Government sets target of reducing public spending by 3 pp of GDP until 2021

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Page created: Thursday, 4 May 2017 10:22 GMT | Updated: Friday, 12 May 2017 12:54 GMT

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National Reform Programme  Portuguese Public Finance Council  Stability Program 2017-2021

Portugal to achieve first budget surplus in 2020

In the Stability Program 2017-2021 presented by the Government, a consistent improvement of the budget balance and the public debt is expected, thus fulfilling the European directives. The Government anticipates an acceleration of economic growth and the continued reduction of the unemployment rate. The Portuguese Public Finance Council has favourably evaluated the economic forecasts that underpinned the Program. At the same time, the National Reform Program was presented with the country’s medium-term development strategy.

The Government presented the Stability Program (SP) setting out its budgetary strategy and economic forecasts until 2021. In 2017 the GDP growth is expected to rise to 1.8%, due to the increase in the contribution of net external demand (from -0.1 pp in 2016 to 0.1 pp) and to a growth in the investment, which is expected to be 4.8%, reversing the negative trajectory of recent years. This evolution of investment will be fundamental, due to the forecasted reduction in public consumption. Inflation is expected to rise to 1.6% and the unemployment rate will continue to decline, reaching 9.9%. Net lending will remain positive, despite the balance of payments surplus falling to 1.1% of GDP. In terms of public accounts, the government forecasts a reduction of the budget deficit to 1.5% and of the structural deficit to 1.7%. Gross public debt is expected to start a downward trajectory, declining this year to 127.9% of GDP.

By 2021, public spending is expected to decline by 3 pp of GDP, compared to 2017, accompanied by a smaller reduction in revenue of 0.6 pp of GDP, allowing a continuous improvement in the budget balance, with the first surplus foreseen by the end of this program. The government also plans to achieve the “medium-term objective” (measured by the structural balance set by the European Commission), of 0.25% of potential GDP, whereas successive budgetary adjustments will enable the structural balance to have a surplus of 0.3% in 2021. This evolution will reduce the public debt to 109.4% of GDP by the end of 2021. The Executive also underlines that it will continue to work to ensure the health of the financial sector, in particular in the area of bad loans, in order to fully exploit the potential of the country’s economic growth/ thus ensuring the effective financing of the economy.

The Portuguese Public Finance Council (CFP) considered these forecasts as plausible. However, the CFP warns that there may be a slowdown in economic activity in the second half of this year and, therefore, growth forecasts for the following years will only be confirmed in the absence of negative shocks (1.9% in 2018; 2% in 2019; 2.1% in 2020; 2.2% in 2021). The Council also points out that the growth of gross fixed capital formation (investment in a generic way) and the improvement of the contribution of external demand should be the main drivers of the growth of the Portuguese economy in the coming years.

The Government has published an update of the National Reform Program 2016-2021 which establishes as the main priorities the relaunch of investment, the pursuit of structural reforms to modernize the economy and the maintenance of responsible public finances. In the area of ​​qualifications, the Government considers fundamental to fight school failure and long-term unemployment. In the area of ​​innovation, the priority is the reinforcement of investment in science and technology, the promotion of the potential of new companies, new entrepreneurs and new offers; and the encouragement of the integration of companies and institutions in international value chains. The Government also bets in the valorisation of the territory, pointing out as fundamental the investment in urban rehabilitation and the optimization of the use of the country’s endogenous resources (sea, forest and mobility). In the area of ​​reforms, the Government intends to modernize the state in order to make it simpler and closer to the population, reducing administrative burdens for businesses and citizens. In parallel with the resolution of financial sector problems, the Government also intends to solve the problem of over-indebtedness of the economy by solving the problems of bad credit and loans to companies, setting as an example the Capitalize Program. In all these areas, the use of European funds under the Portugal 2020 program will be crucial to support businesses and investment.

Thursday, 27 April 2017 8:57

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