Portugal must reform now, warns OECD

By Chris Graeme [email protected]

The Secretary-General of the Organisation of Economic Cooperation and Development (OECD) warned that Portugal needed to introduce tough new measures to restore market and investor confidence and bring the budget deficit under control.

Speaking in Lisbon on Monday, Angel Gurría, who was presenting the OECD’s Portugal Country Report for 2010, admitted that the pressure which the financial markets had put on Portugal was “unfair” but stressed that Portugal needed to “frontload” additional budgetary measures to fill a 2.5 billion Euro black hole in the Government’s finances.

According to Angel Gurría, this included raising VAT to as much as 23 per cent and increasing property taxes (IMT and IMI) rather than putting up Corporation Tax (IRC) and Income Tax (IRS).

“The situation is unfair, especially given the fact that Portugal launched significant and far-reaching economic reforms well before and during the world economic crisis,” he said.

The Secretary-General of the OECD said that he was “confident” that the country would overcome the current situation but, in an obvious reference to political party wrangles over the State Budget for 2011, called for a “strong political consensus” which Portugal had already shown capable of attaining in the past.

He said it was vital that Portugal continued to pursue “rigorous public finance consolidation” in order to return investor confidence which he believed was the “most immediate challenge.”

Angel Gurría said that a lack of investor confidence and Direct Foreign Investment not only “caused problems for budgetary consolidation but also damaged the chances of economic recovery.”


In his 45-minute presentation, the Secretary-General of the OECD praised Portugal for making “significant progress in modernising its economy in recent years” but pointed to “weak growth potential” made worse by the current economic climate.

He warned of ever widening sovereign spreads (the increased cost of servicing foreign borrowing in terms of interest rates on Government bonds) which could put “Portugal’s fragile economic recovery at risk”.

“More fundamentally, Portugal needs to pursue policies to move to more dynamic and sustainable growth, which would help fiscal consolidation and narrow the large income gap with wealthier OECD countries,” he said.

“Notwithstanding ongoing policies to reduce energy dependence, a sustained correction of the external balance of payments and imports/exports depends crucially on restoring competiveness through improved productivity and rebalancing growth from consumption to exports,” he added.

On the financial side, reliance on domestic savings, both private and public had to be enhanced while public sector wages had to be kept at bay to encourage economy-wide wage restraint and shifting taxation from employers’ social security contributions to VAT consumption and property taxes.

The business environment needed to be enhanced by simplifying the tax system while in a nod to the TGV and new airport, he said the authorities should help develop transport infrastructure if projects were “based on transparent and careful cost-benefit analysis.”

In terms of education, Portugal needed to ensure that pupils didn’t drop out of secondary schooling while reducing the country’s high rate of school-year repetition.

Political tension

It has been a difficult week for the ruling Socialist PS Government which threatened to resign at the end of last week if the opposition PSD and CDS-PP parties tried to block the passage of the State Budget for 2011 in Parliament.

As tension mounted over the weekend, amid warnings from right-wing economists that Portugal and its frail business community wouldn’t stand further tax increases, the PSD party said it wouldn’t vote against the Government’s Budget proposals but neither would it support its overall platform of budgetary consolidation policies which might include scrapping the Christmas Holiday Subsidy and raising VAT to 23 per cent.