Council Implementing Decision of 9 October 2012 amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal (2012/658/EU)

Council Implementing Decision

of 9 October 2012

amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal

(2012/658/EU)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism(1), and in particular Article 3(2) thereof,

Having regard to the proposal from the European Commission,

Whereas:

(1) In line with Article 3(9) of Council Implementing Decision 2011/344/EU(2), the Commission, together with the International Monetary Fund (IMF) and in liaison with the European Central Bank (ECB), has conducted the fifth review of the Portuguese authorities’ progress on the implementation of the agreed measures under the economic and financial adjustment programme (Programme) as well as of their effectiveness and economic and social impact.

(2) The rebalancing of the Portuguese economy is taking place at a faster-than-expected pace. The second quarter of 2012 brought a substantial quarter-on-quarter real gross domestic product (GDP) contraction of 1,2 % following a flat first quarter. For the year as a whole, the projected pace of the economic recession remains unchanged at – 3 %. The current account deficit is declining more rapidly than anticipated, falling to 3 % of GDP in 2012 from nearly 10 % just two years ago. This adjustment is taking place on the back of well-performing exports and a rapid fall in imports. Looking forward, economic activity will be affected by a diminishing stimulus from external demand and the impact of further budgetary consolidation. Consequently, GDP growth has been revised downward by about 1 percentage point in both 2013 and 2014 to around – 1 % and + 1 %.

(3) In spite of a rigorous budget implementation on the expenditure side, data until July point to a budgetary gap of 1¾ % of GDP in 2012 compared with the budget plans. While the faster-than-projected adjustment from domestic demand to exports is welcome, it impacts on budgetary execution in two ways. First, employment-intensive domestic sectors, such as construction, are affected most negatively and the resulting higher unemployment weighs on social security budgets. Second, the tax-intensity of production and consumption is falling, leading to noticeable revenue shortfalls. The growth composition effect on revenue is compounded by intra-category shifts away from higher-taxed items such as consumer durables towards lower-taxed items of daily consumption. Also, the weakness in direct taxation is exacerbated by negative bracket creep as falling incomes are taxed at lower rates and tax revenue on profits shrink. By contrast, expenditure has overall developed according to plans, with higher-than-budgeted savings on compensation for employees. Budgetary execution is also benefitting from lower-than-expected interest payments and the reprogramming of Union Structural Funds. Although some one-off factors could reduce the gap to about ¾ % of GDP in 2012, a large carry-over into 2013 and 2014 of approximately 1½ % of GDP would remain, making the fiscal programme targets over 2012-2014 unattainable.

(4) In view of the large revenue shortfalls and the more subdued growth outlook, the deficit targets haven been adjusted to 5,0 % of GDP in 2012, 4,5 % in 2013 and 2,5 % of GDP in 2014. As the fiscal gap is assessed to be essentially outside the control of the government, a revision of the targets to accommodate part of the shortfall seems appropriate. Even under the revised targets, significant consolidation efforts of 3 % and 1¾ % of GDP will be necessary in 2013 and 2014 respectively. In order to maintain the credibility of the Programme, some degree of front-loading of the adjustment is warranted.

(5) A range of structural spending and revenue measures underpin the revised fiscal targets. Measures worth ¼ % of GDP should still be taken in 2012 in order to reach the target of 5 % of GDP. This includes, inter alia, spending freezes and a frontloading of some of the measures planned for 2013. For 2013, consolidation measures amounting to 3 % of GDP should be incorporated in the budget in order to achieve the target of 4,5 % of GDP. These include a further decrease in the wage bill mainly through the reduction of the number of public employees, a reduction in intermediate consumption, a cut in social transfers, a further rationalisation in the health sector, reduced spending on capital formation, as well as revenue increases achieved via a reform of the personal income tax simplifying the tax structure, broadening the base by eliminating some tax benefits, increasing the average tax rate while improving progressivity, broadening the corporate income tax base by eliminating interest deductibility, raising excise taxes and changing property taxation. For 2014, a comprehensive expenditure review has been initiated with a view to identifying spending cuts (of EUR 4 billion over two years) in order to reach a budget deficit of 2,5 % of GDP.

(6) Instruments to control government expenses are being put in place. The new commitment control system is being implemented but full compliance needs to be ensured so as to avoid a further build-up of new arrears. Budgetary fragmentation should be reduced and costly inefficiencies are being tackled across a broad range. This includes containing losses of State-owned enterprises (SOEs), renegotiating public-private partnerships (PPP) and pushing for further savings in the health sector.

(7) Under the Commission’s current projections for nominal GDP growth (– 1,0 % in 2011, – 2,7 % in 2012, 0,3 % in 2013 and 2,2 % in 2014) and the revised fiscal targets, the path for the debt-to-GDP ratio is expected as follows: 107,8 % in 2011, 119,1 % in 2012, 123,7 % in 2013 and 123,6 % in 2014. The debt-to-GDP ratio would therefore be stabilised at below 124 % and be placed on a declining path in 2014, assuming further progress in the reduction of the deficit. Debt dynamics are affected by several below-the-line operations, including sizeable acquisitions of financial assets, in particular for possible bank recapitalisation and financing to SOEs and differences between accrued and cash interest payments.

(8) The liquidity and the solvency conditions of the banking system have improved since the fourth review, reflecting the ongoing deleveraging, the exceptional liquidity support provided by the Eurosystem, and a capital augmentation worth over EUR 7 billion. Banks presented their updated funding and capital plans (4th edition). Albeit slightly less optimistic on deposits growth, all banks foresee to meet the indicative loan-to-deposit target of 120 % by 2014. Overall, the implementation of the Memorandum of Understanding on Specific Economic Policy Conditionality (Memorandum of Understanding) on the financial sector part is proceeding in accordance with the envisaged objectives to preserve financial stability. Efforts are still needed in some banks to meet the end of the year target for 2012 of the Banco de Portugal of a Core Tier 1 ratio of 10 %.

(9) Progress in the implementation of reforms to raise competitiveness, employment and the growth potential is broadly satisfactory. The revised Labour Code entered into force in August 2012. Further important reforms in the area of severance payment and collective bargaining are planned by the end of September 2012. The Portuguese Government has recently adopted a number of active labour market policies aimed at improving the functioning of public employment services, supporting employment creation, strengthening activation and offering more effective training opportunities. The judiciary reforms in the areas of civil procedure and court organisation, which will speed up civil and commercial litigation and unclog the court system, are progressing well. Steps have been taken to improve the framework for the recognition of professional qualifications with the adoption of amendments to the law transposing Directive 2005/36/EC of the European Parliament and of the Council of 7 September 2005 on the recognition of professional qualifications(3) and with the adoption by the Portuguese Government of a law proposal aimed at improving the functioning of highly regulated professions. Work on the implementation of Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market(4) has advanced at a steady pace as regards sector-specific legislation, with the adoption of the remaining necessary sector-specific legislative amendments expected by the end of 2012. Further efforts in the implementation of the Zero Authorisation initiative and the set-up of the Point of Single Contact provided for in Directive 2006/123/EC are essential to reduce the administrative burden. With a view to facilitating access to finance to small and medium-sized enterprises (SMEs), the Portuguese Government is committed to adopt, if necessary, a number of additional initiatives, including mechanisms to strengthen the export orientation of SMEs.

(10) Building on the independent report on the main national regulator authorities, Portugal will prepare a framework law that protects the public interest and promotes market efficiency. The framework law shall guarantee the regulators’ independence and financial, administrative and management autonomy to exercise their responsibilities, in full compliance with Union law. The framework law shall also contribute towards the effectiveness of the Competition Authority in enforcing competition rules, thereby supporting and complementing the effect of the recently adopted Competition Law.

(11) The fifth update of the Memorandum of Understanding includes a full section on promoting a business-friendly licensing environment which provides a more detailed calendar and specific milestones in the revision of some important legal regimes such as environment and territorial planning, industrial, commercial and tourism licensing.

(12) In the light of these developments, Implementing Decision 2011/344/EU should be amended,

HAS ADOPTED THIS DECISION:

(1)

OJ L 118, 12.5.2010, p. 1.

(2)

OJ L 159, 17.6.2011, p. 88.

(3)

OJ L 255, 30.9.2005, p. 22.

(4)

OJ L 376, 27.12.2006, p. 36.