Economic Policy Reforms 2019

Portugal

After a deep and long recession, the catch up in GDP per capita relative to the upper half of OECD countries has improved. Employment has been recovering strongly, but total factor productivity growth remains low and the income gap to the upper half of OECD countries remains large.

Inequality remains high and the share of national disposable income held by the poorest 20% of the population is just below the OECD average. Greenhouse gas emissions, either relative to the size of the population or the size of the economy, are lower than the OECD average.

Portugal has registered a reduction in the corporate debt burden in recent years, but the indebtedness level remains high, hampering a higher rate of economic growth. A plan has been outlined that aims to raise computer literacy and to increase the proportion of the population with internet access, but low levels of educational attainment in the workforce remains a challenge more generally. Initiatives aimed at improving innovation collaboration between the public and private sectors, including through the establishment of “collaborative laboratories”, are also underway.

Improving the efficiency of the tax system should be a key priority given the need to reduce the stock of public debt. This includes reducing exemptions and special rates under the consumption tax and increasing the share of property taxes in the tax mix. The design of such reforms should ensure that the progressivity of the tax system is not eroded.

Growth performance, inequality and environment indicators: Portugal

Source: Panel A: OECD, Economic Outlook Database; Panel B: OECD, Income Distribution and National Accounts Databases; United Nations Framework Convention on Climate Change (UNFCCC) Database and International Energy Agency (IEA), Energy Database; Panel C: OECD, National Accounts and Productivity Databases.

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Policy indicators: Portugal

Source: Panel A: OECD (2018), Consumption Tax Trends 2018: VAT/GST and Excise Rates, Trends and Policy Issues, Consumption Tax Trends; Panel B: OECD, Education at a Glance Database.

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Beyond GDP per capita: Portugal

Source: Panel A: OECD, Income Distribution Database, World Bank, World Development Indicators Database and China National Bureau of Statistics; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

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Portugal: Going for Growth 2019 priorities

Reduce corporate debt overhang. Bank profitability and solvency is negatively impacted by the high stock of non-performing loans that remain on their balance sheets. Inefficiencies in the legal system hamper the swift resolution of non-performing loans, reducing the lending capacity of banks.

• Actions taken: In 2017, NPL reduction plans were submitted by three banks with a high stock of non-performing loans to regulators. A platform for integrated management of bank loans was established in 2018 to manage the negotiation of non-performing loan claims and guarantees on behalf of three major Portuguese lenders.

• Recommendations: Continue to monitor the non-performing loan reduction plans of banks and translate performance in achieving reduction targets into capital requirements. Make bankruptcy a viable solution for heavily indebted individuals, reducing the time to discharge and exempting more of the debtor’s assets from bankruptcy proceedings. Introduce an out-of-court mechanism to facilitate the liquidation of non-viable firms.

Improve equity and outcomes in education. Improving educational attainment will raise the skills of the labour force and strengthen productivity. It will also foster the creation of higher quality jobs and improve equity and well-being.

• Actions taken: A national initiative on digital competencies (INCoDe.2030) was launched in 2017 to enhance the digital skills of the population and to ensure that every Portuguese household has internet access by 2030.

• Recommendations: Provide more, earlier and individualised support to students at risk of falling behind to reduce grade repetition and drop-out rates. Improve teaching quality by strengthening teachers’ and school principals’ training and exposure to best practices. Create incentives to attract the most experienced teachers to disadvantaged schools. Consolidate vocational education and training (VET) into a single system that includes workplace training of good quality. Streamline the supply of VET courses and improve its alignment with labour market needs through better career guidance and enhanced monitoring of labour market outcomes. Provide more autonomy to schools, including for adjusting class size to students’ profile and in retaining good teachers.

Strengthen the link between research and business. Stronger links between public sector research and the private sector would boost the development of new technology-intensive products as well as process innovations. This would contribute to the creation of more high-skilled jobs and strengthen the competitiveness of the tradable sector.

• Actions taken: Under the Interface Programme, launched in 2017, the government is promoting research collaboration between science, technology and higher education institutions and the business sector. This is partly through the introduction of “Collaborative Laboratories” and “Interface Centres” that support research activities which involve collaborations between companies and public sector research institutions. The programme also includes the recognition of 20 sectoral clusters that aim to promote knowledge sharing among companies, higher education and research institutions and “Clubs of Suppliers” that encourage companies, especially SMEs, to participate in international value chains.

• Recommendations: Create career incentives for academics to co-operate with the private sector, including through the pursuit of dual careers. Continue to support intermediary organisations that focus on fostering innovation collaboration for small and medium enterprises. To support business innovation further, consider reforming the R&D tax incentive to allow unused tax credits to be indefinitely carried forward or cash refunds of R&D tax credits.

Strengthen competition in non-manufacturing sectors. Strengthening competition would lower input prices and bolster export competitiveness and productivity.

• Actions taken: No action taken

• Recommendations: Reduce entry barriers in regulated professions and monitor entry and price regulation by professional bodies to safeguard competition. Reconsider exclusive rights for certain tasks, remaining nationality requirements and restrictions on the form of business. Renegotiate existing port concessions and undertake new public tender processes to ensure that lower port labour costs translate into lower port user costs. Further reduce the scope of application of legacy remuneration schemes in the energy sector through renegotiations with incumbent companies.

1Improve the efficiency of the tax structure. The share of property taxes in the tax mix is low, while consumption taxes are subject to numerous exemptions and reduced rates which reduce efficiency and undermine public finance sustainability.

• Recommendations: Reduce consumption tax exemptions and special rates. Increase the share of less distortionary forms of taxation, such as property taxes, in the tax mix.