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2014 OECD ECONOMIC SURVEY OF PORTUGAL

Reforms are paying off Lisbon, 27 October 2014

Main Findings

• Fundamental reforms have put the economy on the right track.

• The economy is emerging from the severe recession. Unemployment is falling but still high and full economic recovery is still work in progress.

• The main challenge now is to build on improving export performance by further enhancing productivity and competitiveness.

• Fiscal consolidation is turning public debt around, but corporate and external debt are too high.

• Families with children are particularly suffering from rising poverty. Income inequality is among the highest in Europe.

Key recommendations

• Strengthen competition in services sectors through further regulatory reform.

• Promote wage bargaining at the firm level, and avoid a return of administrative extensions.

• Improve the links between researchers in universities and the private sector, and reform financial incentives for R&D.

• Continue fiscal consolidation as planned, but if growth slows down, allow automatic stabilisers to operate.

• Strengthen the social safety net by reducing overlaps between different programmes and expanding support for those most in need.

Reforms are paying off

1. Long-term unemployment refers to the share of unemployed persons who have been looking for jobs for 12 months or more to total labour force. 3. Balance of payments basis, four-quarter moving average. 2. Export performance is the ratio between export volumes and export markets for total goods and services. Source: Banco de Portugal (2014), "Main Indicators" and "General Statistics", BP stat, September; World Bank (2014), "Quarterly External Debt Statistics/SDDS", World DataBank, September and OECD (2014), OECD Economic Outlook: Statistics and Projections (database), September.

• GDP growth has resumed

• Unemployment is falling

• Export performance has been strong

• The current account has turned positive

But the recovery is still work in progress

1. Productivity growth is still low

2. Debt levels are still very high

3. Credit is scarce and expensive

4. Many firms are struggling to pay back their loans

5. Exports are still not as strong as they could be

6. Unemployment, inequality and poverty are too high

7. A stronger social safety net would support those most in need

Public debt is set to decline from 2015

Illustrative public debt paths

General government debt, Maastricht definition, per cent of GDP1

1. The baseline consists of the projections for the Economic Outlook No. 95 until 2015, prolonged with the OECD long-term

baseline scenario and assuming a neutral fiscal stance (constant structural primary budget balance) from 2016 onwards. The "lower GDP growth" scenario assumes lower nominal GDP growth by 1.5 percentage points per year over the period. The "additional fiscal consolidation" scenario is identical to the baseline and assumes an additional 1% of GDP. The "lower fiscal consolidation" scenario is identical to the baseline and assumes that fiscal consolidation is 1% of GDP lower spread over 2015-17.

Source: Calculations based on OECD (2014), OECD Economic Outlook: Statistics and Projections (database), April.

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2000 2005 2010 2015 2020 2025 2030

Baseline Lower GDP growth Lower fiscal consolidation

Exports have risen

In the future, more exports will allow Portugal to import more, particularly investment goods that will support growth and productivity.

Source: OECD (2014), OECD Economic Outlook: Statistics and Projections and OECD National Accounts (databases), September.

Regulation in labour and product markets has improved

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USA

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FIN

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OECD NO

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A. Employment protection of permanent workers against individual and collective dismissal

2013 2008

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B. Product market regulation indicator

2013 2008

Index scale of 0-6 from least to most restrictive. The OECD aggregate is an average of the data shown. Source: OECD (2014), OECD Employment Protection Database, June, and OECD (2013), OECD Product Market Regulation Database.

Reforms have helped but the potential gains from further reforms are still high

Expected gains from product market reforms Impact on the level of productivity and potential GDP by 2020, per cent

Source: OECD estimates.

Challenges ahead

Debt is very high

1. General government debt. Maastricht definition. 2. Also includes non-profit institutions serving households. Source: Banco de Portugal (2014), "Main Indicators" and "General Statistics", BP stat, September; World Bank (2014), "Quarterly External Debt Statistics/SDDS", World DataBank, September and OECD (2014), OECD Economic Outlook: Statistics and Projections (database), October.

External debt and public debt government are very high. Household debt is falling, but not company debt.

The cost of credit is still high

Interest rate on loans to non-financial corporations, per cent per annum

Figures refer to total loans (defined for cost of borrowing purposes) to non-financial corporations. The total for maturity is calculated by weighting the volumes with a moving average. Source: ECB (2014), “MFI Interest Rates”, Statistical Data Warehouse, European Central Bank, October.

Productivity growth is low

Average annual total factor productivity growth in 2000-09 and 2010-15 Per cent1

1. 2001-09 instead of 2000-09 for Estonia. Data for 2014 and 2015 are forecasts.

Source: OECD (2014), OECD Economic Outlook: Statistics and Projections (database), June.

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2000-09 2010-15

Locally sourced inputs have become more expensive

A simplified cost breakdown in tradable sectors Per cent of costs of goods sold, mid-2000s

Prices of non-tradable sectors relative to tradable sectors1

1. Ratio of harmonised index of consumer prices (HICP) (2001=100) of non-tradable sectors to HICP (2001=100) of tradable sectors. Sources: OECD (2012), "STAN Input-Output: Input Output Database", STAN: OECD Structural Analysis Statistics (database), June; Eurostat (2014), Harmonised Indices of Consumer Prices (HICP) (database), July.

Poverty has increased, especially among children

Inequality and poverty Portugal1

Recommendations

Ensure a timely and consistent recognition of banking losses. Assess the performance of insolvency procedures and enhance them if

necessary.

1. First quarter of 2014 or latest quarter available. 2012 for Germany. Second quarter of 2012 for the United Kingdom. The OECD aggregate covers 28 countries. Non-performing loans relative to total gross loans.

Source: IMF (2014), Financial Soundness Indicators (database), International Monetary Fund, September, Banco de Portugal (2014), "Portuguese Banking System - Latest Developments", Data Package, September and ECB (2014), "Consolidated Banking Data", Statistical Data Warehouse, European Central Bank, September.

Many firms are struggling to pay back their loans, creating challenges for banks.

Create the right framework for new firms to grow

Young firms play a crucial role for productivity. Some policies hamper the emergence of young high-productivity firms.

Young firms experience faster productivity growth Average annual productivity growth, per cent, 2006-20111

1. Young firms are defined as those aged 5 years or less. Source: OECD calculations based on data from Integrated System of Business Accounts (Sistema Integrado de Contas, SCIE).

Promote wage bargaining at the firm level, and avoid a return of administrative extensions of labour agreements

Administrative extensions discourage the entry of new firms and reduce competition, as one way new firms can enter the market is by paying lower wages for some time.

New extensions of collective wage agreements have declined Number of workers covered by instruments of collective wage agreements, in thousand1

1. S1: first semester. Source: Direção-Geral do Emprego e das Relações de Trabalho.

Consider allowing refunds of R&D tax credits for loss-making firms, or extending the carry-forward period.

These tax credits can put new market entrants at a disadvantage if they are not refundable for firms without profits. Young firms often do not have profits.

Public funding for business R&D Per cent of GDP, 20111

Improve the links between researchers in universities and the private sector.

Expenditures on R&D are concentrated in universities while business R&D spending is low.

1. 2011 instead of 2012 for Australia, Iceland, New Zealand and Mexico. 2003 instead of 2002 for Luxembourg, New Zealand and Sweden. 2004 instead of 2002 for Switzerland.

Business enterprise expenditure on R&D Per cent of GDP1

Strengthen regulation in services sectors through further regulatory reform

• 90% of electricity is still sold at guaranteed prices. These guaranteed price schemes should be phased out sooner than currently planned.

• Reduce restrictions in professional services

– These include the power of profession organisations to regulate entry, exclusive rights for certain professions, regulations of prices and fees or the form of business and nationality requirements.

• Improve the efficiency of ports – Attach service level agreements to concession contracts and promote

competition among terminals.

Further reduce drop-out rates from secondary education

Upper secondary and tertiary attainment for 25-34 year-olds Per cent, 20121

1. 2011 for Chile. The category of at least upper secondary education covers upper secondary, post-secondary non-tertiary education and tertiary education. Source: OECD (2013), Education at a Glance 2014.

Further improve the efficiency of the tax system, and consider reducing corporate tax rates in the medium term

Source: Spengel C., C. Elschner and D. Endres (2012), "Effective Tax Levels Using the Devereux/Griffith Methodology", Project for the EU Commission TAXUD/2008/CC/099, Final Report 2012, Centre for European Economic Research (ZEW), Mannheim, October.

Reduce trial length and the backlog of pending court cases

1. Values for 2013 are preliminary. Source: Ministry of Justice, PORDATA.

Strengthen the social safety net

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With housing benefit Without housing benefit

Per cent of net minimum wage

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Number of individual RSI beneficiaries (left scale) RSI transfers to beneficiaries (right scale)

Thousands EUR millionBeneficiaries and transfers of the guaranteed minimum income benefit RSI2

Net income level provided by cash minimum-income benefit 1

Minimum income benefits are low and have been reduced. Reducing overlaps and better targetting could free resources to raise benefit levels of the minimum income support scheme RSI.

1. For single person families. Median net household incomes are from a survey in or close to 2012, expressed in 2012 prices and are before housing costs (or other forms of “committed” expenditure). Results are adjusted for household size and account for all relevant cash benefits (social assistance, family benefits, housing-related cash support as indicated). The OECD and EU28 (i.e. European Union) aggregates refer to the unweighted averages of those countries that have minimum wage policy and are included in the chart. Source: OECD (2014), "Taxes and benefits", June; Ministério da Solidariedade e da Segurança Social (MSSS), Instituto de Informática, I.P., Departamento de Gestão de Informação.

Provide better support to students from disadvantaged socio-economic backgrounds

Relationship between students' participation in higher education and socio-economic status Odds ratio of being a student in higher education by parents' educational level, 20091

1. The chart shows the odds of someone from a low (or high) educational background attending higher education. The odds ratio is calculated by comparing the proportion of parents with low (or high) levels of education in the total parent population to the proportion of students in higher education whose parents have low (or high) levels of education. If young people from a low (or high) educational background were as likely to attend higher education as those from more (or less) educated families it would result an odds ratio equal to 1. Countries are ranked in increasing order of difference between the odds ratios of being a student in higher education with low and high educational backgrounds. Source: OECD (2012), Education at a Glance 2012: OECD Indicators.

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