'Risk of significant deviation' in adjustment

By TPN/Lusa, in News · 26-01-2020 16:00:00 · 0 Comments

Portugal’s Public Finance Council (CFP) has warned of a risk of significant deviation in 2020 from the pace of structural adjustment of the Portuguese economy, noting that the path for expenditure laid out in the state budget for the year does not coincide with the reference value.

"The planned (recalculated) structural balance will correspond to a deficit of 0.1% of GDP [Gross Domestic Product], a value close to the medium-term goal of achieving a structurally balanced budget,” the council states in an analysis of the draft state budget for 2020.

“The planned evolution of expenditure does not meet the applicable reference value, with primary expenditure net of discretionary measures and temporary and non-recurring measures deviating from 0.9% of GDP in 2020,” it said. "This deviation combined with planned developments in the structural balance points to a risk of deviation from compliance with EU rules as reflected in the most recent Recommendation of the Council of the European Union.”

In its analysis, the institution explains that the planned nominal growth of primary expenditure, net of discretionary measures and temporary and non-recurring measures calculated by the CFP, points to an increase 4.2%, far exceeding the maximum recommended increase of 1.7% - the reference rate applicable to expenditure. That leads to a deviation from the planned growth of primary expenditure of -0.9% of GDP in 2020.

"This deviation is higher than the permitted margin of 0.5%, pointing to a risk of significant deviation in 2020," the CFP states.

In this context, the council said that, in terms of compliance with the structural side of the budgetary rules, the pace of adjustment foreseen for 2020 points to the risk of deviation from its recommendation and the requirements of the euro-zone Stability and Growth Pact.

The expectation of Portugal's meeting its MTO (Medium-Term Objective) can, therefore, only be confirmed in the framework of an 'ex-post' evaluation to be carried out by the European Commission in the spring of 2021, the CFP stresses.

It warns of "risks to be noted" regarding compliance with the surplus projected in the state budget, of around 0.2% of GDP, noting that in addition to the pressures resulting from current expenditure, this depends on the revenue side on the achievement of the economic growth projected in the scenario, whose associated risks are on the downside and mainly of an external nature.

Another downside risk is the continuing need for support to the financial sector, which the CFP says may exceed the amounts already foreseen in the draft budget.

Stressing that higher growth and productivity depend on a more favourable environment for investment, in a context of increasing international competitiveness, the CFP says that this will require progress in reforming taxation, education and vocational training, the selectivity of public investment, the efficiency of the judicial system and, in general, the quality of expenditure and public administration.

With that in mind, it stresses that contextualising budgets in multi-year and strategic terms - a longstanding recommendation of the CPF - would greatly help in the definition of structural public policies directed towards growth, and once more recommends the implementation of the Budgetary Framework Law of 2015, which is currently postponed to April 2020.

Describing the state budget for 2020 as "a continuity budget", the CFP notes that it continues the strategy of fiscal consolidation of recent years, aiming at a budget surplus of 0.2% of GDP in 2020 and a reduction of the public debt ratio by 2.7 percentage points of GDP, so complying with euro-zone rules on debt reduction.

That reduction cannot but be considered good news, it adds.


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