Troika mission criticises Portugal deficit management

23 Jun 16

Portugal will have to “step up” its efforts to reduce its budget deficit as the country’s economic recovery falls short of expectations, the European Commission and European Central Bank have warned.

Portugal's parliament


A mission to the country yesterday, including staff from the commission, ECB and International Monetary Fund, concluded that Portugal’s efforts to reduce its “excessive deficit” in line with eurozone budgetary rules have been “insufficient”.

The country is currently subject to a European Union corrective mechanism aimed at bringing its deficit to below an agreed ‘safe’ level of 3% of GDP.

Portugal missed the deadline to achieve this in 2015 and the commission deemed its 2016 budget to be non-compliant with its obligations under the corrective programme. The country could be hit with disciplinary measures as a result, including a fine of up to 0.2% of GDP, but the decision has been delayed until after the UK’s referendum on membership of the EU.

The mission said yesterday that the progress of Portugal’s fourth year of recovery from economic crisis has deteriorated since the last visit to the country in February, further increasing risks to the country’s fiscal outlook.

“The authorities have committed to comply with European budgetary rules,” a statement said. “To achieve this, the effort to reduce the underlying structural budget deficit needs to be stepped up.”

The Portuguese government anticipates its deficit will reach 2.2% of GDP in 2016, but the commission has judged the country’s estimates to be too optimistic in the past.

The mission statement said that, while cash-based fiscal data suggested budget execution had been largely on track between January-April, significant uncertainties predicted for the rest of the year mean a figure closer to 3% is predicted – not enough to free the country from the EU’s corrective mechanism.

“The adjustment in the underlying structural deficit reflects an insufficient consolidation effort,” the statement concluded.

Portugal’s debt-to-GDP ratio also topped 129% of GDP at the end of 2015 – another issue the country will need to resolve before it can be released from the excessive deficit procedure.

The mission stressed that continued consolidation efforts are needed, as well as public financial management reforms and a “comprehensive expenditure review” to further enhance control over spending and “contain budget risks more generally”.

The mission also noted a number of other factors obstructing Portugal’s recovery, including high indebtedness in all sectors, non-performing loans that weigh on bank’s profits, and rigidities in the labour and product markets.

Labour market reforms in particular should be “stepped up” as segmentation, long-term and youth unemployment remain high.

Meanwhile, another financially troubled eurozone country got some better news from the ECB.

The bank’s governing council yesterday decided to reinstate a waiver that allows Greek debt to be accepted as collateral for regular ECB loans for the first the first time in more than a year, bringing the country’s banking system markedly closer to recovery.


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