon 2035 GreaterPorto 1286 PEOPLE Population Totallabourforce(thousands) 5513 Thousands 10562 Employment(%oftotal) Increase2006-11(annualrate,%) –0.04 Agriculture,forestryandfishing 10.0 Numberofinhabitantsperkm2 115 Industry,construction,energyandwater 27.5 Services 62.5 PRODUCTION Grossdomesticproduct Grossfixedcapitalinvestment Inbillioneuros 171 In%ofGDP 18.1 Perhead(thousandUSD) 22.5 Perhead(thousandUSD) 4.1 GOVERNMENT Publicconsumption(%ofGDP) 20.1 NumberofseatsinParliament 230 Generalgovernment(%ofGDP) SocialDemocraticParty(PSD) 108 Currentexpenditure 47.4 SocialistParty(PS) 74 Currentrevenue 40.3 People’sParty(CDS/PP) 24 Grossdebt,Maastrichtdefinition 107.8 DemocraticUnityCoalition(CDU) 16 LeftBlock(BE) 8 Lastgeneralelections:June2011 FOREIGNTRADE Exportsofgoodsandservices(%ofGDP) 35.5 Importsofgoodsandservices(%ofGDP) 39.3 Maincommodityexports(%oftotal) Maincommodityimports(%oftotal) Industrialsupplies 35.7 Industrialsupplies 28.7 Transportequipment 18.4 Fuelsandlubricants 17.3 Consumergoods 18.3 Consumergoods 14.7 CURRENCY Monetaryunit:euro CurrencyunitsperUSdollar,averageofdailyfigures Year2011 0.719 June2012 0.798 EXECUTIVESUMMARY Executive summary P ortugal has started down a long road of economic adjustment to boost growth and correct an excessive reliance on debt.The government is resolutely implementing the EU-IMF financial assistance programme of fiscal adjustment and reform. Accordingly, significant legislation has been passed, with broad political support, to improve the performanceofthelabourandproductmarkets.Inaddition,manyOECDrecommendationsof thelastsurveyhavebeenadopted.Theauthoritiesshouldensureeffectiveimplementationof these ambitious reforms. Returning to a sustainable fiscal position is a pre-condition for restoring confidence, investment and growth.The authorities should therefore aim to meettheheadlinedeficittargetsintheEU-IMFprogramme.However,thegovernmentmay needtoletautomaticstabilisersplayatleastpartiallyifrisksmaterialiseandgrowthturns out much lower than projected in the programme, while sticking to its structural fiscal targetstorestoreinvestors’confidence.Atthesametime,credittotheeconomyshouldbe 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 shouldbepaidtothefinancingconditionsofsmallandmedium-sizedenterprises,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 economicactivityfromlow-productivitydomestically-orientatedsectorstotradablegoods and services.Vigorous reforms of the labour market would combat duality and boost competitiveness. Structuralfiscalreformsarerequiredtoreturntofiscalsustainability.Still-highbond 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-transparentlythroughpaymentarrears,stateownedcompanylossesandpublic-private partnerships. The introductionbythegovernmentofamedium-termbudgetframework, better financial management tools, a fiscal council and greater transparency in fiscal accountsarewelcome.Inaddition,thefiscalframeworkwouldbesignificantlyreinforced by introducing a clear, operational expenditure rule for general government, in line with the new European fiscal framework. Local and regional government finances have generatedlargenegativesurprisesandreformstotheirfiscalframeworksarealsorequired, asenvisaged. Awiderangeofstructuralreformsisrequiredtoraiseproductivityandrebalancethe economytowardsinternationaltrade.Althoughlegallyliberalised,manymarketsremain concentratedduetosignificantbarrierstoentry,hamperingcompetitionandinnovation. Streamlining business licensing procedures, as planned, would encourage firm entry, competition and employment. Portugal’s international trade is limited, considering the 8 OECDECONOMICSURVEYS:PORTUGAL©OECD2012