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The Portuguese Public Finance Council releases its report “Public Finances: Position and Constraints 2016-2020 – Update” which includes projections on the state of Portuguese economy and public finances until 2020. This document updates last report issued in March and takes into account the information released meanwhile.
The scenario for the five-year period is based on a no-policy change assumption, that is, only takes into account the effects of policy measures already legislated and implemented for the period concerned and sets the constraints which the fiscal strategy must face in the absence of new measures. These projection exercises are presented by the CFP before the main budgetary instruments are released: the Stability Programme, in April, and the State Budget 2016, in October.
Developments in the Portuguese economy in 2016 have confirmed – and in some cases enhanced – the risks highlighted by the Portuguese Public Finance Council (CFP) in its reports on the State Budget for 2016 (SB/2016) and the 2016-2020 Stability Programme (SP/2016), as well as its March report on Public Finance: Position and Constraints (Situação e Condicionantes das Finanças Públicas) which this document brings up-to-date.
The main risks highlighted at the time concerned the assumptions made as to changes in external demand and prices, as well as the impact stimulating private consumption would have on investment and economic growth. In fact the projections included here, which have been revised to take into account developments that have taken place in the meantime in both the world economy and in Portugal, suggest a GDP growth of 1% in 2016, significantly below the 1.8% forecast in SP/2016. In nominal terms the decrease is even sharper: 2.5% under the current projection compared to 3.9%.
These figures would appear to confirm the weakness of external demand and a rise in prices smaller than forecast, while at the same time private consumption is expected to see clearly lower growth than was predictable given the increase in disposable income. The lack of confidence in a sustained recovery in economic growth affected investment, and the current projection is for a slight fall (-0.3%) in Gross Fixed Capital Formation (GFCF) compared to the SP/2016 projection of 4.9%.
The CFP has repeatedly drawn attention to the need for a clear political commitment to a medium-term economic and fiscal programme, that is well substantiated, detailed and transparent in regard both to the proposed measures and to monitoring and reporting. Fiscal consolidation and the increasing of confidence among economic agents as to the borrowing capacity of the economy and the stability of tax policy are closely connected areas and are the essential basis for a programme of this nature, capable of establishing the conditions for sustained growth in such a financially fragile economy. The persistent use of public expenditure and abundant borrowing to drive growth not only failed to ensure that growth but also eroded the fiscal and financial space to pursue such path. The absence of measures capable of putting an end to the budgetary incrementalism has led to across the board spending cuts and subsequent reversals and to tax instability, moves which breed insecurity and are incapable of building confidence.
The no-policy change scenario presented in this Report stresses the need for reform, at both the macro and micro level. Pursuing current policies will, at best, maintain budgetary deficits close to 3% of GDP, without a safety margin large enough to ensure that outcome whenever an adverse event arises. The public debt ratio will remain practically stable in the coming years, while economic growth will stand at 1% to 1.5%, compared to growth in external demand of around 4% and a strongly expansionist monetary policy. The possibility of the macro-fiscal aggregates performing more favourably than projected in this report is contingent on the institutional and political stance taken at the national level and on that depends the restoring of the confidence level required to ensure the economic growth desired.
Date of last update: 15/09/2016
