Decision 2014/197

Contents

THE COUNCIL OF THE EUROPEAN UNION,Having regard to the Treaty on the Functioning of the European Union,Having regard to Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism^note, and in particular Article 3(2) thereof.Having regard to the proposal from the European Commission,Whereas:

(1)The Council granted financial assistance to Portugal, at the latter's request, on 17 May 2011 by means of Implementing Decision 2011/344/EU^note. That financial assistance was granted in support of a strong economic and financial reform programme (the ‘Programme’) which aims to restore confidence, enable the return of the economy to sustainable growth, and safeguard financial stability in Portugal, the euro area and the Union.

(2)In line with Article 3(10) of Implementing Decision 2011/344/EU, the Commission, together with the International Monetary Fund (IMF) and in liaison with the European Central Bank (ECB), conducted, between 4 December and 16 December 2013, the tenth review of the Portuguese authorities' progress on the implementation of the agreed measures under the Programme.

(3)Quarterly real gross domestic product (GDP) growth continued at positive rates in the third quarter of 2013 and the short-term indicators point to the projected economic recovery. On an annual basis, real GDP is still forecast to decline by 1,6 % in 2013 but to move into positive territory in 2014 and 2015, with growth of 0,8 % and 1,5 %, respectively. The labour market outlook has improved as well but unemployment remains high, expected to peak at 16,8 % in 2014 and to progressively decrease thereafter. Downside risks to the macroeconomic outlook remain, as the projected recovery crucially hinges on positive trade and financial market developments, which also depend on the broader European outlook.

(4)Up to November 2013 the government cash deficit recorded an improvement of 0,25 % of GDP (net of extraordinary factors) compared with the same period of the preceding year, which resulted from revenue growth outpacing expenditure growth. The acceleration of tax revenue growth reflects the recovery of economic activity in recent months as well as improved efficiency in the tax administration, especially in the fight against fraud. On the expenditure side budget execution is overall in line with the targets of the second supplementary budget.

(5)The general government deficit target of 5,5 % of GDP (net of bank recapitalisations) in 2013 is likely to be met and the deficit outcome may even be below the target. This results from positive risks having materialised in the last months of the year while most negative risks dissipated. In particular, tax collection is expected to exceed the implicit targets in the second supplementary budget. Moreover, the yield of the one-off debt regularisation scheme for outstanding tax and social security contributions launched at the end of 2013 was about 0,3 % of GDP higher than envisaged. The absorption of Union Funds is also expected to be better than previously estimated. Furthermore, negative risks from the public-private partnerships' (PPPs) renegotiations have been mitigated. Some negative risks nevertheless persist, notably lower-than-projected revenue from property taxes while overruns on specific expenditure items, particularly personnel costs, intermediate consumption and pensions benefits cannot be excluded.

(6)The 2014 State Budget and other supporting legislation are consistent with a deficit target of 4 % of GDP in 2014. In order to reach the target consolidation measures amounting to about 2,3 % of GDP are being implemented, which also cover budgetary pressures and the need to rebuild the provisional budget allocation for 2014. Those measures are primarily of a permanent nature and rely predominantly on expenditure savings.

(7)Most of the consolidation in 2014 — about 1,8 % of GDP — should be drawn from the public expenditure review, which was carried out over the past year with the objective of increasing equity and efficiency in the provision of social transfers and public services. The main public expenditure review measures will be implemented along three principal axes: (1) limiting outlays on the public sector wage bill by reducing the size of the public-sector work force while shifting its composition towards higher-skilled employees, in particular through a requalification programme and a voluntary redundancy scheme; further convergence of public and private sector work rules and the revision of the wage scale as well as the streamlining of wage supplements; increase of beneficiaries' contributions to the special public health insurance schemes, aiming at the self-financing of those systems; (2) limiting public pension expenditure, given the need to reassess its sustainability with regard to demographic developments, while at the same time protecting the lowest pensions, by increasing the statutory retirement age by changes to the sustainability factor; recalibrating the ‘extraordinary solidarity contribution’, by lowering the minimum threshold for the application of the progressive rate as well as the thresholds for the application of higher rates; streamlining survivors' pensions of both Caixa Geral de Aposentações (CGA) and the general pension regime; reducing lifelong pensions to politicians; (3) savings in intermediate consumption and expenditure programmes across line ministries.

(8)With a view to achieving the 4 % of GDP deficit target, the authorities should adopt further smaller-yield permanent revenue measures amounting to 0,4 % of GDP, aiming to further improve the efficiency and equity of the current tax and benefit structure and to complement the public-expenditure-review package. Moreover, a number of one-off measures totalling 0,2 % of GDP should be implemented, which more than offset the costs arising from the one-off upfront payments related to the introduction of a mutual agreement redundancy scheme in the public sector.

(9)Most of the above-mentioned measures were adopted through the 2014 Budget Law or by changes to specific legislation. Some of the envisaged consolidation measures have not yet been fully legislated for. Among them are the tightening of the eligibility conditions for survivors' pensions (beyond the change of replacement rates in case of accumulation with other pensions); the sale of online gambling licences; the transfer of the postal service's (CTT) health fund to the general government and the sale of port concessions.

(10)A comprehensive reform of the corporate income tax aimed at promoting simplification as well as boosting the internationalisation and competitiveness of Portuguese companies was approved in the Parliament in December 2013 and entered into force on 1 January 2014. A key feature of the reform is the reduction of the standard Corporate Income Tax (CIT) rate from 25 % to 23 % and a reduced 17 % rate applicable to the first EUR 15000 of taxable income for Small and Medium Enterprises (SMEs). In addition to the existing surtaxes, a third state surtax of 7 % will apply on taxable profits exceeding EUR 35 million. Other key provisions of the reform include the revision of tax incentives, changes to dividends and capital gains taxation, group taxation and intangible assets regime, the introduction of a participation exemption regime, an extension of the period during which losses can be carried forward and a further limitation to interest deductibility.

(11)The debt-to-GDP ratio is expected to peak below 129,5 % in 2013 and to decline thereafter. The upward revision of the debt profile compared with the combined eighth and ninth reviews, in spite of a better-than-expected budget execution, is to a large extent explained by a substantial increase in the Treasury's cash balance as well as the postponement to 2014 of some short-term debt reducing operations on the part of the Social Security Financial Stabilisation Fund. Accordingly, the net debt — excluding the cash deposits of the Instituto de Gestão do Crédito Público (IGCP) — is projected to peak at about 120 % of GDP, slightly below the level expected at the last review.The expected decline in the general government debt-to-GDP ratio starting from 2014 will be supported by the projected economic recovery as well as by a decline in cash deposits and the realisation of the Social Security's short-term debt-reducing operations.

(12)The budgetary adjustment process is flanked by a range of fiscal structural measures to enhance control over government expenditure and improve revenue collection. The comprehensive reform of the Budget Framework Law is progressing in a number of important areas. However, given the scope of the reform and the need to engage in a broad-based consultation with all relevant stakeholders the process is expected to take place in two phases. The new commitment control system is showing results by limiting the build-up of new arrears but implementation needs to be monitored closely to ensure that commitments are covered by the available funding. A task-force to evaluate and improve this process will be created. Reforms in the public administration are being implemented with a view to modernising and rationalising public sector employment and entities. Reforms towards a modern compliance risk management model of the revenue administration continue. A new Risk Assessment Unit has recently been established and will become operational shortly, focusing in the first place on improving compliance of certain groups of taxpayers such as the self-employed and high wealth individuals. Some other reforms, such as the reduction of local tax offices, are delayed. While the renegotiation of PPPs has made progress, it could not be concluded by the end of 2013. Nevertheless, significant savings are expected for 2014 and beyond. State-owned enterprises (SOEs) reached operational balance on average by the end of 2012 and additional reforms are foreseen to avoid a renewed deterioration of their results. Privatisation has made good progress and the proceeds exceed the target under the programme. Reforms in the health care sector are producing significant savings and implementation is continuing broadly in line with targets.

(13)Policy implementation and reforms in the health sector continue progressing and producing savings through increases in efficiency. The consolidated deficit for the sector has been significantly reduced since 2010. However, the remaining stock of arrears, the tight budget line and increased labour costs due to the reinstatement of the 13^th and 14^th bonus payments forced the authorities to speed up the existing reforms. The existence of an important stock of arrears is strongly (though not solely) related to the consistent underfunding of SOEs hospitals vis-à-vis their service provision. The authorities remain committed to implementing the ongoing hospital reform and to the continued fine-tuning of the set of measures related to pharmaceuticals, centralised procurement and primary care.

(14)The banks' capital ratios comfortably continued to meet the European Banking Authority (EBA) regulatory capital buffers as well as the 10 % Core Tier 1 Programme target. That capital buffer remains adequate across the board when using the new Capital Requirements Directive (CRD) IV rules for evaluating the banks' own funds. These new capital rules apply from January 2014 onwards with a threshold set at 7 % of Common Equity Tier 1 ratio. The system wide loan-to-deposit is 120,7 % and is likely to continue to decrease until the end-of 2014, with some banks already below this threshold. Efforts to diversify the sources of funding for the corporate sector are being continuously strengthened. Building on the recommendations of the 2013 external audit of the existing government-sponsored credit lines, the authorities are implementing the measures aiming to improve the performance and the governance of those instruments including risk management capabilities and practices. The legal framework for new debt restructuring tools directed at households and aiming at the non-litigious settlement of debts is in place and fully operational. Similarly, the impact of the changes in the corporate insolvency and recovery law is being assessed as the new debt restructuring and debt recovery mechanisms are now functioning. The crisis management toolkit is being completed. The bank resolution fund is functioning, early intervention powers have been introduced and the recapitalisation law has been amended to reflect the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis^note.The roadmap for improving the effectiveness and governance of the National Guarantee System is being implemented to better serve SMEs financing needs.

(15)Further progress has been made in implementing growth and competitiveness-enhancing structural reforms. The authorities have adopted additional measures to reduce unemployment and to boost labour market effectiveness, including enhanced activation policies and a youth guarantee implementation plan. Revisions affecting the definition of fair dismissals in the Labour Code are under preparation after previous arrangements were declared unconstitutional. Additional measures have been adopted in the area of education, in which progress is satisfactory overall.

(16)The government approved a new levy on energy operators for 2014 which must be closely monitored to avoid distortions in the system. As regards the elimination of the energy tariff debt and ensuring the sustainability of the system, further reforms are required.

(17)In the telecommunication and postal sectors actions have been implemented to comply with Union rules and underpin the attainment of the programme objectives. The selection of the universal service providers and the revision of the existing contract with the incumbent are positive developments towards the full implementation of Directive 2002/22/EC of the European Parliament and of the Council^note. The publication of legislation laying down the framework of the concession contract with the national provider of the postal service will reduce the current concession period, thus increasing competition. The authorities remain commited to increasing the sustainability and efficiency in the transport sector.

(18)Sector-specific legislation with a view to alignment upon Directive 2006/123/EC of the European Parliament and of the Council^note is progressing, with some delays in the adoption of the regulatory framework for the construction sector, the amended professional bodies' bylaws and internal rules to adopt the horizontal framework law on public professinal associations. The authorities are commited to further improving the functioning of the Point of Single Contact

(19)The assessment of the urban lease reform is underway after the full implementation of the new legal framework. The authorities aim at increasing the efforts to fight tax evasion in the rental market.

(20)The new framework of the National Regulatory Authorities (NRAs) is advancing and the relevant bylaws are being amended and are expected to be adopted shortly. The publication of a new executive order establishing the contributions of the regulators for 2014 has been delayed.

(21)Reforms of the judicial system continue progressing as planned. Advances have been made in the implementation of the Judicial Organisation Act to streamline the court system, a law strengthening the body for enforcement agents and insolvency administrators has been published and a new extrajudicial procedure creating a pre-trial triage to identify and settle cases out of court is being finalised. Measures to improve the licensing environment and reduce administrative burdens have advanced with the adoption of legal provisions streamlining licensing in the area of tourism, industry and territorial planning. Legislation on commercial licensing is underway and the legal regime for urbanism and building is being reviewed.

(22)In the light of these developments, Implementing Decision 2011/344/EU should be amended,

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