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1 | 2009

THE MAIN TRENDS IN PUBLIC FINANCE

DEVELOPMENTS IN PORTUGAL: 1986-2008

Jorge Correia da Cunha

Cláudia Braz

November 2009

The analyses, opinions and findings of these papers represent the views of the authors,

they are not necessarily those of the Banco de Portugal or the Eurosystem.

Please address correspondence to

Economics and Research Department

Banco de Portugal, Av. Almirante Reis no. 71, 1150-012 Lisboa, Portugal;

email: [email protected]

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ISSN 1646-7477

ISBN 978-989-678-007-4

The main trends in public finance

developments in Portugal: 1986-2008∗

Jorge Correia da Cunha and Claudia Braz

November 2009

Abstract

Public finance imbalances have been one of the main topics ofpublic debate in Portugal, in the last decades. After the accessionto the European Community their correction was always identified asa central issue in the context of successive medium-term macroeco-nomic and fiscal adjustment programmes. The Maastricht Treaty in1992 stepped up the urgency of achieving sound public finances, asfiscal criteria played a key role in the decision on the participationof Member-states in the euro area. Later, in 1997, the Stability andGrowth Pact established the multilateral fiscal supervision framework,focused on avoiding excessive deficits and achieving fiscal positionsclose to balance or in surplus, in the medium-term. Portugal fulfilledthe convergence criteria in 1997, but showed some difficulty in com-plying with the discipline and objectives of the Pact afterwards. Thispaper uses the analytical framework currently underlying the multilat-eral supervision of national fiscal policies in the EU to explain the keyfeatures of budgetary developments in Portugal from 1986 to 2008.

JEL classification: H62, H20, H50

Keywords: Public finances, fiscal policy, deficit and debt.

∗The opinions and findings of this paper represent the views of the authors, which donot necessarily reflect those of Banco de Portugal. Address: Banco de Portugal, Economicsand Research Department, Av. Almirante Reis no71, 1150-165 Lisboa, Portugal; E-mailaddress: [email protected] and crbraz@bportugal; Phone: +351 21 3128358 or+351 21 3130549.

1

1 Overview1

In 1986, the year of Portugal’s accession to the European Community, thegeneral government deficit according to the accounting rules currently inforce (ESA95, base year 2000) amounted to almost 8 per cent of GDP (fordetails on data compilation, see Box 1). In 2008, it reached a figure closeto 2.5 per cent of GDP (Table 1, Figure 1). A remarkable feature is that itnever fell significantly below the reference value of 3 per cent of GDP2, evenafter the coming into force of the Stability and Growth Pact in 1999.

Table 1: Main fiscal indicators�� !� "#$# "#$% "&$' "&$% "'$( "#$( ")$* "#$# "#$& "*$% ")$* "&$*+�,-��. �� !� %$) %$( ($/ &$% 0$1 0$0 &$' "%$& "0$0 %$/ %$* %$)23�4!34�� 5�� !� 678 "'$% "'$' "&$# "&$0 "#$& "/$1 "'$* "/$0 "'$' "&$# "&$& "&$023�4!34�� 9�,-��. �� !�678 ($0 %$# ($/ ($/ %$/ "%$' 0$' "%$# "%$) ($0 0$# %$/23�4!34�� 353�� 4� 678:6;8 &($* &0$' &&$) &)$# &)$% &*$0 &/$' &#$( &'$( &/$) &1$# &1$)23�4!34�� 9�,-��. �<9� =,34�� 678:6;8 &%$* &%$1 &%$# &0$1 &&$0 &*$/ &#$% &#$1 &'$' &'$) &/$0 &/$'+4��,! =��3 *1$) ')$1 '&$& '%$0 **$% *#$) *0$' *'$& *1$0 '0$% *1$1 *'$0�� !� "&$) "($/ "($1 ")$& "($/ "($1 "&$) "'$0 "&$1 "($' "($'+�,-��. �� !� "%$( %$( %$( "0$& %$% "%$( "%$# "&$* "0$( %$( %$&23�4!34�� 5�� !� 678 "&$) "&$* ")$* "*$0 ")$* ")$' "*$% "*$) "&$# "&$( ")$#23�4!34�� 9�,-��. �� !�678 "%$( "%$* "0$) "($0 "0$# "0$1 "($& "($/ "0$% "%$) "0$/23�4!34�� 353�� 4� 678:6;8 &1$) )%$0 )%$% )%$( )%$# )%$( )0$% )0$' )($* )&$* )&$(23�4!34�� 9�,-��. �<9� =,34�� 678:6;8 &1$' )%$' )0$) )($& )($) )($0 )&$& ))$* )&$* )&$1 )*$0+4��,! =��3 *($0 *0$) *%$* *($1 **$' *'$1 */$& '&$' ')$# '&$* ''$)>?��@ ABC ��D �?�E��F ��G�?G��H��IB��@ JKL ME� ��?��?��G N�G?�� O�GH��GGO �DP?��D ��D �Q�G?D� �E� �� R��O R��?�� R STTU �V��D�I ME� �O�GH��G �R�� D��R��O R��?�� G�?G��D WO X�� D� ��?�G ��DH� � �E� C>YX R��EDGH��I JZL �� RH��G ��D � �I1Previous papers of the authors are useful references, like Cunha and Neves (1995),

Cunha and Braz (2003), Cunha and Braz (2006a) and Cunha and Braz (2006b).2Reference value for the deficit in the context of the excessive deficit procedure. It

is an important part of the criteria for accession to the euro and plays a key role in theframework of the Stability and Growth Pact.

2

Figure 1: Actual and structural overall balance and fiscal policy stance

-10-8-6-4-2024

86878889 90 919293 94 95969798 99000102 03 04050607 08

As a

perce

ntage

of G

DP

Change in the structural primary balanceActual overall balanceStructural overall balance

Sources: INE and authors’ calculations.

Box 1. Data compilationThis paper is based on the general government accounts compiled by the NationalStatistical Institute according to the 1995 European System of National andRegional Accounts (ESA95), which are presented in Annex 1. There is, however,a structural break in the data available from 1994 to 1995 as the accounts for the1986-1994 period are only available according to the procedures of base year 1995and in the following period (1995-2008) base year 2000 was used. As shown in thetable below, this methodological change had a minor impact on the deficit, butimplied an increase of both revenue and expenditure ratios by around 0.8 p.p. ofGDP. The main modification affecting the deficit consists of the adoption of “cash-adjusted” recording for the receipts of Tax on Oil Products, Tax on Tobacco,Tax on Alcohol and Alcoholic Beverages and contributions to the Social Securitysubsystem. The effect of this new approach is, nevertheless, not very significant,as, in the national accounts, only the January collection of each year shifts tothe previous year. Most of the other changes have no impact on the deficitas, for example, the recording of Financial Intermediation Services IndirectlyMeasured, which has a positive effect on interest received by general governmentand intermediate consumption and a negative effect on interest payments, or theconsideration of the value of production to be used by general government itself,which increases sales of goods and services, on the revenue side, and intermediateconsumption and investment, on the expenditure side.

3

[\]^\_àb\ cde_`f dg hi[jklmn opqprsp tuvwjmx opqprsp tuyvzl{po |sooprl opqprsp tu}~�m��lmn opqprsp tuttjklmn px�pr��lsop tuv}�k|�mn �m��prl� tuyw�k��pr�ml�kr k� p��nk�pp� �tuty�rlpo�p��mlp |kr�s��l�kr tu�~�rlpop�l �tuy�zl{po |sooprl px�pr��lsop �tuy}�m��lmn px�pr��lsop tu�vzqpomnn �mnmr|p tut��d�]^\f� �� a_� a�`�d]f� â�^��aèd_f�

�� ¡¢� £¤¤¥ ¦��§¨�¡©ª«¬ ®«¯ °±±±²ª«¬ ®«¯ £¤¤¥

A different type of structural break may occur even while using the same baseyear in the compilation of national accounts. Indeed, the units classified in thegeneral government sector are not necessarily the same over the entire period, aschanges in the legal status, functions and/or financing often lead to the inclusionor exclusion of entities in the sector. In this regard, it is of utmost importance tomention the gradual transformation of public hospitals into corporations, whichbegan at the end of 2002 and is still underway. For the hospitals involved, thischange implies the adoption of a management model closer to the practice ofthe private sector and a funding scheme based on payments made by the Stateper medical act provided (instead of an annual overall transfer from the StateBudget). In terms of the compilation of national accounts, corporate hospitalscease to be part of general government and are included in the non-financial cor-porations’ sector. The fact that this process took place gradually over a numberof years since 2002 (34 hospitals at the end of 2002, 2 by mid-2004, 5 at the endof 2005, 17 during the course of 2007 and 9 during the course of 2008) introducesseveral structural breaks in the recent past. The items most influenced by thisprocess are compensation of employees and intermediate consumption, which de-crease when the change takes place, and social payments in kind, which, in turn,increase.a In the period prior to the start of the transformation process (2001),expenditure associated with the hospitals converted between 2002 and 2008 in-cluded in general government accounts totalled approximately 2.3 per cent ofGDP and was mostly related to compensation of employees (1.3, 0.8 and 0.2 percent of GDP in compensation of employees, intermediate consumption and socialpayments in kind, respectively).

aThe impact on social payments in kind reflects the amount paid on services providedby corporate hospitals, net of these hospitals spending with medicine co-payments andcontracts with private health service providers when they were still included in generalgovernment.

4

In terms of data compilation, it is also useful to highlight that the sequence ofaccounts of ESA95 does not provide all the details necessary for the analysiscarried out in this paper. This occurs, for example, in the breakdown of severalkey variables: taxes on income and wealth (into taxes paid by households and byfirms), taxes on production and imports (excluding VAT), and social payments incash (into pensions, unemployment-related expenditure and other benefits). Inthese cases, other sources of information, such as Banco de Portugal’s long-termhistorical series or public accounts data, were used.Lastly, concerning the macroeconomic series, relevant not only for the calcula-tion of ratios but also in the context of the cyclical adjustment methodology,the National Statistical Institute did not compile a retropolation for the periodbefore 1995. As an alternative, the growth rates underlying Banco de Portugal’shistorical series were used.

The breakdown of the annual change in the overall balance into the con-tributions of the cyclical component, interest payments, temporary measuresand the structural primary balance provides a useful insight into the dynam-ics of the Portuguese public finances in the last two decades (for details onthe calculation of the cyclical component and the definition of temporarymeasures see Boxes 2 and 3). In the first years of the period, until 1989,there was a sharp decline in the deficit, explained to a large extent by a pos-itive contribution of the cycle and the decline of interest payments (Figure2). From 1990 to 1993 the trend reversed owing to an adverse conjunctionof expansionary discretionary measures (with the exception of 1992, whena major change of VAT rates led to a substantial increase of tax receipts),a hike in interest expenditure in the first years and a sudden deteriorationin cyclical conditions in 1993. From 1994 onwards the deficit again showeda declining trend as a consequence of a sustained fall in interest paymentsrelated with nominal convergence, enhanced in a first phase by discretionarymeasures and afterwards by particularly favourable cyclical effects, partiallyresulting from the composition of expenditure and income. This context,decisively marked by the impact of disinflation, allowed the fulfilment of thefiscal criteria for the accession to the euro area, according to the accountingrules then in force (ESA79), in spite of a continuous deterioration of thestructural primary balance.

In 2001, already in the framework of the Stability and Growth Pact, asinterest expenditure stabilised as a ratio to GDP and economic activity decel-erated, the deficit exceeded 4 per cent of GDP. The policy package adoptedin 2002 in order to correct the excessive deficit included a hike in the stan-dard rate of VAT and several short-term measures, in particular a sizeableamount of temporary measures. The structural measures on the expendi-

5

Figure 2: Breakdown of the change in the overall balance

-5-4-3-2-101234

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

p.p. o

f GDP

Change in the structural primary balanceContribution of interest paymentsChange in temporary measuresChange in the cyclical component


ture side implemented from 2002 to 2004 were relevant in some major areassuch as the public employees’ pension system, the National Health Serviceand the financing of municipalities, but failed to tackle the reforms of publicadministration and the private sector social security system, instrumentalto curb the growth of current primary expenditure. As a consequence, theaccumulated change in the structural primary balance over this period wasclose to zero and in 2003 and 2004 even deteriorated. Portugal only avoidedincurring on excessive deficit once again through an accrued recourse to tem-porary measures, which exceeded 2 per cent of GDP in both of these twoyears.

The political decision of not using temporary measures in 2005 unveiledthe magnitude of the deterioration of the structural fiscal position. For thesecond time in a short period, Portugal was subject to an excessive deficitprocedure. The fiscal adjustment programme delineated to correct it puta strong emphasis on structural reforms to dampen expenditure growth, inparticular compensation of employees and pension outlays. In 2006 and 2007,however, the considerable improvement in the structural balance mostly re-lied on short-term measures on the expenditure side (which permanentlyaffect the expenditure level, but only transitorily have an impact on its rateof change as, for example, the freezing of automatic progressions in careers,

6

the limitation of early retirements, changes in unemployment benefits proce-dures and reduction in the co-financing of medicines), several tax increases,in particular in indirect taxation, and the ongoing process of stepping up theeffectiveness of tax administration. Following the 2007 fiscal outcome the ex-cessive deficit procedure was closed, one year ahead of the deadline initiallyset down. The structural deficit was, however, still significantly above themedium-term objective (MTO), set at that time at 0.5 per cent of GDP. 3

The most prominent features of 2008 fiscal developments were the returnto the pattern of increasing structural primary current expenditure ratio totrend GDP, after a halt in 2006 and 2007, and the magnitude of temporarymeasures, which were decisive to avoid a deficit of more than 3 per cent ofGDP. This evolution raises the issue of how important were the measuresimplemented in 2005-2007 in curbing expenditure growth, which is crucial toachieve a sound fiscal position.

Box 2. The cyclical adjustment methodologyIn recent years, the cyclically adjusted budget balance has gained relevance asone of the indicators used in the assessment of the underlying position of publicfinances in European Union Member-states. Indeed, the reform of the Stabil-ity and Growth Pact increased the role of the balance adjusted for cyclical ef-fects and temporary measures, when defining, at the “preventive arm” level, themedium-term fiscal objective based on this variable, as well as the annual min-imum convergence required for the Member-states that have not yet reached it.As regards the “corrective arm”, the fiscal adjustment imposed on Member-statesincurring excessive deficit situations in the recent period has also been measuredin terms of the change in the structural balance, i.e. adjusted for cyclical effectsand temporary measures.There are several methodologies for cyclical adjustment of the budget balance,most of them implemented by international organizations, such as the EuropeanCommission, the OECD and the IMF. As far as the European System of CentralBanks (ESCB) is concerned, a cyclical adjustment methodology was adopted in2001, which has since then been followed by Banco de Portugal (see Bouthevillain,Cour-Thimann, Dool, Cos, Langenus, Mohr, Momigliano and Tujula (2001) andNeves and Sarmento (2001)).

3The MTO’s are currently under revision in the context of the establishment of theappropriate criteria and modalities to take into account implicit liabilities.

7

This methodology assumes that the fiscal variables influenced by the economiccycle have other-than GDP macroeconomic bases that better explain their devel-opment. The cyclical component of a specific budgetary category is calculatedby applying a constant elasticity to the trend deviation of its macroeconomicbase. The trend is estimated using a Hodrick-Prescott filter with a smoothingparameter of λ=30.a It should be highlighted that trend values obtained usingthis filtering technique become predominantly determined by observable valuestowards the end of the sample period (the so-called “end-point bias”). To over-come this problem, the series under consideration is further extended on the basisof projections and expert judgment. As such, trend values are affected by changesin growth prospects of the macroeconomic bases, which suggest some caution onthe interpretation of cyclically adjusted figures.b

On the revenue side, taxes and social contributions are adjusted, while on theexpenditure side, generally only unemployment-related expenditure is corrected.In the standard implementation the following categories are adjusted (with cor-responding macroeconomic bases in brackets): taxes on income and wealth paidby households (private sector wage bill), taxes on income and wealth paid byfirms (operating surplusc), taxes on production and imports (private consump-tion), social contributions paid by the private sector (private sector wage bill)and unemployment-related expenditure (number of unemployed).In this framework, the semi-elasticity of the budget balance to GDP can beobtained indirectly from the following formula:

∆BB∆GDPr

GDPr

=∑

j

[

ξBj ,Mj∗ ξMj ,GDPr

∗

Bj

GDPn

]

(1)

The last estimate of this elasticity for Portugal, carried out at the end of 2006,pointed to a semi-elasticity equal to 0.50, calculated on the basis of 1995-2005data (see Braz (2006)). Given that the analysis developed in this paper covers theperiod from 1986 to 2008, an update based on data for the same time span wouldhave been advisable. This exercise, however, is not possible for the elasticities ofthe fiscal variables with respect to the macroeconomic bases (ξBj ,Mj

), as it wouldbe necessary to have the impacts of discretionary measures affecting these fiscalvariables for the period before 1995, which are not available. Additionally, themost recent information is influenced by significant revenue windfalls that wouldincorrectly affect the estimates. The elasticities of the macroeconomic bases vis-a-vis GDP (ξMj ,GDPr

) and the weights of the fiscal variables on GDP (Bj

GDPn)

were updated but, overall, the final result was similar to the previous one (0.49).

aIn order to calculate ratios, trend nominal GDP is consistently defined as the realtrend GDP, estimated using the same procedure, multiplied by the actual GDP deflator.

bIn particular at the current juncture, given the sharp decline in economic activityprojected for 2009 and the still very low or negative growth foreseen for the next years.

cCurrently, private GDP in the case of Portugal.

8

This 0.49 value is the theoretical semi-elasticity that would occur in each year ifthe composition of growth was balanced. As presented in Figure A below, theimplicit semi-elasticity may differ significantly from that value in each year, buton average over the whole period it will not be the case. The difference betweenthe cyclical component calculated using the ESCB methodology and the one thatwould be obtained if the 0.49 semi-elasticity was used is called the compositionof growth effect and has been quite small in the recent period, although quitesignificant in several years, such as 1990 or 1993.d Figure B shows the contributionof each macroeconomic base to the composition effect. As an example, the 1993composition effect is explained by the fact that while the output gap was alreadynegative in that year, the gaps of private consumption and the private sectorwage bill were still positive, and the gap of the number of unemployed was muchmore negative than the output gap.

³´µ¶³·µ³·µ¶³¶µ¶µ¶¶µ·µ¶·µ´µ¶

¹º ¹» ¹¹ ¹¼ ¼¶ ¼· ¼´ ¼½ ¼¾ ¼¸ ¼º ¼» ¼¹ ¼¼ ¶¶ ¶· ¶´ ¶½ ¶¾ ¶¸ ¶º ¶» ¶¹Figure A: Cyclical component, composition

effect and the implicit semi-elasticity

¿ÀÁÂÀÃÄÅÄÀÆ ÀÇ ÈÉÀÊÅË ÌÇÇÌÍÅ ÎÏ ÀÇ ÐÑÒÓ¿ÔÍÕÄÍÖÕ ÍÀÁÂÀÆÌÆÅ ÎÏ ÀÇ ÐÑÒÓ×ÁÂÕÄÍÄÅ ÃÌÁÄØÌÕÖÃÅÄÍÄÅÔÙÚÌÉÖÈÌ ÃÌÁÄØÌÕÖÃÅÄÍÄÅÔÛÜÝÞß

àáâãäåæçâèéáãêë äìíäâíìèîáïêð ³·µ³·µ¶³¶µ¶µ¶¶µ·µ¶

¹º ¹» ¹¹ ¹¼ ¼¶ ¼· ¼´ ¼½ ¼¾ ¼¸ ¼º ¼» ¼¹ ¼¼ ¶¶ ¶·¶´ ¶½ ¶¾ ¶¸ ¶º ¶» ¶¹ñòóôõö÷õøùóúõûüýþÿFigure B: Breakdown of composition effect

��Á�ÌÉ ÀÇ �ÆÌÁÂÕÀÔÌ�ÒÉÄÚÖÅÌ ÐÑÒÒÉÄÚÖÅÌ ÍÀÆÃ�ÁÂÅÄÀÆÒÉÄÚÖÅÌ ÃÌÍÅÀÉ ÊÖÈÌ �ÄÕÕ¿ÀÁÂÀÃÄÅÄÀÆ ÌÇÇÌÍÅàáâãäåæçâèéáãêë äìíäâíìèîáïêðdThe relation between the implicit semi-elasticity and the composition effect is given

by the following formula:Implicit semi − elasticity = 0.49 + Composition effect

Output−gap. This

particularly explains the high implicit semi-elasticity and low composition effect in 2005,as in that year the output-gap was close to zero.

Looking at the fiscal outcomes over the period 1986-2008, it should behighlighted that the fiscal stance, measured by the change in the cyclicallyadjusted primary balance excluding the impact of temporary measures, loos-ened in most years, in general pro-cyclically (Figure 3). In these conditions,it would have been possible to achieve a much sounder fiscal position with-out major strains. Additionally, it appears that the implementation of fiscalpolicy was far from optimal in terms of macroeconomic stabilization. Fig-ure 4 shows the contributions of structural revenue and primary expenditureratios to the annual change in the structural primary balance. In the years

9

represented above the 45 degree line a loosening of the fiscal stance occurred,while the years below the line correspond to periods of tightening. The mostcommon outcome was a simultaneous increase in both structural revenueand structural primary expenditure. For the period as a whole structuralrevenue and structural primary expenditure increased by 10.7 and 14.6 per-centage points (p.p.) of nominal trend GDP.

Figure 3: Fiscal policy and cyclical position

86

87

88

89

9091

92

93

94

95

96

9798

99

0001

0203 0405

0607

08

-4.0-3.0-2.0-1.00.01.02.03.04.0

-4.0 -2.0 0.0 2.0 4.0

Fisca

l stan

ce (ch

ange

in th

e stru

ctural

prim

ary ba

lance)

Cyclical position a)(change in the output gap)

Pro-cyclical tightening of fiscal policy

Counter-cyclical loosening of fiscal

policy

Counter-cyclical tightening of fiscal policy

Pro-cyclical loosening of fiscal policy

Sources: INE and authors’ calculations.Note: a) The cyclical position of the economy is assessed by the change in the outputgap which approximately represents the difference between the growth rates of GDP andtrend GDP.

The sizeable rise of the structural revenue and structural primary expen-diture ratios appears as a peculiar feature of public finance developments inPortugal, contrasting with the general trends in the euro area (12).4 Table2 clearly highlights that point for the years from 1995 to 2008, using theAMECO database. Indeed, while in this period cyclically adjusted revenueand primary expenditure increased by 3.7 and 5.4 p.p. of GDP in Portugal,they declined by 2.1 and 1.2 p.p. in the euro area (12). Figure 5 shows thegradual convergence of the cyclically adjusted primary current expenditureratio in Portugal to the euro area (12) average from 1997 to 2005. It also

4Comprising the first 12 participating countries, i.e., Austria, Belgium, Finland, France,Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.

10

Figure 4: Change in structural revenue and structural primary expenditure

86

87 88

8990

91

9293

94

95

96

97

9899

00

01

0203

04

05

06

07

08

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-4.0 -2.0 0.0 2.0 4.0

Chan

ge in

struct

ural p

rimary

expen

diture

(% tr

end G

DP)

Change in structural revenue (% trend GDP)

Improvement of the

structural primary balance

Deterioration of the

structural primary balance

Sources: INE and authors’ calculations.Note: See Box 1.

illustrates the upward trend of the cyclically adjusted tax burden after 2001,approaching but staying below the euro area (12) average.

11

Table 2: Change in the main fiscal indicators in the 1995-2008 period: com-parison with euro area developments)

Percentage points of GDP

1995-2008Portugal Euro

area (12)Overall balance 2.4 3.1Cyclical component 1.3 1.5

Cyclically adjusted overall balance 1.2 1.6Interest expenditure -2.9 -2.4

Cyclically adjusted primary balance -1.7 -0.9Cyclically adjusted total revenue 3.7 -2.1Cyclically adjusted primary expenditure 5.4 -1.2

Public debt 5.3 -2.6Source: European Commission (AMECO database).

Figure 5: Cyclically adjusted tax burden and primary current expenditure:comparison with euro area developments

30

32

34

36

38

40

42

44

95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

perce

ntag

e of G

DP

Cyclically-adjusted primary current expenditure: PT

Cyclically-adjusted primary current expenditure: EA12

Cyclically-adjusted tax burden: EA12

Cyclically-adjusted tax burden: PT

Source: European Commission (AMECO database).Note: The concept of tax burden used by the European Commission includes taxes onproduction and imports paid to the EU budget and excludes imputed socialcontributions.

12

Box 3. Temporary measuresTemporary measures affecting the general government balance and/or debt havebeen implemented in a number of EU Member-states in the past few years. Theycan be defined as policy decisions that change the level of general governmentrevenue and/or expenditure during a very limited period of time, possibly onlyone year (one-off measures, e.g. sales of non-financial assets), or which basicallymodify their time profile in the medium to long run (self-reversing measures, e.g.transfers of companies to public pension systems, in exchange for the assump-tion of future liabilities with pension payments). Governments may implementtemporary measures with a view to responding to exceptional circumstances orto facilitate gradual fiscal adjustments. In the latter case, they create room forimplementing permanent measures regarding structural problems affecting publicaccounts. Recourse to temporary measures, however, may also signal the govern-ments failure to take appropriate measures to correct structural imbalances.In the framework of the original version of the Stability and Growth Pact (SGP),whose implementation was focused on the actual balance, temporary measureswere very appealing to countries with higher deficits, given that they made itpossible to comply with the benchmark value without the need to enforce perma-nent measures. In the revised SGP, this type of incentives is mitigated, as partof the focus on sustainability is obtained by excluding temporary measures whenassessing compliance with the medium-term objective or convergence towards it.In conceptual terms, temporary measures can be easily characterised. Their iden-tification and the quantification of their effects, in the context of fiscal policy as-sessment, however, have significant limitations and warrant particular caution. Inthis regard, several aspects should be highlighted. Firstly, these measures shouldnot be mistaken for other short-term measures or effects, which also do not havea lasting impact on rates of change of revenue or expenditure items, but perma-nently influence their level (e.g. the freeze of automatic wage progressions for oneor two years). Secondly, their assessment may require very detailed information,which is not publicly available, and/or depend crucially on the treatment of cer-tain operations in national accounts. Thirdly, these temporary measures should,in any case, be restricted to large transactions, in order to prevent the increasingcomplexity of fiscal developments assessment (0.1 per cent of GDP is frequentlyused as threshold). Finally, the calculation of structural adjustment should in-clude the impact of deficit-increasing discretionary decisions, so as not to createincentives to their presentation as temporary measures, with a subsequent loss oftransparency.Banco de Portugal has adopted the definition of temporary measures used in theEuropean System of Central Banks. This includes both deficit decreasing anddeficit increasing measures. But, to avoid contributing to political incentives forwindow dressing, a cautious approach is called for with respect to measures oreffects which give rise to a deterioration of the budget balance.

13

In this regard, in principle, effects related to court rulings and natural disastersare considered as temporary, while other selected deficit increasing measures maybe considered on a case-by-case basis, but only if they are outside the control ofthe government. Based on this definition, the table below presents the temporarymeasures, and their respective impacts on the budget balance, considered in theanalysis carried out in this paper. �� !"#$%&'" (& #%%')% )( *'$'"#+ *(,'"$-'$) #% ).' /(0$)'"1#") &(" ).' &0)0"'1#2-'$) (& 1'$%3($% 4567 #$8 9:;:<= >?@AB�� C#+' (& DE!C +3/'$/'% >?@AB��B ��FGH)"#("83$#"2 %'))+'-'$) (& )#H #""'#"% >?AIC#+' (& ).' "3*.)% )( 0%' ).' &3H'8 )'+'/(--0$3/#)3($% $')J("K >?LMC#+' (& ).' "3*.)% (& "'%)#0"3$* )(++% ($ ).' NOPQ -()("J#2 >?LRB�� B��FS'-#3$3$* '&&'/) (& ).' 'H)"#("83$#"2 %'))+'-'$) (& )#H #""'#"% >?RTC#+' (& )#H /"'83)% 4%'/0"3)3%#)3($= )( # $($U&3$#$/3#+ 3$%)3)0)3($ 4V:WXYZ = R?LM!"#$%&'" (& #%%')% )( *'$'"#+ *(,'"$-'$) #% ).' /(0$)'"1#") &(" ).' &0)0"'1#2-'$) (& 1'$%3($% 4N[[= >?\TB��] B��B!"#$%&'" (& #%%')% )( *'$'"#+ *(,'"$-'$) #% ).' /(0$)'"1#") &(" ).' &0)0"'1#2-'$) (& 1'$%3($% 4N^_ ` 6ab` a6a #$8 c6N9 = L?RLB��F d��]e8f0%)-'$) 3$ /($)"3g0)3($% )( ).' GD` &(++(J3$* ).' "',3%3($ (& $#)3($#+#//(0$)% U>?RTB�� Bh"#$)3$* (& ).' /($/'%%3($ &(" ).' 'H1+(3)#)3($ (& # 8#- 4aij<Yk: = >?RLB�� Bl"(/''8% &"(- ).' *"#$)3$* (& /($/'%%3($% 48#-% #$8 "(#8%= R?RLmnopqrs touvnpwx qyzqozyu{n|w}2 Revenue

As already highlighted, the increase of the structural revenue ratio to trendGDP was one of the driving forces of Portuguese public finances from 1986to 2008, reaching a peak of 43.5 per cent in 2007 (Figure 6). It predomi-nantly reflected the rise in the tax burden.5 In the last years, tax and socialcontributions receipts exceeded 85 per cent of overall revenue. The sustainedgrowth of the tax burden was possible after the reforms of direct taxation in

5Includes receipts from taxes on income and wealth, taxes on production and importsand social contributions.

14

1989 and indirect taxation in 1986 (see Boxes 4 and 5).6 Indeed, they laiddown the foundation of a modern tax system, broadening the tax base anddecreasing tax rates. As a consequence, tax-induced distortions in severalkey areas were reduced and the ability to raise revenue increased. Further,the system became potentially less vulnerable to tax evasion and fraud. Af-ter the reforms of direct and indirect taxation several other discretionarymeasures were adopted in order to fine tune the existing structure or executeactive tax policy.

Figure 6: Breakdown of the structural revenue

0

5

10

15

20

25

30

35

40

45

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

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DP

Total revenue

Tax and social contributions revenue

Other current revenue Capital revenue

Base year 1995 Base year 2000

Sources: INE and authors’ calculations.Note: All the values are cyclically adjusted and exclude the impact of temporarymeasures.

The increase of structural tax revenue from 1986 to 2008 was explainednot only by discretionary measures, but also by several structural trends.The most relevant are: the long-term trend of consumption patterns towardsa larger share of goods and services taxed at the standard rate of VAT; thestructural evolution of the economy, in particular in the distribution sector,which led to a growing weight of medium and large companies more prone tofulfil tax obligations; the fast expansion of the general government wage bill;

6The taxonomy of taxes in public accounts (direct or indirect) does not exactly matchthe national accounts categories (taxes on income and wealth and taxes on production andimports). For example, the taxes on real-estate and real-estate transactions are direct taxesin the public accounts, but in the national accounts are included in taxes on productionand imports.

15

the sharp growth of pension expenditure of the public employees’ subsystem,implying a parallel increase of the contributions required to finance it7; andthe improvement in the effectiveness of tax administration, in particular inthe more recent period. On the contrary, the decline in nominal interest rateshad a sizeable negative impact on the receipts of taxes on income. Overall,all main categories of the tax burden contributed to the rise of structural taxrevenue (Figure 7).

Figure 7: Breakdown of the structural tax burden

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As a

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DP

Taxes on production and imports

Social contributionsTaxes on households

incomeTaxes on firms

income


The national accounts data show that as short a time ago as 1995, thetax burden in Portugal was much lower than the average for the euro area(12) (Table 3).8 In 2008, it still appears as a relatively low tax country when

7Actual contributions of general government entities as employers include not onlythe amounts resulting from the application of the rates defined in law to gross wages,whose scope and value has been gradually increased, but also the State transfer necessaryto balance the system. As such, the growth of expenditure of former public employeespensions in the past few years has contributed somewhat artificially to the increase in thetax burden in Portugal.

8Comparisons of the tax burden between countries may be distorted by several legalor institutional features. In this regard three issues should be highlighted. Firstly, thegovernment may choose to pursue a certain goal through explicit expenditure, tax benefitsor a combination of both. The first option will show a higher tax burden, everything elseconstant. Secondly, several items of expenditure, such as social transfers or interest on

16

compared with the same group of countries although the gap has narrowedsubstantially, partly as a result of the rise in all major categories of taxesand social contributions in Portugal, as already mentioned. In terms of thecomposition of the tax burden, Portugal has a relatively high ratio of taxeson production and imports to GDP. The revenue from taxes on income andwealth and social contributions is, on its turn, lower than the average in thecontext of the euro area.

Table 3: Tax burden: comparison with euro area developments

As a percentage of GDP

Portugal Euroarea (12)

1995 2008 1995 2008Tax burden 31.9 37.5 40.4 40.5Taxes on income and wealth 8.4 9.9 11.1 12.3Taxes on production and imports 13.0 14.6 12.2 12.9Social contributions 10.5 13.0 17.0 15.3of which: actual social contributions

to the CGA subsystem 1.7 3.0 - -of which: imputed social contributions 0.8 1.0 1.4 1.1

Sources: European Commission (AMECO database) and authors’ calculations.

Since 1989, most receipts from taxes on income and wealth paid by house-holds are raised through personal income tax withholding schemes on labourincome, pensions and interest. The net reimbursements related with the finalsettlement of the tax on the previous year’s income are also an importantfactor behind yearly developments. Figure 8 shows the structural evolutionof this type of taxes from 1986 to 2008. The hike in its ratio to GDP inthe first years after the 1989 reforms and its relative stability afterwards arenoticeable. Four other points are worth mentioning. Firstly, final withhold-ing tax on interest income declined substantially, in particular from 1992 to1999. Secondly, the receipts from the taxation of public employees’ wagesrecorded a buoyant growth until 2002 paralleling the swift expansion of thegeneral government wage bill. Thirdly, discretionary tax measures had asignificantly positive impact on revenue in 1995-1996, but afterwards do notappear to have had a major effect on the ratio of the amounts collected to

public debt may or may not be subject to taxation. For instance, in Portugal, unemploy-ment benefits are exempt from income taxation, decreasing the tax burden recorded innational accounts relative to alternative arrangements. Finally, the treatment of socialcontributions in national accounts is not fully comparable between different countries, inparticular in matters related to the public employees’ pension system (see footnote 7).

17

trend GDP. Finally, the increased effectiveness of tax administration is themain factor underlying the slightly upward trend recorded in the last years.

Figure 8: Structural receipts of taxes on income and wealth paid by house-holds

1.0

2.0

3.0

4.0

5.0

6.0

7.0

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

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DP

Tax on interest income

Taxes on income and wealth paid by households

Tax on public employees' wage bill

Sources: INE, Ministry of Finance and authors’ calculations.

Box 4. Direct taxes in Portugal: 1986-2008The reform of direct taxation implemented in 1989, consisted, basically, in the re-placement of several taxes structured on the basis of the sources of income, whichdid not take into account the information on taxpayers’ personal characteristics,by taxes on income structured according to the nature of different groups of tax-payers: the personal income tax and the corporate income tax. A tax on thevalue of real-estate was also introduced. This reform followed the main trendsunderlying the changes in the design of direct taxation in the OECD countries inthe eighties: base broadening of the taxes on income, partly due to the elimina-tion or reduction of tax benefits; decrease of marginal rates, in particular the topones, and the number of tax brackets; reduction of the tax rate on firms’ profits;and partial integration of personal and corporate income taxes. The introductionof the new taxes led, in many cases, to an anticipation of receipts, due to theincrease in the number and importance of situations where withholding schemesor pre-payments are mandatory. Specifically concerning the personal income tax,three additional features are worth mentioning. Firstly, several types of incomeare subject to final withholding schemes, in spite of the predominantly unifiednature of the tax. Secondly, several incomes, previously exempted, such as pub-lic employees’ wages and interest on public debt started to be taxed, implying asimultaneous increase of some items of expenditure.

18

Finally, although an automatic scheme for the indexation of tax brackets, al-lowances and credits was not initially contemplated, it was implicit that an annualupdate close to expected inflation would take place, limiting the fiscal drag.a

Since its inception in 1989, the personal income tax has been subject to manychanges, almost every year, though keeping the main features of its architecture.Most of them concerned the definition of tax benefits, in particular those relatedwith the treatment of expenditure with some long-term saving instruments andhome purchases, and the choice between the enlargement of tax benefits and thereduction of the tax burden on labour income, given the constraint of having aminor impact on revenue growth. The marginal tax rate for the highest incomes,set down initially at 40 per cent, was kept unchanged until 2005, increasing in2006 to 42 per cent, with the creation of a new tax bracket. Beyond the level ofmarginal rates, the distortions in the labour market deriving from the personalincome tax also depend on the number of tax brackets and the amount of specificdeductions for employment income. The number of tax brackets, five at theoutset, was firstly reduced to four (1991), to increase afterwards to the presentseven (1999, 2001 and 2006), on the basis of equity concerns.Still having in mind the promotion of equity, the substitution of deductions tonet income related with tax benefits, for tax credits, in 1998, should be high-lighted. This change meant that any expenditure with a privileged treatmentin the context of the personal income tax allows the same reduction in the taxliability, independently of the level of income. Also designed to enhance equity,but mostly explained by the need to increase revenue, reference should be madeto the partial convergence of the taxation of pensions to taxation of employmentincome, in 2006-2007.The main changes to the corporate income tax implemented between 1990 and2008 stemmed from arguments of tax competition, the incorporation of rules ap-proved at the EC/EU level, the general goal of promoting investment and thefight against tax evasion and fraud, widespread in particular among small andmedium sized firms. Concerns over tax competition justified successive reductionsin the tax rate from 36.5 per cent in 1990, to 36 per cent in 1991, 32 per cent in2000, 30 per cent in 2002 and 25 per cent in 2004 and currently in force. Therules approved in the context of the EC/EU relative to corporate income tax fo-cus on aspects considered crucial for the proper functioning of the single market.Particular reference should be made to the transposition of the parent-subsidiarydirective into Portuguese legislation, in 1992, which aims at reducing the differ-ences between taxation rules for nationally organised groups of companies andtaxation rules for EU-wide groups.

aRefers to the process where tax brackets are either not adjusted for inflation or fail tokeep pace with earnings growth, causing in either case an automatic rise in tax revenues.

19

As already mentioned, the 1989 reform implied a decrease of tax benefits oncorporate income. In the following years, however, several new benefits wereintroduced with the aim of promoting investment and the restructuring and ex-pansion abroad of companies based in Portugal. The growth, over the last fewyears, of tax expenditure in the corporate income tax led to the introduction ofan overall limit on tax benefits in the Budget for 2005. Accordingly, the amountof corporate income tax to be paid cannot fall short of 60 per cent of what wouldhave been due if the tax benefits had not been used. For the purpose of curbingtax evasion and fraud in corporate income tax a special pre-payment was intro-duced in 1998, which is based on the preceding year’s turnover with minimum andmaximum values (1250 and 70000 euros, respectively, in the Budget for 2006).Having in mind the same objective, in the Budget for 2005, several items of thefirms’ costs became liable to autonomous taxation.

After the 1989 reform, most revenue from the taxation of firms’ incometook the form of prepayments and the final settlement of the tax on theprevious year income, in the context of the corporate income tax. The struc-tural evolution of taxes on income and wealth paid by firms is presented inFigure 9. Three points should be highlighted. Firstly, the sharp rise of thereceipts until 1997, partly explained by the evolution in profits of some ofthe main taxpayers and the growth of final withholding taxation. Secondly,successive rate reductions occurred whose impact on revenue has essentiallymaterialised with a one year time lag. Finally, the upward trend in receiptsover the last few years results predominantly from the stepping up of taxadministration.

As in the other Member-states of the EU, VAT is a major source of taxrevenue. In the case of Portugal, as Figure 10 shows, other taxes on spe-cific items of expenditure are also an important part of taxes on productionand imports receipts. Looking at the developments in the 1986-2008 period,the most noticeable feature is that the rising trend of this item of revenueis basically explained by VAT, as a consequence of changes of rates, severalstructural developments in the economy and the stepping up of the effec-tiveness of tax administration. Whenever it was necessary to increase taxrevenue, VAT was a key instrument. On the contrary, both the Tax on OilProducts and, to a lesser extent, the Tax on Vehicles Sales have since thelast years of the nineties evidenced declining trends. In the first case, it ispredominantly due to the increasing number of diesel cars, as the tax ondiesel is lower than the tax on petrol, and the move to more fuel-efficientvehicles. These long-term trends are enhanced in periods of high fuel prices,through behavioural changes. Regarding the Tax on Vehicles Sales, the ex-planation relies, to a major extent, on the gradual deceleration of car sales,

20

Figure 9: Structural receipts of taxes on income and wealth paid by firms

1.5

2.0

2.5

3.0

3.5

4.0

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

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DP Reduction of the tax rate from 36.5% to 36%

Tax rate: 34%

Tax rate: 32%

Tax rate: 30%

Tax rate: 25%


only partially offset by an upside quality effect.9 The relative reduction ofother taxes on production and imports until 1994 is basically explained bythe decrease in customs duties.

After the creation of a unified scheme in 1986, up to 2008 the contri-butions of the Social Security subsystem only recorded minor adjustments:regarding employment income, the employers’ rate was reduced from 24.5 to23.75 per cent in 1995, and self-employment contributions were increased inseveral steps. In the Caixa Geral de Aposentacoes (CGA) subsystem, therate of employers’ contributions was increased from 8 to 10 per cent of grosswages in 1994, and contributions of general government entities as employ-ers were gradually introduced and increased. Figure 11 shows the evolutionof the structural actual social contributions by subsystem in the period un-der analysis. The upward trend in the Social Security subsystem recordedsince the second half of the nineties may be explained by an increase inself-employment contributions and more effective collection procedures. Thesustained growth of overall CGA contributions basically mirrors the evolutionof pension expenditure in this subsystem (see footnote 7).

9The quality effect stems from the sale of vehicles belonging to different ranges concern-ing engine capacity and, more recently, pollution emissions subject, as such, to differentrates in the context of this tax.

21

Figure 10: Structural receipts of taxes on production and imports

0.01.02.03.04.05.06.07.08.09.0

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

perce

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DPVAT

Other taxes on production and imports

Tax on oil products

Tax on vehicles sales


Figure 11: Structural actual social contributions by subsystem

0.01.02.03.04.05.06.07.08.09.0

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

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Social Security subsystem

Caixa Geral de Aposentações subsystem

Sources: INE, Caixa Geral de Aposentacoes and authors’ calculations.

.

22

Box 5. Indirect taxes in Portugal: 1986-2008The reform of taxation on goods and services was essentially implemented in1986, involving the introduction of VAT, while other indirect taxes were abolishedor modified.This change was a consequence of Portugal’s participation in theEuropean Community. The VAT required by the Community directives is ageneral tax on consumption of goods and services, applied in all phases of theeconomic circuit, from production to retail. Its tax base is however, limited to thevalue added at each phase. Exports are not subject to VAT and are only taxedin the country of destination. Imports are taxed by their overall amount. Itsintroduction implied an increase in the tax burden, as a combined result of basebroadening and curtailing tax evasion and fraud. The decision of not adopting asingle rate was mostly related with equity concerns. In parallel, benefiting fromthe decline of international oil prices, the Tax on Oil Products was created in1986. Community membership also had a decisive influence on other areas ofindirect taxation, in particular the sharp reduction in import duties. In the casesof car sales and consumption of oil products and tobacco, VAT coexists withspecific taxes.VAT rates were changed several times since its introduction, in order to expandreceipts, implement decisions approved at the EC/EU level and enhance thecompetitiveness of some sectors. Initially, they were set at zero and 8 per cent(reduced rates), 16 per cent (standard rate) and 30 per cent (increased rate).In 1988, the standard rate of VAT increased from 16 to 17 per cent. Later, in 1992,fulfilling in advance the rules approved at the Community level on the harmoni-sation of indirect taxation, a substantial change in VAT rates was implemented.Thus, the zero rate was abolished and the goods and services that benefited fromthat rate were included in the list of goods and services taxed at a new reducedrate of 5 per cent. The former reduced rate of 8 per cent was eliminated and thegoods previously taxed at that rate were split between the new 5 per cent rateand the standard rate, which was reduced from 17 to 16 per cent. The abolitionof the zero rate implied an important base broadening, with a significant increasein receipts. This was further enhanced by the taxation at the standard rate ofmany goods and services that previously benefited from the reduced rate. Thedecrease of the standard rate had the opposite effect. The standard rate of VATreturned again to 17 per cent in 1995 and the additional revenue was allocatedto Social Security in order to offset the effect of the decrease of employer’s socialcontribution rate. In 1996, an intermediate rate of 12 per cent was introduced,benefiting restaurants services and some foodstuffs, previously taxed at the stan-dard rate. In 2002 and 2005, in the context of packages of measures aiming atthe reduction of the fiscal deficit, the standard rate of VAT was increased, firstly,to 19 per cent and then to 21 per cent. In July 2008, it was reduced to 20 percent.

23

As regards the VAT administration the main change occurred in 1993 as a conse-quence of the inception of the single market. Indeed, the abolition of tax bordersin intra-Community transactions made necessary an adaptation of VAT returns,for which the tax administration was not fully prepared. In this framework, be-yond the inevitable creation of a time lag in VAT collection as far as imports fromother Member-states are concerned, further opportunities for tax fraud emergedtemporarily, amplifying the impact of the 1993 recession. These opportunities oftax fraud were curtailed through changes to the tax returns and closer coopera-tion between national tax administrations.Beyond VAT, three areas of taxation on goods and services recorded majorchanges from 1986 to 2008. Firstly, the unit rates of the Tax on Oil Productswere set at fixed amounts simultaneously with the liberalisation of the prices ofpetrol and diesel at the end of 2003. This scheme replaced a system based onadministrative prices, where the unit amounts of the tax appeared as a residual.Secondly, the taxation on car sales was modified in 1988, with the creation of theCar Tax, which was levied in accordance with the engine size. In 2006, the CarTax also became dependent on carbon dioxide emissions. This policy guidelinewas gradually enhanced, in particular in the context of the 2007 reform of thetaxation on vehicles, in which the Tax on Motor Vehicles sales replaced the CarTax. On average, this reform also decreased the taxation on the acquisition ofnew cars, rising at the same time the annual tax on the use/ownership of the cars.Finally, at the end of 2003/beginning of 2004 a reform of taxation of real-estatewas implemented. The main innovation of the new Municipal Tax on Real-Estaterelied on the revaluation of the taxable value of property, which will approachmarket value, re-establishing some equity in the treatment of property built indifferent periods. At the same time the limits of the ranges for the rates set downby municipalities were reduced. The new Municipal Tax on Real-Estate transac-tions has lower rates, while the calculation of the taxable value was changed inorder to take into account the characteristics of properties and not stated values,which were in general much lower than the actual amounts of the transactions.

A useful approach to the analysis of tax developments consists of thebreakdown of the change in the structural tax burden into: the effect oflegislative changes, the decoupling of the macroeconomic bases from GDP,the impact of tax elasticities and a residual. Figure 12 summarizes the re-sults of this exercise for the period 2000-2008 using the ESCB methodologydescribed in Kremer, Braz, Brosens, Langenus, Momigliano and Spolander(2006). One of the more striking features is the magnitude of the residualsin almost all years from 2000 to 2008. Its explanation may to some extentbe associated with the drawbacks of the cyclical adjustment methodology,an inaccurate quantification of the effects of policy measures and the changein items that affect simultaneously general government revenue and expen-diture. Indeed, the positive residual in 2000 is mostly related with social

24

contributions, due to the increase of the State subsidy to the CGA subsys-tem also recorded on the expenditure side, while the negative residual in 2003is mainly concentrated on corporate income tax and might be explained bya poorer evolution of profits than the one of its macroeconomic base. Themajor factor behind the positive residuals in the period 2004-2007 is the en-hancement of the effectiveness of tax administration, based on a wider use ofinformation technology and stepped up human resources. It is worth notingthat the improvement in administrative procedures has a permanent nature,but that a part of the revenue windfalls recorded in this period also stemmedfrom the collection of overdue amounts, which will tend to vanish in time. In2008, the sign of the residual reversed but apparently not yet as a result ofthe decrease in the transitory part of effectiveness gains, once it is essentiallyassociated with the specific behaviour of several taxes on production and im-ports. Regarding procedures, five main areas are worth mentioning. Firstly,at the preventive level, an effort has been made to identify taxpayers whobelong to risk groups in terms of fraud and evasion in order to alert them totheir tax obligations. Secondly, at the corrective level, taxpayers who do notfill in their tax returns are notified. Thirdly, the cross-checking of databasesbecame a common practice. Fourthly, recourse to the administrative dero-gation of bank secrecy increased substantially. Lastly, an automatic systemfor the seizure of moveable and immoveable goods and financial assets wasimplemented.

3 Expenditure

As already mentioned, the evolution of public expenditure is crucial for un-derstanding Portuguese fiscal developments in the period under analysis. In-deed, structural expenditure as a ratio to trend GDP grew in more than halfof the years from 1986 to 2008. As a whole, the increase totalled 9.8 p.p. oftrend GDP (around 10.6 p.p. of trend GDP corrected for the impact of the1995 structural break in the data - see Box 1) (Figure 13). This outcome wasdriven by structural primary current expenditure, whose ratio to trend GDPwent up by 15.1 p.p. On the contrary, interest payments declined significantly(-4.8 p.p. of trend GDP), while investment decreased only slightly between1986 and 2008. Social payments and, to a minor extent, compensation ofemployees were the items of primary current expenditure that contributedthe most to this evolution (Figure 14).

Table 4 presents the comparison of public expenditure ratios to GDPbetween Portugal and the euro area (12) for the longest period available in

25

Figure 12: Breakdown of the change in the structural tax burden a)

-1.0

-0.5

0.0

0.5

1.0

1.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

p.p.

of tre

nd G

DP

Legislation changesDecoupling of the macro base from GDPImpact of tax elasticitiesResidualOverall change in the structural tax burden

Sources: INE and authors’ calculations.Note: a) For further details on the methodology used to calculate these contributions, seeKremer et al. (2006) and Braz (2006).

terms of data, which is the 1995-2008 period.10 As shown, the strong growthof total expenditure in Portugal contrasts with a decline in this variable asa percentage of GDP at the euro area level. In spite of this evolution, publicexpenditure in the economy was still slightly below the euro area (12) av-

10International comparisons between levels and developments in public expenditure mayprove useful but should be made with caution. Three points should be highlighted inthis respect. Firstly, the comparisons with other countries are often influenced by thedelimitation of the general government sector. Indeed, it is important to know for eachcountry the degree of outsourcing in the supply of several goods and services usuallyprovided publicly, in particular in the areas of health and education. The differences inthe general government perimeter may only have an effect on the composition of publicexpenditure, for example in the case of health services financed publicly but provided byentities classified outside the general government sector, or, alternatively, may also have animpact on the time pattern of government expenditure (and, as such, on its level in eachperiod), as it is the case of public-private partnerships. Secondly, differences in the taxsystem concerning the taxation of social benefits and the existence of tax allowances andtax credits instead of explicit expenditure might have a non-negligible impact on the levelof overall public expenditure as measured in national accounts. Finally, other country-specific factors, such as the recording of expenditure related with the public employees’pension system in Portugal, might also distort international comparisons relating to publicexpenditure.

26

Figure 13: Breakdown of structural expenditure

05

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Total expenditurePrimary current

expenditure

Interest expenditure Capital expenditure


erage in 2008, but this is not the case for current expenditure. Concerningsocial payments in cash, the relatively low value of this item in Portugal in1995, and the strong rise thereafter, suggests that the degree of maturationof the social security system was then lower than in other euro area countries(or that the Portuguese system became relatively more generous, which wasnot the case). On the contrary, the relatively high ratio of compensationof employees vis-a-vis the euro area average was explained, in addition tothe high average relative wage of public employees, by the fact that mosthealth and education services were provided by entities classified inside thegeneral government sector in Portugal. Indeed, according to the functionalclassification of expenditure, in 1995, education and health represented 55.6per cent of compensation of public employees in Portugal, to be comparedwith 45.4 per cent in the euro area. As mentioned in Box 1, the gradualtransformation of public hospitals into corporations affects the analysis ofpublic finance developments, in particular as regards expenditure composi-tion, as it results in an increase in social payments in kind and a declinein compensation of employees and intermediate consumption in the generalgovernment accounts. Correcting for this effect, compensation of employeesas a ratio to GDP would have increased by around 1.3 p.p. of GDP in the pe-riod from 1995 to 2008 (the offsetting effect is on other current expenditure).

27

Figure 14: Breakdown of structural primary current expenditure

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Compensation of employees

Social payments

Other primary current expenditure

Intermediate consumption


In addition, it should be noted that this expenditure item is influenced bythe fact that, in Portugal, only part of actual social contributions of generalgovernment entities as employers is calculated as a fixed rate on wages, asit also includes the amount required to ensure the financial balance of thepublic employees’ pension system. As in the last few years expenditure onpensions of former public employees has been increasing substantially, thefigures for compensation of employees are affected by this recording scheme.Lastly, it should be mentioned that developments between 1995 and 2008 ininterest expenditure in Portugal and the euro area (12) were broadly similar.

The evolution of social payments stemmed, mostly, from the behaviourof pension expenditure. Indeed, from the 11.1 p.p. of trend GDP increasein structural social payments in the period from 1986 to 2008, 6.7 p.p. arerelated to pensions (Figure 15). The remaining increase in social paymentsresults predominantly from social payments in kind (3.5 p.p. of trend GDP)and is explained by both a strong growth in spending on medicines co-payments and contracts with private health-care providers, as well as the al-ready mentioned transformation of public hospitals into corporations (whichoccurred at the end of 2002, mid-2004, end-2005 and during the course of2007 and 2008, and implied an increase in this item by approximately 2.0p.p. of trend GDP).

28

Table 4: Expenditure: comparison with euro area developments

As a percentage of GDP

Portugal Euroarea (12)

1995 2008 1995 2008Total expenditure 43.4 45.9 50.6 46.7Current expenditure 38.1 43.2 46.3 43.0Social payments (except in kind) 11.2 15.6 16.9 16.1Compensation of employees 12.9 12.9 10.9 10.1Interest 5.8 3.0 5.4 3.0Other current expenditure 8.3 11.8 13.1 13.8

Capital expenditure 5.3 2.7 4.3 3.8Investment 3.8 2.1 2.6 2.5Other capital expenditure 1.5 0.6 1.7 1.3

Source: European Commission (AMECO database).

As in Portugal there are two main public social security subsystems, com-prising private sector workers (Social Security subsystem) and public employ-ees (CGA subsystem), they are analysed separately. The strong increase inexpenditure on old-age, disability and survivors’ pensions of the Social Se-curity subsystem between 1986 and 2008 (reaching 3.6 p.p. of trend GDP)can be explained by three factors: (i) the annual updates of pensions; (ii)the increase in the number of pensioners; (iii) the additional change in theaverage pension, reflecting, essentially the impact of a composition effect anddiscretionary measures. Concerning the former, the pensions of this subsys-tem were updated above expected inflation in most years under consideration(Figure 16). Among the three factors underlying pension growth in the So-cial Security subsystem, this has definitely been the least important over thelast few years. The strong rise in the number of pensioners, particularlyrelevant in the case of old-age pensions, stemmed mainly from the ageing ofpopulation and contributed by 2.0 p.p. to the annual average growth rate ofold-age pension expenditure, which stood at 13.2 per cent (Figure 17). It isworth mentioning that between 1994 and 1999 the slowdown in the growthrate of the number of pensioners was explained by the gradual increase inthe retirement age for women from 62 to 65 years old, six months per year.Finally, the hike in the average pension, excluding the annual update, wasalso very significant from 1986 to 2008: 4.0 p.p. of the annual growth rateof old-age pensions, on average. This effect was a consequence of the higherwages the new retirees received during their contributory careers, but it isalso due to the fact that, on average, they contributed more years to thesystem. In addition, in 1990, it incorporates the effect of the introduction of

29

Figure 15: Breakdown of the change in structural social payments

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

p.p. o

f tren

d GDP

PensionsSocial payments in kindUnemployment benefitsOther social payments in cashChange in social payments


the 14th month in the payment of pensions.Pension expenditure in the public employees’ subsystem increased by 3.1

p.p. of trend GDP in the period from 1986 to 2008. Figure 18 illustrates thebreakdown of the rate of change of this item according to the same explana-tory factors as in the case of the Social Security subsystem. Concerning theupdate of former public employees’ pensions, it is worth referring to the factthat in general they were annually adjusted in line with the update of thewage scale, which has followed inflation quite closely. Pensions were, how-ever, nearly frozen in 2003 and 2004. As far as the number of pensioners isconcerned, a strong growth can be observed in all years of the period from1986 to 2008 (around 4.6 per cent on average in this period). It is worthmentioning that the substantial increase in the number of pensioners in 2003is mainly the result of an extraordinary rise in requests for retirement be-fore the entry into force of new rules from January 1 2004 onwards, whichinvolved a new definition of the initial pension - formerly the average grosswage of the last three months, afterwards the average wage of public employ-ees net of social contributions of the last three months - and the introductionof penalties for those who retire before reaching the age of 60: - 4.5 per centfor each year below the age of 60. Further, there was an additional effect in2003 and 2004, related with the inclusion of pensions of former employeesof several public corporations in general government expenditure, followingthe transfer of pension funds to the public employees’ subsystem. Again, in

30

Figure 16: Update of pensions of the SS subsystem and inflation (observedand budgeted)

0

5

10

15

20

25

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Per c

ent

Update of pensions (SS subsystem)

Inflation

Inflation considered in the Budget a)

Sources: Authors’ calculations.Note: a) Measured by the private consumption deflator.

2006-2007 and to a lesser extent in 2008, a significant rise in the retirementrequests delayed the deceleration of pension expenditure in the context ofthe reform of the Retirement Statute introduced at the beginning of 2006.The magnitude of the increase in the average pension (not explained by theannual update), which usually follows quite closely the change in the numberof pensioners, has also been very significant in almost all years of the 1986-2008 period due, essentially, to higher wages just before retirement. Thelatter was particularly significant in the years after the approval of the NewPublic Employees Pay System. Occasionally, several discretionary measurescontributed considerably to the growth of pension expenditure in the pub-lic employees’ subsystem, as the compensation for taxation in the contextof the personal income tax, the adjustment of pensions initiated before theNew Public Employees Pay System and the introduction of the 14th monthin the payment of pensions.

In the absence of the recent reforms of Social Security and CGA pen-sion subsystems, public expenditure on pensions would have continued togrow much above nominal GDP, offsetting any consolidation effort carriedout by fiscal authorities. In the first case, population ageing and matura-tion of the system were the main explanatory factors. In the CGA case, theunsustainable evolution of expenditure would have stemmed from the gen-

31

Figure 17: Breakdown of the growth rate of old-age pension expenditure ofthe SS subsystem

-505

101520253035

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Perce

ntage

poin

ts UpdateNumber of pensionersResidual

Sources: Social Security statistics and authors’ calculations.Note: a) Measured by the private consumption deflator.

erosity in the calculation of the initial pension and eligibility conditions, inconjunction with the age structure of general government employees. It isalso worth referring that the fact that CGA paid higher pensions for similarcontributory careers raised equity concerns (see Box 6).

32

Figure 18: Breakdown of the growth rate of pension expenditure of the CGAsubsystem

-10-505

10152025303540

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Perce

ntage

poin

tsUpdateNumber of retireesResidual

Sources: Caixa Geral de Aposentacoes and authors’ calculations.Note: a) Measured by the private consumption deflator.

Box 6. The reforms of public pension systemsIn 2005, in a context of severe public finances imbalances, it was already con-sensual that structural reforms in key areas were essential to curb the upwardtrend of expenditure and ensure fiscal sustainability.a As such, during 2006, thediscussions with the social partners on a reform of the Social Security subsystemstarted, resulting in a new Social Security Framework Law published at the be-ginning of 2007.b This aimed at implementing a package of measures to face thepopulation ageing challenge. The main changes introduced by this reform werethe following:

• New rule for the annual update of pensions based on inflation, real GDPgrowth and the amount of the pension (see table below).

• Increase in the financial penalty for early old-age retirement from 4.5 to6 per cent per each year relative to the statutory age of retirement (onlypossible for contributors with at least 30 years of contributory career and55 years old).

aIndeed, in 2000 and 2002, two revisions of the Social Security Framework Law wereapproved (Law no. 17/2000 of 8 August and Law no. 32/2002 of 20 December). Theseones, however, led to a worsening of the system’s sustainability in spite of introducing thecalculation of the initial pension based on the wages of all the years of the contributorycareer, as accrual rates were higher on average.

bLaw no. 4/2007 of 16 January and Decree-Law no. 187/2007 of 10 May, for specificregulations.

33

• Introduction, from 2008 onwards, of a ’sustainability factor’ which willreduce new pensions in accordance with the increase in life expectancy at65 years old. If beneficiaries intend to counteract the financial penalty ofthe sustainability factor, they may opt to postpone the retirement age orcontribute, on a voluntary basis, to a new supplementary public system ofindividual accounts.

• The transition to the new formula for the calculation of the initial pensionbased on the wages of all the years of contributory career, introduced in2002c, will be faster.

• Reinforcement of the incentives for the postponement of the retirementbeyond the statutory age.

Similarly to the private sector subsystem, the expenditure on pensions of theCGA subsystem would follow a structural growth trend over the next years,in the absence of a reform, which would be mitigated in about 25 years time,when the new retirees would have their pensions calculated according to theSocial Security subsystem rules, which are less favourable.d Thus, by mid-2005,it was decided to anticipate the convergence to the private sector rules. The newlegislation came into force at the beginning of 2006 and essentially included agradual increase (by six months in each year) of the retirement age from 60 to 65years old and of the contributory career for a full pension from 36 to 40 years.e Inaddition, with the reform of the Retirement Statute, the system became a closedone as the new public employees hired from January 2006 onwards have startedto contribute to the Social Security subsystem. At mid-2007, additional changesin the public employees’ pension system were implemented, in order to ensurefull compatibility with the new Social Security Framework Law (for more detailson the impact of the recent reform of the Portuguese public employees’ pensionsystem see Campos and Pereira (2008)).f

cDecree-Law no. 35/2002 of 19 February.dFor subscribers joining the CGA subsystem after September 1993, the rules for the

calculation of their initial pension would be those of the private sector subsystem. Thismeans that, in general terms, their contributory careers would have to be 40 years insteadof 36 years to have access to a full pension and the replacement rate would also be lower.

eLaw no. 60/2005 of December 29.fLaw no. 52/2007 of August 31.

34

GDP < 2% 2% ≤ GDP < 3% GDP ≥ 3%

Pension < 1.5 IAS CPI CPI+20% GDP (min. CPI+0.5 p.p.) CPI+20% GDP

1.5 IAS ≤ Pension < 6 IAS CPI-0.5 p.p. CPI CPI+12.5% GDP

6 IAS ≤ Pension ≤ 12 IAS CPI-0.75 p.p. CPI-0.25 p.p. CPI~�� ¡ ¢ £ ¤¡�¡¢ ¥¦ §�� ¨©©ª« �� ¬�� ¨©© ®��¯ ®��®�® ¬�°� �� ¯ ��®�� ¯�� ±�¬ ��¦²³´µ¶¨©©¥¦The new rule for pension indexation

In the European context, this reform of the public pension systems justified anupdate of the official projections of pension expenditure, which were approved atthe Economic Policy Committee in October 2007. Accordingly, pension expendi-ture in Portugal was foreseen to increase by 5.5 p.p. of GDP from 2004 to 2050,instead of the 9.7 p.p. rise previously projected, allowing the reclassification ofPortugal from the high risk group of countries in terms of sustainability to themedium risk group of countries. More recently, the Economic Policy Commit-tee and the European Commission made public updated projections for pensionexpenditure in the European Union Member-states for the period from 2007 to2060. The increase in pension expenditure as a ratio to GDP is expected to reachonly 2.1 p.p. for this period in Portugal, below the euro area and EuropeanUnion averages. The downward revision vis-a-vis the previous update is mainlydue to different projection assumptions, in particular those concerning migrationflows. In any case, this reform, if implemented consistently in conjunction withthe attainment of a sound fiscal position, will significantly decrease the risk ofunsustainability of public finances in Portugal.

Concerning compensation of employees, an increase in its ratio to trendGDP can be observed in most years until 2005. As already mentioned, part ofthis evolution stems from the current procedure of recording as actual socialcontributions of general government the amounts transferred by the State inorder to ensure the financial balance of the public employees’ pension sys-tem. Figure 19 presents the breakdown of compensation of employees intothree components: the wage bill, actual employer social contributions andimputed social contributions. The part of the evolution of compensation ofemployees in the last decade to be explained by actual social contributions ismore than half of the overall change observed in this item (2.3 out of 3.7 p.p.of trend GDP) and results, to a large extent, from the rise in expenditure onthe pensions of former public employees, which has already been analysed inmore detail. Imputed social contributions, which mainly encompass generalgovernment expenditure with health care subsystems benefiting public em-

35

ployees, were reasonably stable as a ratio to trend GDP in the period underanalysis.

Figure 19: Breakdown of compensation of employees

024681012

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

perce

ntag

e of t

rend G

DP

Wage billWage bill (corrected for the effect of new corporate hospitals)Actual employers' social contributionsImputed social contributions


Regarding the wage bill, corrected for the effect of new corporate hospitalsclassified outside the general government sector, there was a 2.3 p.p. of trendGDP increase in the period under analysis. This rise was quite significantin the 1986-1992 and 1996-2002 periods. Figure 20 shows the breakdown ofthe growth rate of the wage bill into three explanatory factors: the update ofthe wage scale, the number of public employees and a residual. This residualessentially incorporates the wage ’drift’, which corresponds to the increasein wages due to normal promotions and progressions in careers and the riseof the average wage resulting from the renewal of the population of publicemployees, and the effect of extraordinary revisions of careers. The relativerise in the wage bill does not stem from annual updates of the public employ-ees’ wage scale above inflation, as those were broadly in line with expectedinflation as assumed in the budgets, in reasonable anticipation of the disin-flation process (Figure 21). In addition, it is worth mentioning that in both2003 and 2004 there was a quasi-freezing of the update of the public sectorwage scale in the context of the measures undertaken to control the growth ofpublic expenditure. Regarding the number of general government employees,the period from 1986 to 2002 witnessed a strong rise, in particular until 1991

36

and after 1997. In 2003, correcting for the impact of the transformation ofseveral hospitals into public corporations, the number of public employeesremained more or less constant and showed a slower growth in 2004-2005. Inthe 2006-2008 period it declined, mostly as a result of the control of hiring,in particular the implementation of the rule of only one employee hired foreach two that leave service from mid-2005 until 2008. The residual effectwas also very significant in almost every year from 1986 until 2002. Part ofthis evolution stemmed from an automatic scheme of promotions and pro-gressions in careers, essentially based on tenure, which was basically frozenfrom mid-2002 onwards. In 2008, new rules for promotions were already inforce but the amounts involved were still not representative of the new steadystate. In addition, the residual also incorporates the impact of discretionarymeasures such as making public employees’ incomes liable to taxation in1988-1989 (simultaneously increasing gross wages), the introduction of theNew Public Employees Pay System in 1989-1993, and extraordinary revi-sions to several specific careers namely between 1997 and 2002. The NewPublic Employees Pay System was designed with two main objectives: thepublic employees pay system needed to regain internal fairness and publicsector salaries needed to become more competitive in relation to those paidby other sectors for the same job or the same qualifications. Its implementa-tion, however, resulted in a substantial across the board increase in wages ofpublic administration careers, distorting to a certain extent the initial pur-poses of the reform. These developments contributed to a significant wagepremium associated with working in the public sector vis-a-vis the privatesector, which, according to estimates produced by Campos and Pereira (2009)has been increasing. These authors also conclude that this wage premium isparticularly high in several occupations, in particular those related with theprovision of education and health care services, where general government isthe main employer.

The dynamics of pension expenditure and compensation of employees inthe period from 1986 to 2008 analysed above, although different in theirnature, involved in most years a substantial rise in the average pension ofthe public systems and, to a lesser extent, in the average public wage, bothdefined in real terms: on average, 4.7 per cent per year in the former caseand 3.2 per cent in the latter (Figure 22).

The other items of primary expenditure as a ratio to trend GDP showdiverse patterns in the 1986-2008 period (Figure 12). Indeed, while interme-diate consumption increased by 1.4 p.p. of trend GDP (slightly more whencorrected for the impact of new corporate hospitals net of the effect of the1995 structural break in data), investment and other primary expenditure(encompassing subsidies, other current expenditure and other capital expen-

37

Figure 20: Breakdown of the rate of change of public employees wage bill(corrected for the effect of new corporate hospitals)

-5051015202530

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Perce

ntage

poin

tsResidualUpdate of the wage scaleNumber of public employees

Sources: Caixa Geral de Aposentacoes and authors’ calculations.

diture) declined by 0.7 and 0.9 p.p. of trend GDP, respectively. Regardingintermediate consumption, it is worth highlighting that the rise observed inthis item over the entire period is, nevertheless, considerable given that onaverage intermediate consumption represented only 10 per cent of primaryexpenditure. In the case of investment a rising trend is noticeable up to 1997,though not very pronounced. This one can be partly explained by accessionto the European Community and the use of structural funds. The decline ob-served thereafter can, to some extent, be justified by the use of public-privatepartnerships, in particular as far as the construction and exploitation of toll-free motorways is concerned. Lastly, it should be noted that the reduction inother primary expenditure stemmed almost entirely from the developmentsconcerning subsidies.

As already mentioned, interest expenditure as a ratio to trend GDPshowed a clear declining trend in almost every year of the period underanalysis, with the exception of 1990-1991, 2000 and 2006-2008. These devel-opments followed quite closely those of the implicit interest rate on publicdebt, as illustrated in Figure 23. The disinflation process contributed sig-nificantly to the reduction of the public debt interest rates, in particularat the beginning of the nineties, since public debt was then predominantlycomposed of short-term instruments, such as Treasury bills, and by floating-rate instruments such as saving certificates and most bond issues and loans

38

Figure 21: Update of the public employees wage scale and inflation (observedand budgeted)

02468

1012141618

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Per c

ent

Update of public employees wage scale

Inflation a)

Inflation considered in the Budget a)

Source: Authors’ calculations.Note: a) Measured by the private consumption deflator.

provided by the domestic banks. From 1992-1993 onwards, the nominal con-vergence required to ensure the participation of Portugal, from the outset, inthe euro area became the key objective of economic policy. Until 1993 therewere still increases in the “real” implicit interest rate of public debt mainlyexplained by three factors. Firstly, the gradual substitution of tax exemptpublic debt by public debt subject to income tax from 1989 onwards. Sec-ondly, the substitution of public debt at below market interest rates held bythe central bank and financial institutions, on a compulsory basis, by publicdebt with market interest rates. In this respect, reference should be made toan important operation, amounting to more than 12 per cent of GDP, gearedto absorbing the excess banking liquidity deposited with Banco de Portugal,which took place at the end of 1990. Finally, the tightening of monetaryand exchange rate policies. As nominal convergence progressed, the level ofinterest rates, as well as their differentials with other countries, recorded asharp reduction, mainly as a result of the decline in the currency risk pre-mium. Overall, the implicit interest rate on public debt reached a minimumof 4.3 per cent in 2005, in comparison to 15.0 per cent at the beginning ofthe period.

39

Figure 22: Growth rates of real average pension and public employees’ wage

-4-202468

101214

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Per c

ent

Real public employees average wage

Real average pension

Source: Authors’ calculations.

4 Public debt

In the framework of the Maastricht Treaty and the Stability and GrowthPact, the relevant concept of public debt is total gross debt at nominal valueoutstanding at the end of the year and consolidated between and within thesub-sectors of general government. Figure 24 presents the evolution of thisvariable in Portugal for the period between 1986 and 2008. In 1986, thedebt ratio was very close to 60 per cent and at the end of the period underanalysis was above that threshold, reaching 66.4 per cent.11 According to thedata now available, in the year relevant for the participation in the euro area,public debt as a ratio to GDP was clearly below the 60 per cent referencevalue (56.1 per cent in 1997). The debt ratio ended up by not playing animportant role in the initial stage of the fiscal surveillance mechanism at theEuropean level. The revised Stability and Growth Pact, however, increasedthe importance of this variable, in particular by making it relevant to thedefinition of each Member-state’s medium-term fiscal objective.

The impact of the increased integration of financial markets was crucialin this period, not only reducing, in particular, the currency risk premium,which, as already mentioned, benefited the implicit interest rate on publicdebt, but also creating the conditions for a growing role of non-residents in

11Since data is only available from 1990 onwards, a retropolation was made based onthe work by Sousa (1998).

40

Figure 23: Implicit interest rate on public debt

-4-2024681012141618

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Per c

ent

Implicit interest rate on public debtInflation a)"Real" implicit interest rate on public debt

Sources: INE and authors’ calculations.Note: a) Measured by the private consumption deflator.

general government financing. Indeed, the share of Portuguese governmentdebt held by non-residents rose from around 7 per cent at the beginning ofthe nineties, to around 78 per cent in 2008. In fact, with the elimination ofthe exchange rate risk as a consequence of the participation in the euro area,government debt securities of euro area countries became virtually perfectsubstitutes and until the end of 2007 there was no significant market dis-crimination on the basis of sovereign risk. This situation changed in 2008 ina context of high uncertainty stemming from the international economic andfinancial crisis.

The evolution of the debt ratio can be broken down into three factors:the contribution of the primary balance, interest expenditure net of the effectof economic growth (“snowball effect”) and deficit debt-adjustments. Overthe period as a whole, the 7.0 p.p. rise in the debt ratio results from a debtincreasing contribution of deficit-debt adjustments of 10.4 p.p. and the effectof interest expenditure net of economic growth, which reached 3.3 p.p. incumulative terms. These effects were partially offset by the debt decreasingimpact of the primary balance that amounted to 6.7 p.p. (Figure 25). Inthe period after the outset of the euro area, up to 2008, the debt ratio rose

41

Figure 24: Evolution of the public debt ratio

45

50

55

60

65

70

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

As a

perce

ntag

e of G

DP


by 14.3 p.p. as a result of primary deficits (5.9 p.p.), “snowball effect” (4.1p.p.) and deficit-debt adjustments (4.3 p.p.).

The favourable impact of the primary surpluses was clearly concentratedin the years from 1988 to 1992, while 2005 was the most unfavourable yeardue to a significant primary deficit. In this respect it is worth highlightingthat, in the absence of temporary measures, the primary deficits in the yearsfrom 2002 to 2004 and 2008 would have had a more important contributionto the debt ratio increase.

Concerning the “snowball effect”, the impact of strong nominal economicgrowth surpassed the high level of interest expenditure up to the economicdownturn in 1991. This situation was reversed afterwards, until 1996, in spiteof the declining trend in interest payments. After 1998, with interest outlaysbroadly stabilised, the contribution of this item to the evolution of the debtratio was not very important and was broadly in line with the economic cycle.

Lastly, regarding deficit-debt adjustments, two points are worth high-lighting. Firstly, the important amount of deficit-debt adjustments at thebeginning of the period, in particular between 1987 and 1989, may partlyarise from data inconsistencies (see footnote 11). Secondly, in 1992 and be-tween 1996 and 1998, privatisation receipts contributed significantly to thereduction of the debt ratio. In the remaining years, several factors were be-

42

Figure 25: Breakdown of the change in the debt ratio

-8

-6

-4

-2

0

2

4

6

8

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

p.p.

of GD

P

Primary balance contributionContribution of interest expenditure net of economic growth effectDeficit-debt adjustmentsChange in the debt ratio


hind the quite erratic evolution of deficit-debt adjustments. These includedchanges in general government deposits, equity injections not reclassified ascapital transfers, debt settlements by the Treasury, the difference betweenaccrual and cash recording of taxes and social contributions, EU transfersand several expenditure items, inter alia.

5 Concluding remarks

One of the key features of public finances in Portugal since accession to theEuropean Community has been the creation of a modern tax system, verysimilar to those of most advanced economies. During this period, fiscal de-velopments were also characterised by a sustained growth of current primaryexpenditure, essentially related with the dynamics of public pension systemsand the expansion of compensation of employees, partly related to the pro-vision of education and health services. Overall, consolidation efforts wereminimalist, hampering the achievement of a sound fiscal position. At itsbest, the structural deficit hovered around 3 per cent of GDP.

From 1993 up to the end of the nineties, the decrease in interest pay-ments stemming from nominal convergence and the prospect of participation

43

in the euro allowed an expansionary stance of fiscal policy in most years.The unsustainability of this approach became evident in 2001, when interestexpenditure ceased to decline and economic activity decelerated, leading toan excessive deficit. The policy package adopted then, though correctingthe excessive deficit, basically failed as it relied too little on structural mea-sures on the expenditure side and too much on VAT increase and short-termmeasures, in particular temporary measures.

In 2005, in the absence of sizeable temporary measures, Portugal onceagain incurred an excessive deficit. The programme approved to correct itpresented some similarities but also major differences vis-a-vis the 2002-2004policy. On the one hand, it relied heavily in a first stage on tax increasesand short-term measures on the expenditure side. On the other hand, in ad-dition to the distinct stance on temporary measures, the programme placedstronger emphasis on major reforms on the expenditure side, in particularregarding public pension systems and public administration. Further, its im-plementation benefited from the ongoing stepping up of tax administration.In the short-term, it was a success as it allowed the closure of the excessivedeficit procedure in 2007, one year ahead of the deadline initially set down,and changed to some extent the views on the sustainability of Portuguesepublic finances. The structural deficit was, however, still significantly abovethe MTO, set at that time at 0.5 per cent of GDP.

Since 2008, fiscal developments in the euro area Member-states have beenaffected by the economic crisis, particularly in the last months of the year. InPortugal, the recent budgetary evolution has not differed substantially fromthat observed in this group of countries. A critical assessment of medium-term fiscal prospects in Portugal is, however, not clear cut. Four aspectsare crucial in this respect. Firstly, the quantification of the impact of mea-sures taken in 2006 and 2007 that have a permanent effect on the revenueand expenditure levels, but only a transitory impact on the rates of change(as, for example, the freezing of automatic progressions in careers, the limi-tation of early retirements, changes to unemployment benefit rules and thereduction in medicines co-payments). Secondly, an evaluation of the addi-tional effect that can be expected from the reforms launched over the lastyears taking into account the likelihood of their consistent implementation.Thirdly, the confirmation of the reversible nature of the fiscal stimulus mea-sures approved and put into practice since mid-2008. Fourthly, the strictnessof the constraints resulting from the Stability and Growth Pact and marketreactions. The 2008 and 2009 developments, much influenced by the inter-national crisis, point to a high level of uncertainty and leave many scenariosopen. In this context, the definition of a medium term fiscal consolidationprogramme is crucial.

44

.

Annex 1.a)·¸¹ ¹ ¸º»¼ º ½¾¿À º¼ Á ÂÃÄ Á Â ÃÅ Á Â Ã Ã Á Â Ã Â Á Â ÂÆ Á Â Â Á Á Â ÂÇ Á Â ÂÈ Á Â ÂÉ Á Â ÂÊ Á Â ÂÄ Á Â ÂÅ Á Â Â Ã Á Â Â Â Ç Æ Æ Æ Ç Æ Æ Á Ç Æ Æ Ç Ç Æ Æ È Ç Æ Æ É Ç Æ Æ Ê Ç Æ Æ Ä Ç Æ Æ Å Ç Æ Æ ÃË Ì Ë ÍÎÏ ÐÑ ÐÒÓ Ð Ã Å Ä Æ Á Æ Æ Å É Á Ç Å Å Â Á Ê É É Æ Á Ã Æ Ç Æ Ç Á Â Á Ã ÇÅ Ç Ã È ÇÅ É Å Ç Ç Ã Ä Ã Æ È Ç Ä Ä Ã È Ê ÂÆ Á È Ã Ã È É É Á ÂÊ Ã ÉÄ Á Â Ç É Â Ç Æ Ç Ê Á Ã É É ÊÄ Æ È Ç Ê Ã ÂÄ É Ä Ç ÁÄ É Ä Á ÂÃÄ Ä Ê Ã ÁÅ Å Æ ÈÅ Ç Å Á ÃÅ ÈÔÕÖ Ö ×Ø ÙÖ ×Ú ×Ø Õ × Ã ÊÅ È Â Ã É È Á Ç È ÂÆ Á É Ã ÇÅ ÁÅ Ç Ã É Ç Æ ÃÅ Å Ç Ê Â ÇÅ ÇÄ Á Ã È ÇÅ È Â Ç È Á ÁÄ È È É Á Ç Æ ÈÄ Ä Ä Æ É Æ ÈÄ Â É É ÇÅ Á ÉÅ Ê É Ê É ÂÄ Ä Ê Ê È Ä ÂÈ Ê Ê Ç Æ É Ê Å Æ É Æ Ê Â Ã È Ã Ä É Æ É Ã Ä Ã Â Á Æ Å Æ È Ç ÈÛÜÝÞ ßà ßáâ ß ãä ãä å äæ æ æ ç ãè ä æ è åä ä æé èé ê æ åëé ë è è æé ã è è ë å è è äé ìé è ãæ êæ è ê ãäé ë è è èæ ëé é ë ã ë å êé è ä è æ å å ä ä ë ë ì ä ã ì ì ê ä êë ä è é ç è å ê é ë ìé é é ã ç è ã ìæ æé ã ì è ë ëéÛÜÝ ßíî á ï á ðî ñ ß Ü á òó ßÜ ôõ ö æ é ì ç æ ìä ä è ë êä ë è å ç ë å ê è ä êé è ì è ì ê é ê ãä ìë çë ãæ ì ê åæ êä å êë ì ê ä ë ì æ ç ì ì è æ è çæ ì æ è æ ë ç æ èé ãä æ æ êé ä æ è ë æ ì æ èé ãä æ ë ãæ ê æé ê çé æ ìé è äÛÜÝ ßíî á öî â í ß öî ô ò í æ ç ìë æ çë ë æ é ê å è è äæ èé è ç ë è ä è ä ë ë ì ä ë êæ äé ã ì ä êë ä é ä å ç é ì è ì é ê ç è ì ä ç ì ãæ ìæ ã ì çé ã ã ìæ ã ê ìé ã å êë å è ã ã å åæ ì ê ìäæ æ ç ç ç åÛÜÝ ßíî á ÷ ïÞ ñ í ä ê ã ìæ æ ã ê ì æ çä ç æ ë ãè æ ãæ ç æ êë ë æ é åä æ ãè å è è ëé è ãæ ä ë ë æ ç ëé ë ä ä èé ì ä åé é äé èé ä åæ ë ë ê å ê ä ä è ë ä è ê ã ä ê çä ì è ìä ìé æ ìÛÜÝ ßíî áø Þ î òâ ð õ ïî á Ü á ò ï ñø îÞ õ í ë ä åé ë ê è ç ä ê è ì é é å ì ìé é ã ãé åä ê ç ìé ê ç çä æ çæ ãæ æ æ çä ë æ è ç åæ æ è åæé æ äé ç ê æé ê ì è æ ì ä ê ç æ ã ä ì ê æ ê è è ë è ç ä ì ì è ç ä ç ç è è ë åä è ë êä ã è äé ëé è ä è ìéù úû üýþ üÿ�Ü ôâ ß Ü ò ò ß ò õ ÜÝ � �� Û � æ è åë æ é å ê è ç èé è ë ìé è ì êä ë æ æ å ä ç è ê ë å ãæ ä ì å ì é é ç ã ì è èæ ì ìé æ ãé ä è åë ëé ê è è å êé åë æ çé ê ã æ æ ì åæ æ æ ë ä ã æ è ã å å æ ëé ç ã æ ä ç ì ê æ ä æ ãëÛÜÝ î á î ï ôø Þ î òâ ð õ í á� Ü å è ì êæ ã æ çé ã æ è ä ã æ é ä ë æ å ç å æ åä ä æ ê êæ è èæ ä è ë æé è ë ç è èé ã å èé ì ã è çæ æ è äé ì è ê è è ë æ çé ë æ èé ë æ ë ä ë æ å ã ë ë è å ë æ êæÛÜÝ î á à ß ö ï ð ô ßí í Ü ô ßí �� æ æ ä æé æ è ãä è ì ã ë ç è ë ë ä é ç ç ä ê ì ì çä ì ã ì ã êæ åëé æ ç è å æ è ë ã æ è ë ë æ æ êë æ æé ç ê åé æ æ èæ æ æ ãë æ æ ì ì æ æ êé êé ê�î ð ï Ü ô ðî á õÞ ï â õ ïî á í è ä è ê è åä ã ë ä çä ë ê ã å ä åæ ç é åæ ã ì å è ë ã ä çä å ç êæ å ê ã ê ê ä ã ç æ ç ä ã ç æ æ é ê è æ è ë è å æ ë ì å è æ ä ãë å æé å ãè æ ì ê è è æ ãé ãë æ å ì ê ã æ êë ì ç è ç ãæ ã èæ é ä ì� ð õâ Ü ô è è è å èé ã ç ë ç åæ ëé ê ã ä ë ìä é èé æ ì ç ê è ìé ä ì ã è ã ç å è ãæ å å è ì ê åæ è æ ç ì ã ì æ æ é ë æ æ è ìë ì æ ë ì ç ê æ ä ìæ ë æé ë ä ç æ ì ç è ê æ ì êé ä æ ã ãæ è æ ê ç ã ã æ ê åé ë�î ð ï Ü ô í ß ðâÞ ï õ íâ í í õ ß ñ æ å ê ã èæ ê ã è ìë ê ë çä å ë ì å ì ä ä è ã ä åä ã é æ ì è é ì çæ é ê ì ã ì è è ë ì ê ãè ãé ì ç åæ ê è å êëé ê ãä å æ ç è å ã æ ç ì ç ì æ ç ìé é æ æ è ê ç æ æ å ç ã æ èé å è æ ë æ å ã�� íâ í í õ ß ñ ë ë æ ë ãë ä ä è é é ç ì ã å å è ä æ è äé æ ë åä æ ì ì ê è ë çä è ì çë è åä ç ë æ æ ì ë ë ë ê ë ã çæ ë å ìæ ä ë è ì ä ãë ä é ë ãä é ì ìë é ê çé ì ä êé ì ì ì ì� ñø â õ ß ò è çæ è ã ã ë è ä ë åæ ä ä ì é ì ì ãë æ åé ê å èæ ã ç å ìäé ìé ê êæ ì ã ê ã æ çä ã æ æ è ê æ èé ê æ é å è æ é ä ä æ ãä ë æ ìä å æ ìä ç æ ì êë�Ü ô ßí ä ìæ é å è ì å å åä ç êæ å ê êæ æ æ êä æ è å ç æ ä ç ç æ åäé è çé ä è è ã ì èé ç ç è å ê ê ë æ ê ê ë æé é ë è êë ë è çé ë ë ã ê ëé ì ê ë ã ãë ä æ ë å ä æ ì è� õ ö ßÞ ðâÞ Þ ßá õÞ ßà ßáâ ß ìë ê åé ç ê ã ã æ æ ä ë æ æ ç ã æ é ë ä èé ãé èé èæ æ ä è ã èæ è ì è ë èæ èæ ìë è ë ë ë è ä è ç è æé ã è æ ãë è ãë è è ìé ã ë ë ãæ è ìæ ä ë è ä å ë ìæé ë å èéÔ� � � Ù� �Ö ×Ú ×Ø Õ × Á ÃÅ Ç È Á È Ã Â Ä Á È Å ÈÅ ÁÆ É Á Á È ÊÄ Á Ç Ã Â Á Ç Ã Ã Á Ê Æ Ê ÁÅ Ã Á Ç ÁÅ É ÁÊ Ã Â Á Â Ç Á ÁÄ ÊÅ Ç Á Ã Æ Ç È È Ã ÈÅ Ä Æ Ê Á Ç É Ç ÁÉ Ã ÁÅ Ä Â Á ÉÄ Ç Á Ê É ÂÛÜÝ ßíî á ðÜø ï õ Ü ô ìé ì å ì è ë ä ãä æ çæ é ä é ç é ç é ã ì ç ãæ åä êä æ çë êæ æ çé æ çé è ã ì ê è ë æ ç æ æÛÞ Ü á í ÷ ßÞ í ÷Þ î ñ õ ö ß �� å ç æ ë ã è ã ê é é é ìä ä ê è ä æ è å ì æ èæ ç æ èæ è æ è ãë æ ìæ è æ ìäæ æ ä è ä æ ìë ë æ ë ê ì æ å è ê æ êä å æ êë æ æ é åä æ å ã ç æ ìä ã æ ë å å æ ë ä ã� õ ö ßÞ ðÜø ï õ Ü ô õÞ Ü á í ÷ ßÞ í äæ è ì ä ã è ë æ ê æ ã æ ì è ê è ì æ ãé æ æ ç ä ìæ å ç æ êä æé å èé ê è å ì æ ãè ä ëé æ ë è ç ê æ ç ç ìä æ ê èË Ì Ë ÍÎ Ð� � ÐÒ �� ËÓ Ï Ð Á Æ Ã È È Á Ç È Æ Æ Á É Á Ê Ã ÁÄ Å Ä É Ç Á È Ã É ÇÄ È É Â È Æ É Á Ç È È Æ Ê Ê È É ÉÄ Ê ÈÄ ÂÊ Â È Â ÂÊ Â É Ç ÇÄ Ê É Ê Ê Å Â É Â È Ê È Ê Ç Å Å Æ ÊÅ ÈÄ È Ê Â ÃÅ Å Ä Ç ÂÊ Ã Ä Ä Â ÂÊ Å Á ÆÄ Â Å Á ÂÆ Â Å É Ê ÂÆ Å Ä Ç Á ÈÔÕÖ Ö ×Ø Ù ×� � ×Ø � � ÙÕ Ö × Â ÊÄ Ä Á Æ Â ÂÊ Á Ç Ê Á É Á É Ä Ä Ã Á Ã Å Å Ê Ç È Ç È É ÇÄ Ê Æ É Ç Ã Â Ã É È Æ Ä Â Á È Ç ÉÅ Æ È É Ê Å Å È Ê ÂÅ Æ È Â Ç Æ É É Ç Å ÃÅ ÉÄ Å Ä Ä Ê Æ É È Ç Ê É Æ ÂÃ ÊÅ Æ É Â Ä Æ É ÂÉ Ä É Ä Å È Ä Ä Ä Á Á Ä Ã ÂÆ Æ Å ÁÅ É Ç�î ñø ßá í Ü õ ïî á î ÷ ß ñø ôî ß ß í è ì å ç ë æ ãé ë êë ã ä êë è ì çæ è ãé çé ê ç å ã ê ãé ê æ çæ åä æ ç ê åä æ æ å è ê æ è åä è æ ä ë æ æ æé ì ç ç æ ãë è ê æ åé æ ì æ ê ê ç ã æ êé ì å è çë ä è èæ é äæ èæ æ ãä èæ çé ê èæ ë ã ã�á õ ßÞ ñ ß ò ï Ü õ ß ðî á íâ ñø õ ïî á å ìë êë ê æ ç ì ã æ ë ä ì æ ì ç å è è ç ê è ç çä è è ã ç èé ã ê ë ä ä ã ë ãä è ë êä ã ä æ èæ ä ì ã ê é è êé é ì ç ì é ã ç ê é èé æ é ãè å ìë æ ì ìë ê è ì ãé é ã è ìé�á õ ßÞ ßí õ ßÝ ø ßá ò ï õâÞ ß èæ å è è ë çé è ä ëé è ìé ã ä ë ìé é æ ë æ é ìæ æ é ë ì ç ä êä ê ä êë æ äé çé ë å ç å ë ä ä ã ë ä ä ì ë ã ì ã ë åé ë ë åä ê ë ãä ç ë å ç ã ë å å ã ä è ì ã äé ê è ä åæ ã�âÞ Þ ßá õ õÞ Ü á í ÷ ßÞ í ë åä è äé ã ã é ç ãé é ãë ë ì ã ê ç åë ê ç ê å çæ æ æ é êä æ è ê ã ê æ ë æ ç å æ äé çæ æé ë ãë æ ãë è ì æ ê ç ì è è çë ã ì è è äé ã è ä ìë ë è å ä ê ç ë ç ìæ ì ë è ê è ê ë ä ã ã å ë ì ä êä ë å è åëõî öî â í ß öî ô ò í è ì è ä ë æ ãè ë ãä å ä ë ë è é ë ç å ìé ä ì ãé êæ å ã å ì æ çé çë æ ç åë ç æ æ ãä ã æ èé è å æ ë åé ç æ ä êäé æ ìé ç ç æ å ç çæ æ ê ã ãè è ëé ç å èé ä ë å è ãé æ ì è êæ åæ ë æ ë ë ä ë ë çä çï á ðÜ í ö è ë åæ è å åä ë ë ì ã ë å ì ì ä ãë ä é åä ê ì ãäæ ã ã ìä ê ä ãæ ê ä êä æ ç èæ ã æ ç å ì è æ è çæ ì æ è åé é æ ä è ã å æé é æ ã æ ã çä ë æ êæ æ ç è ç ìæ ã è è èé ç è ë ä ë ë è ä ãæ ë èé ê ì êï á � ï á ò è ä ë è å å ë åæ ä ì ã é ãä ì ê å åé ç æ ç è è æ çë è æ ë ë ì æ é è ê æ ì ì ì æ åë ä è ç ê ç è è è è è ä åé è ãè ê ä ë ê å ä å èæ é è ìé é ãä å ì ì èæ ã ç ãæõî ÷ ïÞ ñ í � íâ í ï ò ï ßí � å êæ å è ì å å ê êæ æ å ã å êé ã æ è ãè æ ì ì è æ è å å æ ç ê ì æ è ãé æ æé ç æ ä êé è ç è ã æ é æ ê æ ã åæ è ç ê è èé ç ì è æ ã ç è ë ë ê è è ë æ æ ê çæ æ êë æî õ ö ßÞ õÞ Ü á í ÷ ßÞ í ë è å é ã å ä ë ê ä ê ç ì çä å å ã êë å æ æ ä ã æ æ å å æ æ å è æ ä å ç æ ì êé æ ê åæ è ç êæ è ëé ã è ì ãä è ã ì ê è ä ãé ë ç ç å ë ç ãé ë ë ì ì ë è ì ç ë ë æ ëÔ� � � Ù� � ×� � ×Ø � � ÙÕ Ö × Á ÇÄ Ä Á È Æ Ê ÁÄ É Ê Ç Æ ÂÅ Ç Ä Æ Â È Á ÁÊ È ÂÆ Ã É Æ Å Ç È Å Å É É É Ã Â Ê È Ã Ç Ä Ç ÂÄ Ä ÈÅ Ê Ä Ê Ä Å Ä Æ Æ Ê Ä Â È Á Ê Å Ã Æ Ê ÂÆ Â Ä Ê Æ Á Ä È ÂÄ Ê Ç Â Ã Ê Ä ÂÆ É ÉÅ Á�á à ßí õ ñ ßá õ åë æ æ ç è ë æ ë ç å æ ä äé æ ì êé è çä è èé é ë è ã êë è ã ì ì ë è è ë ë ã êä ä ä ë ç ä ë çë ä ì è å äé å ì ä ê ê è ä ã êë ä ë ç ê äé ë è ä ë å ç ë ã ç ç ë ã ì ã ëé é ç� õ ö ßÞ ðÜø ï õ Ü ô ßÝ ø ßá ò ï õâÞ ß ä ëé è å è ë ë ã ìé æ êæ ä æ ç ãè æ ëé é æ è ã ê æ ç ç å æ è ì ì æ é å ã æ å ì ì è ç ãè æ êë ê æ äæ ê æ êë å ê å ì æ ì ç ç æ ê ì ê è çæ ì æ é ê å æ ê è ë ê è èÌ Ñ ÐÏ ÍÎ Î � ÍÎ ÍÒ Ô Ð � Ç ÆÅ È � Ç Ç ÇÄ � Á È Ã Æ � Á È Ç Ê � È ÈÄ É �É É È Æ � È Á Ç Â �Ê Ê Ã È �Ê Å Ã Ê � É Ç Â Á � É Æ Ê Ã � È É È Á � È Ä Ç Á � È ÁÄ Ç � È Ê Ä Â �Ê Ê Á Ã � È Ã É Ê � È Â ÂÉ �É Ã È Á � Â Æ Ã È �Ä Æ Â Ç �É Ç Á Ã �É È É Á� à ßÞ Ü ô ô Ü ôÜ á ð ß ßÝ ð ô� õ ß ñø � ñ ßÜ íâÞ ß í è ç ãë è è è ì æ ë å ç æ ë èé ë ë ìä ä ä ë ç ë æ è ê é é åë é ã åé ä è êæ ä çé å ë å çä ë ì èæ ë æ ì è ë ê ì å é é æ å é ì ì ã ã èé æ ã å åë å å åæ ì ç ê è ä äæ ë ìæ êé!"# ù ý$ "# %ÿ&Þ ï ñÜÞ ðâÞ Þ ßá õ ßÝ ø ßá ò ï õâÞ ß ãë åé å ì ê ç æ ç ç ã ê æ è çæ æ æ ä äæ ç æ åæ çë è ç å êë è ë ì è ë èé ãä è è ãé ë ê ë ç ç ãë ë èæ ì è ëé ãé ã ë êë äæ ä è ê ê ê ä ìé ã ê é ç è ä å é ë ë ç å é ì ì å ã ì ç ã å ì ì è ë ä ä ìä ë ç ê ì ì ê èé&Þ ï ñÜÞ Ü ôÜ á ð ß æ ç ê ã ê æ çé é æ ë ë è æ ç çæ ã çæ è ä åæ è è ë åë ì ìä ç ä ä ã ë ã ã æ ãä è åä æ ê å æ ì ìé ä èé ë æ ç è ä 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45

.

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òó òôõ ò öô ò÷ øù ÷ úû úü ÷ ý ü þ û ÿ� � � û ü ÿ öô ö ú ò û

46

.

Annex 1.c)�� !" " #$ %" #& #$ ! # � � � � � � � � � � � � � � � � � � �� '() * +, +- . + / / / / / / / / / / / / / / / / 0 0 12 0 3 2 1 / / / / /'() +4 5- 6 - 7 58 + ( - 9: +( ;< = / / / / / / / / / / / / / / / / >?@ >@ 0 / / / / /'() +4 5- = 5 .4 + = 5 ; 9 4 / / / / / / / / / / / / / / / / A / > A 0@ / / / / /'() +4 5- B 6 *8 4 / / / / / / / / / / / / / / / / @ AC @ A 1 / / / / /'() +4 5- D * 5 9 . 7 < 6 5- ( - 9 6 8 D 5 * < 4 / / / / / / / / / / / / / / / / ? 3 A 3 >? / / / / /E FG HIJ HKL( ; . + ( 9 9 + 9 < () M L N ' O / / / / / / / / / / / / / / / / A@ ? C 3@ / / / / /'() 5- 5 6 ; D * 5 9 . 7 < 4 / / / / / / / / / / / / / / / / / / / / / / /'() 5- , + = 6 7 ; +4 4 ( ; +4 PQ R / / / / / / / / / / / / / / / / / / / / / / /S 5 7 6 ( ; 7 5- < * 6 T . < 6 5- 4 / / / / / / / / / / / / / / / / 0@ 3 ? 2 ? / / / / /N 7 < .( ; / / / / / / / / / / / / / / / / 0@ 3 ? 2 ? / / / / /S 5 7 6 ( ; 4 + 7 . * 6 <U 4 . T 4U 4 < + 8 / / / / / / / / / / / / / / / / 0@ 3 ? 2 ? / / / / /VW X 4 . T 4U 4 < + 8 / / / / / / / / / / / / / / / / / / / / / / /Y8 D . < + 9 / / / / / / / / / / / / / / / / / / / / / / /S( ; +4 / / / / / / / / / / / / / / / / / / / / / / /Z < = + * 7 . * * +- < * +, +- . + / / / / / / / / / / / / / / / / / / / / / / / [ \ ] %[ ^" #& #$ ! # � � � � � � � � � � � �� '() +4 5- 7( D 6 < ( ; / / / / / / / / / / / / / / / / / / / / / / /' *( - 4 B + *4 B * 58 < = + _` / / / / / / / / / / / / / / / / / / / / / / /Z < = + * 7( D 6 < ( ; < *( - 4 B + *4 / / / / / / / / / / / ? 1? / / / / / 0 ? / / ? / 2 A / / / /� � � �� ab � �c d � � �� e � � � � e� � � � � � � � � e �� e � � � !" " #$ % #f \ #$ g ] %! " # � � � � � � � � � � � � � � � � � � � � � � � � �h 58 D +- 4 ( < 6 5- 5 B + 8 D ; 5U + + 4 / / / / / / / / / / / / / / / / / / / / / / /Y- < + *8 + 9 6 ( < + 7 5- 4 .8 D < 6 5- / / / / / / / / / / / / / / / / / / / / / / /Y- < + * +4 < +) D +- 9 6 < . * + / / / / / / / / / / / / / / / / / / / / / / /h . * * +- < < *( - 4 B + *4 / / / / / / / / / / / / / / / / / / / A / A / / /< 5 = 5 .4 + = 5 ; 9 4 / / / / / / / / / / / / / / / / / / / / / / /6 - 7( 4 = / / / / / / / / / / / / / / / / / / / / / / /6 - i 6 - 9 / / / / / / / / / / / / / / / / / / / / / / /< 5 B 6 *8 4 M 4 . T 4 6 9 6 +4 O / / / / / / / / / / / / / / / / / / / / / / /5 < = + * < *( - 4 B + *4 / / / / / / / / / / / / / / / / / / / A / A / / / [ \ ] %[ ^ #f \ #$ g ] %! " # � � � � � � � � � � � � � � e � � � � e� � � � � � � e �� e � � �Y- , +4 < 8 +- < / / / / / / / / / / / / / / / / / / / / / / /Z < = + * 7( D 6 < ( ; +) D +- 9 6 < . * + / / / / / / / / / / / / / / j? 3 3 / j > 2 ? / / / / j 0 3 2 j 0 C 2@� �� k �� e � � � � �� l� � �m n o� p q� � � r ms � m� � s p� � ��tuv wx yz {z | wv {} ~z v }

47

References

Bouthevillain, C., Cour-Thimann, P., Dool, G. D., Cos, P. D., Langenus, G.,Mohr, M., Momigliano, S. and Tujula, M. (2001), Cyclically adjustedbudget balances: an alternative approach, Working Paper series 77,ECB.

Braz, C. (2006), ‘The calculation of cyclically adjusted balances at Banco dePortugal: an update’, Banco de Portugal Economic Bulletin 12(4).

Campos, M. M. and Pereira, M. C. (2009), ‘Wages and incentives in thePortuguese public sector’, Banco de Portugal Economic Bulletin 15(2).

Cunha, J. and Braz, C. (2003), ‘Disinflation and fiscal policy in Portugal:1990-2002’, Banco de Portugal Economic Bulletin 9(4).

Cunha, J. and Braz, C. (2006a), ‘Public expenditure and fiscal consolidationin Portugal’, OECD Journal on Budgeting 6(4).

Cunha, J. and Braz, C. (2006b), The reforms of the Portuguese taxsystem:1986-2006, mimeo.

Cunha, J. and Neves, P. (1995), ‘Fiscal policy in Portugal: 1986-1994’, Bancode Portugal Economic Bulletin 1(1).

Kremer, J., Braz, C., Brosens, T., Langenus, G., Momigliano, S. and Spolan-der, M. (2006), A disaggregated framework for the analysis of structuraldevelopments in public finances, Working Paper series 579, ECB.

Neves, P. and Sarmento, L. (2001), ‘The use of cyclically adjusted balancesat Banco de Portugal’, Banco de Portugal Economic Bulletin 7(3).

Sousa, M. (1998), Dıvida do sector publico administrativo, Documentos deTrabalho 8, Direccao Geral de Estudos e Previsao do Ministerio dasFinancas.

48

OCCASIONAL PAPERS

2007

1/07 FINANCIAL SECTOR ASSESSMENT PROGRAMME PORTUGAL:

BANKING SYSTEM STRESS-TESTING EXERCISE

— Economics and Research Department

2/07 MISS: UM MODELO PARA AVALIAÇÃO DA SUSTENTABILIDADE DA SEGURANÇA SOCIAL PÚBLICA

PORTUGUESA

— Maximiano Pinheiro, Vanda Geraldes da Cunha

MISS: A MODEL FOR ASSESSING THE SUSTAINABILITY OF PUBLIC SOCIAL SECURITY IN PORTUGAL

— Maximiano Pinheiro, Vanda Geraldes da Cunha

2008

1/08 HOUSEHOLD WEALTH IN PORTUGAL: REVISED SÉRIES

— Fátima Cardoso, Luísa Farinha, Rita Lameira

2009

1/09 THE MAIN TRENDS IN PUBLIC FINANCE DEVELOPMENTS IN PORTUGAL: 1986-2008

— Jorge Correia da Cunha, Cláudia Braz

Banco de Portugal | Occasional Papers i

the main trends in public finance developments in portugal ... · the main trends in public finance...

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