Portugal

   

Economic Policies

#28
Key Findings
Showing significant gains as it emerges from austerity, Portugal falls into the lower-middle ranks (rank 28) with respect to economic policies. Its score on this measure has improved by 1.8 points relative to its 2014 level.

The Costa government continued its strategy of gradually reversing past austerity measures without undermining budgetary policy or fiscal consolidation. Growth levels have remained moderately positive, while showing some decline from previous years’ levels. Structural constraints continue to contribute to a deceleration of potential output.

The overall unemployment rates appears to have stabilized at near 6.5%. High levels of emigration continue to be a factor. Youth unemployment rates remain worryingly high. The minimum monthly wage has been steadily increased.

Income and consumption taxes remain high as a means of furthering budget consolidation. Budget deficits have been quite small, allowing the country to regain international credibility. Overall debt levels remain very high, but have begun to decline as a share of GDP. The country’s tech-startup scene is gaining international attention.

Economy

#27

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
In a country marked by considerable policy discontinuities across governments, the stability of the first Costa government, which governed until the October 2019 elections, helped foster and maintain a reasonably reliable economic environment.

The government maintained its strategy of gradually reversing previous austerity measures without generating adverse impacts on budgetary policy or the country’s overall fiscal consolidation. It has also sought to facilitate investment through the SIMPLEX+ program, which aims to simplify bureaucratic processes.

The economy grew during the period under review. Following three years of economic downturn (2011 – 2013), 2018 marked the fifth consecutive year of economic growth – a pattern that has almost certainly been maintained in 2019.

Eurostat has provided a provisional annual growth rate of 2.4% for 2018, which is less than the 3.5% for 2017, but remains above the EU-28 and euro area averages – the second consecutive year in which the Portuguese economy grew faster than its counterparts. The estimated quarterly growth rate for the first two quarters of 2019 has also remained above the EU and euro area averages.

At the same time, there are some notes of caution. First, the estimate for 2019 points to a slight slowing down of economic growth, with the October 2019 forecast of the Portuguese central bank predicting a 2% growth rate in the current year.

Second, and most importantly, the Portuguese economy still faces a number of structural constraints that remained largely unaddressed by government during this period. A recent Bank of Portugal study on potential output (i.e., the highest total GDP that an economy could sustainably produce) found that Portugal’s potential output has been decelerating since the 2000s and diverging from the euro area since 2003. The study concludes that “The results reinforce the case for structural reforms if policymakers desire to resume a sustainable economic convergence.”

Finally, public and commercial debt is high, which should be addressed by the government.

Citations:
Banco de Portugal (2019), “Boletim Económico – Outubro 2019,” available online at: https://www.bportugal.pt/sites/default/files/anexos/pdf-boletim/be_out2019_p.pdf

Duarte, Cláudia; Maria, José R.; & Sazedj, Sharmin (2019), “Potential output in Portugal and in the euro area: Where do we stand?,” in Bank of Portugal – Economics and Research Department (ed.), Portuguese economic growth: A view on structural features, blockages and reforms, available online at: https://www.bportugal.pt/sites/default/files/anexos/pdf-boletim/cep_en.pdf

Eurostat, “Gross domestic product, volumes: Percentage change q/q-4 (NSA)” available online at: https://ec.europa.eu/eurostat/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=teina011&language=en

Eurostat, “Real GDP growth rate – volume: Percentage change on previous year” available online at: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00115&plugin=1

Labor Markets

#25

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Following a downward trajectory in the unemployment rate over the past five years – falling from a peak of 17.9% in January 2013 to 6.6% in October 2018 – unemployment has stabilized. Between October 2018 and September 2019, the unemployment rate has fluctuated between a minimum of 6.4% and a high of 6.7%. The rate in September 2019, the most recent month for which there is data, was 6.6% – identical to the rate in September 2018.

This remains the lowest level since September 2002 and means the unemployment rate is firmly back in single-digit territory – the norm for Portugal’s low wage, low unemployment economy – after more than eight years (February 2009 – April 2017) of double-digit rates.

However, the low level of unemployment is not entirely due to labor-market policies. The available evidence suggests that two factors have contributed. The first is the return to real economic growth after a period of contraction between 2011 and 2013. The second is the continued effect of very high levels of emigration. The most recent data for 2018 indicates that some 81,754 people emigrated (on either a permanent or temporary basis) in 2018. This is a level that is marginally higher than that of 2017 (81,051) and marks the first time since 2014 that emigration has not decreased. Emigration thus remains high and seemingly stable, at least in 2018. This is all the more relevant if we consider that the absolute number of unemployed people declined by a quantity that closely mirrors emigration: some 97,000 in 2018.

As in the previous SGI period, youth unemployment remains a blot on the record of the labor market. Like overall unemployment, youth unemployment has remained fairly stable over the period under review, albeit at a much higher level, standing at 19.4% in the most recent data for September 2019, only marginally below the level for September 2018 (19.6%). Not only is this higher than the euro area average, but the difference between Portugal’s rate and the euro area average increased from 2.9 percentage points in September 2018 to 3.5 percentage points in September 2019.

The monthly minimum wage was increased to €600 in 2019. This marks the fifth consecutive year in which the minimum wage was increased, after a four-year plateau at €485 during the bailout period (2011 – 2014). This increase had the support of business associations, but not of labor unions, who wanted a higher increase.

The government of Portugal passed and published a new labor code in July 2019. The legislation was approved with the support of the center-right PSD and of business associations, with the Socialists’ left-wing allies in parliament voting against this legislation. The new law, which came into effect in October 2019, doubles the experimental period for first-time job-seekers and the long-term unemployed to 180 days, and also establishes tighter limits on companies renewing temporary worker contracts.

Citations:
Eurostat, “Harmonised unemployment rates (%) – monthly data,” available online at: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teilm020&plugin=1

Eurostat, “Unemployment rate by sex and age – monthly average,” available online at: https://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do

Isabel Patrício (2018), “Novo Código do Trabalho entra em vigor hoje com sombra do Tribunal Constitucional. Isto é o que muda na lei,” Eco, available online at: https://eco.sapo.pt/2019/10/01/novo-codigo-do-trabalho-entra-em-vigor-hoje-com-sombra-do-
Lei n.º 93/2019, available online: https://data.dre.pt/eli/lei/93/2019/09/04/p/dre
Pordata, “Emigrantes: total e por tipo – Portugal,” available online at: https://www.pordata.pt/Portugal/Emigrantes+total+e+por+tipo-21

Pordata, “Salário mínimo nacional,” available online at: https://www.pordata.pt/Portugal/Salário+m%C3%ADnimo+nacional-74

Raquel Martins (2018), “Novidades no Código do Trabalho chegam hoje às empresas,” available online at: https://www.publico.pt/2019/10/01/economia/noticia/novidades-codigo-trabalho-chegam-hoje-empresas-1888339

https://www.jornaldenegocios.pt/…/emprego/…/as-principais-alteracoes-do-ps-a-lei-lab..

Taxes

#31

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
The levels of taxation on income and consumption noted in recent SGI reports remained very high during the period under review.

Overall, the tax burden increased to 35.4% of GDP in 2018, a one percentage point increase vis-à-vis the previous year and the highest level since the National Statistics Office (Instituto Nacional de Estatística) began compiling data in 1995. However, it remains below the EU-28 average, albeit above the OECD average. The penultimate citation below summarizes the OECD information.

This historically high level is a result of two factors.

First, while the Costa government has stated its intention to end austerity, it has largely retained the income tax brackets approved in 2013, which generated a massive tax increase (and which boosted the tax burden from 31.8% of GDP in 2012, below the OECD average, to 34.1% of GDP in 2013, above the OECD average). Prior to this change in income tax, the tax burden had only once surpassed 32% (32.3% in 2011). Since 2013, it has never fallen below 34% of GDP.

Second, the Costa government has also sought to maintain budgetary consolidation despite increasing expenditure. To that end, it has resorted to indirect taxation, either maintaining existing high levels on some indirect taxes (e.g., VAT) or increasing the rate on other indirect taxes (e.g., on fuel and cars, particularly in 2016 but also in 2017 and 2018).

Overall, tax policy has failed to achieve horizontal and vertical equity during the period under review.

Fiscal receipts continue to rely excessively on more regressive indirect taxation. Thus, while the share of direct taxation on the overall tax burden in Portugal (29.5%) is below the EU-28 average (34.3%) in 2018, the share of indirect taxation in Portugal (43.5%) is well above the EU average (34%). VAT accounted for more than a quarter of the overall tax burden (25.1%) in 2018, well above the EU average of 18.1%.

Moreover, the overall balance is one in which indirect taxation outweighs direct taxation, in contrast to the EU norm. The considerable dependence of public finances on indirect taxation measures fails to satisfy the vertical-equity criterion.

The tax authority continued to implement measures to combat tax avoidance in 2018 and 2019, and began implementing its new strategic plan to combat fraud and tax evasion for the 2018 – 2020 period. In 2018, it implemented 27% of the 95 measures contained in the strategic plan.

Existing data suggests historically high levels of tax evasion and fraud in Portugal. A paper published in 2018 indicated that over 20% of Portugal’s GDP was held offshore in 2007 – more than twice the world average of 9.8% and second only to Greece in the European Union. While its various measures are a step in the right direction, the tax authority appears unable to fully deal with the accumulation of offshored wealth or sophisticated modes of tax evasion. The tax authority’s report for 2018 notes very small tax receipts arising from the Swissleaks and Panama Papers cases, despite each of these listing around 100 Portuguese taxpayers.

At the corporate level, it should be noted that taxes on the income or profit of corporations (including taxes on holding gains) is higher in Portugal as a percentage of GDP (3.3% in 2018) than the EU-28 average (2.7%).

Regarding the relationship between taxation and ecological sustainability, there appears to be a lack of available data on this important point.

Citations:
Alstadsæter, A., Johannesen, N., & Zucman, G. (2018). Who owns the wealth in tax havens? Macro evidence and implications for global inequality. Journal of Public Economics, Volume 162, June 2018, Pages 89-100.

Eurostat (2019), “Taxation in 2018: Tax-to-GDP ratio up to 40.3% in EU,” available online at: https://ec.europa.eu/eurostat/documents/2995521/10190755/2-30102019-AP-EN.pdf/68739572-f06a-51e4-3a5b-86e660a23376

INE (2019), “Carga fiscal atingiu 35,4% do PIB em 2018,” available online at: https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=353924442&DESTAQUESmodo=2&xlang=pt

Portuguese Republic (2019), “Relatório De Atividades Desenvolvidas de ‘Combate à Fraude e Evasão Fiscais Aduaneiras 2018’,” available online at: https://www.portugal.gov.pt/download-ficheiros/ficheiro.aspx?v=e2d8ee56-2f74-426e-9ef3-1ba2a20dfc82

OECD (2019), Tax revenue (indicator). doi: 10.1787/d98b8cf5-en (Accessed on 02 November 2019)

https://rr.sapo.pt/noticia/…/ocde-um-quarto-do-salario-dos-portugueses-vai-para-impo…

https://www.portugal.gov.pt/…/documento?…relatorio…combate…fraude-e-evasao-fis..

Budgets

#23

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
The budget deficit for 2018 stood at 0.4% of GDP. This is the lowest rate since democratization in 1974, the second lowest since 1964 and an improvement on the government’s target of a 0.7% deficit.

As in 2017, the budget deficit for 2018 was inflated by a one-off capital transfer to a bank. However, the transfer was much lower in 2018 than 2017, allowing for this record low deficit. Without this injection of capital, Portugal would have had no deficit.

These positive results have continued into 2019. The government estimates a deficit for 2019 of 0.2% of GDP and the results for the first semester of 2019 are consistent with this target.

The decrease in the budget deficit has positively affected public debt. While the absolute level of public debt remains very high, at 122.2% of GDP in 2018 (only lower than Greece and Italy in the European Union), this is a 3.8 percentage point improvement vis-à-vis 2017 and a 9.3 percentage point improvement vis-à-vis 2016.

These positive results have helped Portugal regain international credibility, as evidenced on two levels. First, in terms of the evaluation of credit agencies. During the period under review, Portugal’s rating was upgraded by Standard & Poor’s to BBB in March 2019, and both Moody’s and S&P gave Portugal a positive outlook rating.

The second level is the political recognition afforded to Portugal’s minister of finance, Mário Centeno. After being dubbed the “Cristiano Ronaldo of the Ecofin” in May 2017, Centeno was elected president of the Eurogroup by the finance ministers of euro area member states in December 2017 – a result that is inevitably bound to Portugal’s improving budgetary consolidation. During the period under review, Centeno’s international recognition was confirmed when he was mooted as a candidate for the head position at the IMF.

While Minister of Finance Centeno enjoys a good reputation regarding budgetary matters both within and beyond Portugal, it should be noted that there are several so-called cativações within the budget which refer to funds that have been allocated but cannot be spent. These inevitably impinge on the ability to deliver public services.

Citations:
Eurostat, “General government gross debt – annual data,” available online at: http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina225&plugin=1

Eurostat, “Government deficit/surplus, debt and associated data,” available online at: http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do

IMF (2019), “Portugal: IMF Country Report No. 19/221,” July 2019.

Jornal de Negócios (2019), “Défice de 2018 foi ainda mais baixo: 0,4% do PIB,” available online at: https://www.jornaldenegocios.pt/economia/financas-publicas/detalhe/defice-de-2018-foi-ainda-mais-baixo-04-do-pib

Jornal de Negócios (2019), “Défice no primeiro semestre fica nos 0,8% por causa do Novo Banco,” available online at: https://www.jornaldenegocios.pt/economia/financas-publicas/detalhe/defice-no-primeiro-semestre-fica-nos-08-por-causa-do-novo-banco?ref=HP_UltimasNoticias

Pordata, “Estado: despesas efectivas, receitas efectivas e défice/excedente em % do PIB,” available online at: https://www.pordata.pt/Portugal/Estado+despesas+efectivas++receitas+efectivas+e+défice+excedente+em+percentagem+do+PIB-2767

https://eco.pt/2018/10/16/centeno-nao-abre-mao-das-cativacoes-no-ultimo-oe/

Research, Innovation and Infrastructure

#24

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
Portugal’s rank in the World Economic Forum’s 2019 Global Competitiveness Index remained stable compared to the 2018 index, standing again at 34 (albeit now out of 141 countries) in 2019. It also saw a marginal improvement of 0.2 in its score vis-à-vis 2018. Portugal’s score improved in two out of the four index components, including the innovation ecosystem component.

The European Union’s 2019 Innovation Scoreboard continues to classify Portugal as a “moderate innovator,” the second-lowest category (out of four). However, it also shows that Portugal’s position improved in relation to the EU average. Thus, Portugal’s performance relative to the European Union stood at 90% in 2018, a 10 percentage point increase compared to 2017, and five percentage points above the previous best of 2010 and 2011.

As in the previous SGI report, out of the 10 dimensions considered by the 2018 scoreboard, Portugal is above the EU average in three: attractive research systems; innovators; and an innovation-friendly environment.

The government continues to place a great deal of emphasis on research and innovation, with a particular interest in developing the tech sector. During the review period, Lisbon hosted the Web Summit (4 – 7 November 2019), the largest tech conference in the world, dubbed by Bloomberg the “Davos for geeks.” As noted in the previous report, in October 2018 the government announced a deal that will keep the event in Lisbon until 2028, with a public investment of €110 million over the next 10 years.

This is beginning to have some impact. The 2018 State of European Tech Report highlights that Portugal has one of the fastest growing tech sectors, with the fastest growing population of professional developers and the second fastest growing tech workforce in 2018. Likewise, Porto is the third fastest growing tech hub in Europe.

However, the 2018 State of European Tech Report also highlights the very low position from which Portugal is developing. Thus, consistent with the Innovation Scoreboard results, these tech results and initiatives are only slowly percolating through to the general economy.

Citations:
Atomico & Slush (2018), “The State of European Tech 2018,” available online at: https://2018.stateofeuropeantech.com (published on 4 December 2018)

Atomico & Slush (2017), “The State of European Tech 2017,” available online at: https://2017.stateofeuropeantech.com (published on 30 November 2017)

“European Innovation Scoreboard 2019 – Portugal.” Available online at: https://ec.europa.eu/docsroom/documents/35906

“European Innovation Scoreboard 2018 – Portugal.” Available online at: https://ec.europa.eu/docsroom/documents/30696

World Economic Forum (2019), “Portugal: Global Competitiveness Index 4.0 – 2019 edition,” available online at: http://reports.weforum.org/global-competitiveness-report-2019/economy-profiles/?doing_wp_cron=1572725125.5966029167175292968750#economy=PRT

World Economic Forum (2018), “Portugal: Global Competitiveness Index 4.0 – 2018 edition,” available online at: http://reports.weforum.org/global-competitiveness-report-2018/country-economy-profiles/#economy=PRT

https://www.pordata.pt › … › Despesas em I&D e Dotações Orçamentais

https://tek.sapo.pt/…/mercado-tic-em-portugal-cresce-para-os-8-240-milhoes-de-euros…

Global Financial System

#39

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
5
Portugal is a peripheral country, which limits its ability to contribute to the effective regulation and supervision of the international financial architecture. Moreover, the risk associated with the country’s high deficits and public debt has led successive governments since the new millennium to focus overwhelmingly on achieving fiscal sustainability and financial stability, most notably during the 2011-2014 bailout period. In the post-bailout period, Portuguese governments have sought to play a bigger role in contributing to EU debates on regulation. Their role has been enhanced by Portugal’s status as a bailout “success story,” and further reinforced by the election of Minister of Finance Mário Centeno as president of the Eurogroup, but is constrained by its peripheral position.

Citations:
Success story which enhances status as expert says in last sentence above is found in Liz Alderman, “Portugal Dared to Cast Aside Austerity. It’s Having a Major Revival,” New York Times “Business Day” July 23, 2018.
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