PORTUGUESE REPUBLIC SSTTAABBIILLIITTYY AANNDD GGRROOWWTTHH PPRROOGGRRAAMMMMEE 22000088 -- 22001111 January 2009 Update © MINISTÉRIO DAS FINANÇAS E DA ADMINISTRAÇÃO PÚBLICA Av.ª Infante D. Henrique, 1 1149-009 LISBOA • Telefone: (+351) 21.881.6820 • Fax: (+351) 21.881.6862 http://www.min-financas.pt STABILITY AND GROWTH PROGRAMME 2008-2011 i IInnddeexx Executive Summary ................................................................................................................................i I. Economic Outlook ............................................................................................................................1 I.1 World Economy / Technical Assumptions.................................................................................1 I.2 Cyclical Developments and Current Prospects.........................................................................2 I.3 Medium-Term Scenario ............................................................................................................6 II. Economic Policy Measures..............................................................................................................7 II.1 National Plan of Reforms – New Cycle 2008-10.......................................................................7 II.2 Budgetary Consolidation Measures ..........................................................................................9 II.3 Initiative to Strengthen Financial Stability ...............................................................................18 II.4 Investment and Employment Initiative ....................................................................................23 III. General Government Balance and Debt........................................................................................33 III.1 Budget Implementation in 2008 and State Budget for 2009....................................................33 III.2 Medium-Term Budgetary Objectives ......................................................................................36 IV. Sensitivity Analysis and Comparison with the December 2007 Update ....................................39 IV.1 Sensitivity Analysis .................................................................................................................39 IV.2 Comparison with the December 2007 Update ........................................................................42 V. Sustainability of Public Finances ..................................................................................................45 VI. Quality of Public Finances .............................................................................................................49 VI.1 Expenditure Efficiency and Effectiveness ...............................................................................50 VI.2 Tax System.............................................................................................................................53 VI.3 Institutions, Processes and Budget Rules...............................................................................53 VI.4 Impact of Public Finances on Market Functioning ..................................................................58 ANNEX...................................................................................................................................................61 ii STABILITY AND GROWTH PROGRAMME 2008-2011 Box index Box 1. Contributions by COP and OECD to Programme Budgeting........................................................... 54 Tables index Table I.1. International Environment – Table IV.1. Stability Programme – Comparison Technical Assumptions.................................. 2 with the December 2007 Update ................. 42 Table I.2. GDP and National Expenditure Table IV.2. Budgetary Prospects........................ 43 Components .................................................. 2 Table V.1. Pension Expenditure ......................... 45 Table I.3. Portuguese Economy’s Net Table V.2. Sustainability of Public Finances....... 46 Borrowing Position ........................................ 4 Table V.3. Sustainability Indicators..................... 47 Table I.4. Main Macroeconomic Indicators ........... 5 Table II.1. Direct Budgetary Implications of the Table V.4. Financial Prospects of Social Main Measures of the PNR – New Cycle Security ....................................................... 47 (2008-10)....................................................... 9 Table VI.1. Medium-Term Measures Improving Table II.2. Reduction of Personnel in the Public the Quality of Public Finances..................... 49 Administration.............................................. 11 Table II.3. ANCP Framework Agreements – Estimated Saving ........................................ 13 Table A.1. Macroeconomic Prospects ................ 63 Table II.4. Budgetary Impact of the Public Table A.2. Price Developments .......................... 63 Administration Reform Measures ................ 14 Table A.3. Labour Market Developments ........... 63 Table II.5. Utilization of the State Guarantees Table A.4. Sectoral Balances ............................. 64 to Strengthen Financial Stability .................. 21 Table A.5. General Government Budgetary Table II.6. Measures Taken During 2008 to Prospects .................................................... 64 Combat the Effects of the Crisis .................. 24 Table A.6. General Government Debt Table II.7. Direct Budgetary Impact of the Developments ............................................. 65 Investment and Employment Initiative......... 25 Table A.7. Cyclical Developments...................... 65 Table III.1. General Government Accounts......... 34 Table A.8. Divergence from Previous Update .... 65 Table III.2. General Government Accounts Adjusted to reflect the Change in the Table A.9. Long-term Sustainability of Public Method of Recording the State Subsidy to Finances...................................................... 66 CGA............................................................. 35 Table A.10. Basic Assumptions.......................... 66 Table III.3. General Government Account Projections................................................... 36 Table III.4. General Government Balances......... 37 Table III.5. General Government Debt Dynamics..................................................... 38 Charts index Chart I.1. Exports.................................................. 4 Chart IV.2. Sensitivity Analysis to a 1 p.p. Increase of the Short-term Interest Rate ..... 41 Chart I.2. Imports.................................................. 4 Chart IV.3. Overall Balance of General Chart I.3. Contributions to GDP Growth................ 6 Government................................................. 43 Chart II.1. Development of the Number of Civil Chart VI.1. Average VAT Reimbursement Servants in Portugal .................................... 11 Times .......................................................... 53 Chart III.1. Budgetary Consolidation Programming............................................... 37 Chart IV.1. Sensitivity Analysis to a 20% Increase in the Oil Price .............................. 40 STABILITY AND GROWTH PROGRAMME 2008-2011 I E XECUTIVE S UMMARY This document updates the Stability and Growth Programme (SGP) of the Portuguese Republic for 2008- 2011, in accordance with the provisions of the Stability and Growth Pact. It already includes the measures to be taken under the framework of the European Economic Recovery Plan and which are replicated, in particular, in Portugal’s Investment and Employment Initiative (IEI). It will be sent to the European Commission following its presentation and discussion in the Portuguese Parliament together with the Draft Law establishing the IEI budgetary program, on 29 January 2009. The normal time limit established in the Pact’s Code of Conduct for this update has been exceptionally exceeded due to the need to incorporate the abovementioned measures set forth in the European Economic Recovery Plan, including the required amendments to the State Budget for 2009. The depth and extent of the international financial crisis, which severely worsened in the final quarter of 2008, is generating a heavy recessive impact on the world economy, particular on economic agents’ confidence, credit restrictions and economic activity in general. The European Union’s Member States have coordinated their efforts to fight the crisis and its impact. Such efforts are focussed on strengthening financial stability and, as proposed by the European Commission, adopting a plan to boost the European economy, which aims to strengthen economic agents’ confidence by stimulating economic activity and employment. This plan fosters the coordinated consolidation of the anti-cyclical budgetary effort pursued by Member States and by EU’s institutions, generating a budgetary stimulus in the region of about 1.5% of GDP. In this context, after the period of budgetary consolidation and key structural reforms pursued in 2005- 2008, the economic policy of the Portuguese Government is now focused on a significant anti-cyclical budgetary effort to support investment and employment, support the most vulnerable households and strengthen financial stability. The main goals of the Initiative to Strengthen Financial Stability (ISFS) developed in the last quarter of 2008 are the normal financing of economic activity, particularly in relation to households and small and medium-size enterprises (SME),