According to Article 126 of the Treaty on the Functioning of the European Union (TFEU), Member States are to avoid excessive government deficits.

According to Article 126(8) TFEU, the Council decided on 12 July 2016 that Portugal had not taken effective action in response to the Council Recommendation of 21 June 2013.

If actual data pursuant to Regulation (EC) No 479/2009 indicate that an excessive deficit has not been corrected by a participating Member State within the time-limits specified in a recommendation issued under Article 126(7) TFEU, the Council should immediately take a decision under Article 126(9) TFEU.

The Commission 2016 spring forecast projects a moderate recovery of the Portuguese economy. In 2016, real GDP is projected to grow by 1,5 %, at the same pace as in 2015, mainly driven by domestic demand amid still high macroeconomic imbalances. Private consumption is expected to lose momentum in 2016 due to higher indirect taxes and a slight recovery in energy price inflation. The strong rebound in the consumption of durable goods in the first half of 2015 is not forecast to be maintained over the medium term as still high unemployment and debt levels are projected to keep upward pressures on household savings. Business investment already decelerated significantly over the second half of 2015 and is not expected to resume its previous growth rate soon, despite a relatively high capacity utilisation rate. Total investment is anticipated to gain some pace in 2017, supported by EU structural funds and the improvement in financing conditions. Exports are forecast to grow in line with foreign demand, but imports are still expected to outbalance exports. As a result, the contribution of net trade to GDP growth is forecast to remain slightly negative although significantly less so than in 2015. HICP inflation is expected to increase to 0,7 % in 2016, mainly driven by higher indirect taxes. While downward risks to the outlook have increased since the publication of the spring forecast, data on the first quarter of 2016 and preliminary information on the second quarter overall confirm the outlook of the forecast for the rest of the year.

The general government gross debt-to-GDP ratio has broadly stabilised during the period 2013-2015, reaching 129,2 % in 2013, 130,2 % in 2014 and 129,0 % in 2015. Taking into account significant debt-reducing stock-flow adjustments in 2016 and continued primary surpluses, the Commission 2016 spring forecast projects the debt ratio to decrease to 126 % of GDP in 2016, and subsequently to 124,5 % of GDP in 2017. Portugal does not appear to face considerable risks of fiscal stress in the short term, while short-term challenges are nevertheless not excluded (stemming from gross and net public debt, gross financing needs, the net international investment position, as well as the level and the change in the share of non-performing loans or general capital needs in the banking system). In the medium term, however, risks appear to be significant due to the high stock of debt and the high sensitivity of the debt ratio to possible interest rate increases and negative nominal growth shocks. In the long term, provided that adequate structural primary balances are consistently preserved, sustainability risks appear low owing to the pension reforms implemented in the past.

Under the fiscal policy measures taken in the 2016 Budget, the general government deficit would be below 3 % of GDP in 2016. However, according to the Commission 2016 spring forecast, the safety margin against breaching the Treaty reference value is narrow. Against the background of high uncertainties regarding economic and budgetary developments, the budgetary targets recommended for the correction year should be set at a level clearly below the Treaty reference value of 3 % of GDP, in order to guarantee a durable correction of the excessive deficit situation within the requested deadline.

According to Article 5 of Regulation (EC) No 1467/97, in its decision to give notice to take measures for the deficit reduction in accordance with Article 126(9) TFEU, the Council is to request that the Member State achieve annual budgetary targets which, on the basis of the forecast underpinning the notice, are consistent with a minimum annual improvement of at least 0,5 % of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary measures. As that decision is adopted in the second half of the year, and taking into consideration the current Commission estimates of the spring forecast, an unchanged structural balance would be warranted for 2016 to provide a sufficient safety margin towards a durable correction of the excessive deficit.

Therefore, a credible and sustainable adjustment path would require Portugal to reach a general government deficit of 2,5 % of GDP in 2016, which is consistent with an unchanged structural balance with respect to 2015. Those budgetary targets take into account the need to compensate for second-round effects of fiscal consolidation on public finances, through its impact on the wider economy.

The deficit target implied by the proposed adjustment path does not incorporate the possible direct fiscal effect of potential bank support measures in the second half of 2016. This is because there is high uncertainty regarding the effective implementation and statistical recording of these measures, and hence their possible impact on deficit and debt. Any possible bank sector support measures should aim at limiting the fiscal impact to the minimum possible to ensure debt sustainability.

To attain the budgetary targets implied by the proposed adjustment path, additional consolidation measures with an estimated impact of 0,25 % of GDP in 2016 are considered necessary, also in view of the structural deterioration identified in the Commission 2016 spring forecast. In particular, Portugal is to implement the measures included in the 2016 Budget as well as the expenditure control mechanism in the procurement of goods and services, which is currently highlighted in the 2016 Stability Programme. These savings would need to be complemented with other measures of a structural nature which could focus on the revenue side aiming at increasing the yields of indirect taxation by broadening the tax base and reducing tax expenditures. One way to achieve this could be by adjusting the still broad use of reduced VAT rates.

In addition, Portugal should reinforce structural reforms to enhance competitiveness and long-term sustainable growth in line with the Council Recommendations addressed to Portugal in the context of the European Semester and in particular those related to the correction of its excessive macroeconomic imbalances. In particular, further fiscal-structural measures are necessary to strengthen the resilience of Portugal's public finances. The timely and strict implementation of the revised Budget Framework Law and the Commitment Control Law as well as further improvements in revenue collection and expenditure control may significantly contribute to achieving and maintaining a healthy fiscal position. Portugal should present a clear schedule and implement steps to clear arrears fully and improve efficiency in the health care system, to reduce the reliance of the pension system on budget transfers and to ensure fiscal savings in the restructuring of State-owned enterprises.

According to Article 126(9) TFEU, the Council may, as part of its decision to give notice under that provision, request the Member State concerned to submit reports on the adjustment effort in accordance with a specific timetable. According to Article 5(1a) of Regulation (EC) No 1467/97, the Member State report should include the targets for government expenditure and revenue and specify the fiscal policy measures on both the expenditure and the revenue side, as well as information on the policy actions being taken in response to the specific Council recommendations. In order to facilitate the monitoring of the deadline for compliance with the recommendations contained in this Decision, as well as the deadline for correction of the excessive deficit, Portugal should submit such a report by 15 October 2016, at the same time as its 2017 Draft Budgetary Plan.