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Portugal's parliament

The country has debt equivalent to almost 130% of GDP as well as an “excessive deficit”. The commission had wanted the Portuguese government to reduce its deficit to 3% of GDP by 2015. Last June, the European Council told Portugal it is obliged to take measures as necessary to achieve a recommended fiscal adjustment of 0.6% of GDP. 

But the European Commission announced on Friday that Portugal’s draft budget will only achieve a 0.1-0.2% fiscal adjustment and that the 2015 deficit is expected to come out at 4.2% of GDP, putting the country at “serious risk of non-compliance with budgetary obligations”.

European Commission vice president Valdis Dombrovskis, who responsible for the Euro and social dialogue, said that after “intense” technical and political discussions, the commission did not have to request a revised draft budget from Portugal.

Instead, “the Portuguese government is invited to take the necessary steps to ensure the 2016 budget is compliant,” he explained.

The commission said Portugal’s budget is at risk of non-compliance because of optimistic forecasts for real GDP growth, the expected yields of spending cuts and, as a result, the country’s nominal deficit.

Portugal’s draft budget also expects the public debt-to-GDP ratio to fall from 128.7% by the end of 2015 to 126% by the end of 2016, compared to the commission’s less hopeful forecasts of 129% and 128.5%.

Among the European Council’s recommendations were improvements to the sustainability of the pension system, the enforcement of laws to control expenditure and efforts to safeguard the sustainability of state-owned enterprises.

Improvements to tax compliance and the efficiency of tax administration, the alignment of wages and productivity and greater efficiency in public employment services were also tabled.

The recommendations make up a country-specific recommendation as part of Europe’s Stability and Growth Pact, an agreement between member states to facilitate and maintain the stability of the Economic and Monetary Union.

Portugal’s deficit levels mean it is subject to the corrective arm of the pact and has to follow a set of rules, including committing to targets to bring the deficit or debt back to safe levels.

If a eurozone country consistently fails to take adequate action, they can ultimately be subject to sanctions of up to 0.2% of GDP.

The European Commission will reassess Portugal’s compliance with its obligations again in spring.