The Fiscal Challenge in Portugal

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The Fiscal Challenge in Portugal

Author Info

Stéphanie Guichard
Willi Leibfritz ()

Abstract

Portugal’s fiscal policy has failed to durably reduce the deficit below the Stability and Growth Pact threshold of 3% of GDP and was submitted to the excessive deficit procedure of the EU Commission for a second time in 2005. The paper describes fiscal developments in Portugal over the past years and explores why earlier attempts of fiscal consolidation have failed. It also examines the new consolidation programme and assesses its chances of success and discusses further necessary steps to ensure consolidation over the longer term. It is argued that reasons for the failures of past consolidation efforts were the pro-cyclical policy during the earlier economic upswing and the reliance on one-off-measures which reduced the sense of urgency and commitment to undertake structural reforms and to address the chronic weak control of public spending. The new consolidation strategy is not relying on one-off measures in a context where Portugal has been granted more time to get its deficit under 3% of GDP. It includes structural reforms on the spending side that are going in the right direction and, if fully implemented, are likely to succeed in bringing the deficit below 3% of GDP over the next few years. But consolidation will only be successful if all measures are implemented immediately and forcefully. The consolidation programme needs to be complemented by additional reforms to strengthen expenditure control and in particular to reform the general pension system. On the revenue side, further simplifying the tax system and refraining from revising the tax legislation from one year to the next, as has happened in recent years, would make the tax system easier to manage and would facilitate long-term decision-making by economic agents.

Le défi budgétaire du Portugal
La politique budgétaire du Portugal ne lui a pas permis de ramener durablement son déficit sous le seuil de 3 % du produit intérieur brut (PIB) prévu par le Pacte de stabilité et de croissance, si bien que la Commission européenne a déclenché pour la seconde fois la procédure concernant les déficits excessifs contre ce pays en 2005. Nous décrivons dans ce document l’évolution de la situation budgétaire du Portugal ces dernières années, et tentons de cerner les raisons pour lesquelles les précédentes tentatives d’assainissement des finances publiques ont échoué. Nous nous penchons également sur le nouveau programme en la matière et évaluons ses chances de réussite, tout en examinant les mesures complémentaires nécessaires pour assurer l’assainissement des finances publiques à long terme. Nous démontrons que les efforts antérieurs déployés en la matière ont échoué en raison de la politique procyclique menée au cours de la précédente reprise économique, et du recours à des mesures ponctuelles, qui ont atténué le sentiment d’urgence et entamé la détermination nécessaire pour engager des réformes structurelles et remédier aux insuffisances chroniques de la maîtrise des dépenses publiques. La nouvelle stratégie d’assainissement budgétaire ne repose pas sur des mesures ponctuelles, alors que le Portugal s’est vu accorder un délai supplémentaire pour ramener son déficit sous la barre des 3 % du PIB. Elle prévoit au chapitre des dépenses des réformes structurelles qui vont dans la bonne direction et, si elles sont intégralement appliquées, devraient permettre de faire refluer le déficit sous le seuil des 3 % du PIB au cours des prochaines années. Reste que cette stratégie ne sera couronnée de succès que si toutes les mesures prévues sont mises en ?uvre immédiatement et énergiquement. Ce programme d’assainissement doit être complété par d’autres réformes destinées à renforcer la maîtrise des dépenses, notamment en réformant le régime général des pensions. Au chapitre des recettes, en simplifiant davantage le système d’imposition et en s’abstenant de réviser la législation fiscale d’une année à l’autre, comme ce fut le cas ces dernières années, les autorités le rendraient plus simple à gérer et faciliteraient les prises de décisions à long terme des agents économiques.

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Paper provided by OECD Economics Department in its series OECD Economics Department Working Papers with number 489.

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Date of creation: 07 Jun 2006
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Handle: RePEc:oec:ecoaaa:489-en

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H6 - Public Economics - - National Budget, Deficit, and Debt

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-06-17 (All new papers)
NEP-EEC-2006-06-17 (European Economics)
NEP-MAC-2006-06-17 (Macroeconomics)
NEP-PBE-2006-06-17 (Public Economics)

Cited by:
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Mario CatalÃ¡n & Jaime Guajardo & Alexander W. Hoffmaister, 2008. "Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus," IMF Working Papers 08/98, International Monetary Fund. [Downloadable!]
António Afonso, 2007. "Public finances in Portugal: a brief longrun view," Working Papers 2007/01, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]

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