LISBON: The International Monetary Fund (IMF) has recommended that Portugal’s government implement further austerity measures next year equivalent to 0.5 percent of gross domestic product, about €900 million, focussing on public sector salaries and pensions. “The government needs a credible budgetary strategy,” the IMF said in its latest post-bailout report on the country. “Specific measures, principally on the spending side and which result in a primary structural adjustment of 0.5 percent of GDP in 2017 and 2018, would be a suitable route.”
The recommendation comes in the reports on the fourth mission to monitor Portugal’s progress after it exited its eurozone bailout in 2014, under article IV of that process. The missions took place in late June. They come at a time when the Socialist government is readying the 2017 state budget for submission to parliament in three weeks’ time, on 15 October. Before that, though, it must be approved by European Union officials.
In its report, the IMF recalls that the government’s Stability Programme for 2016-2020, presented in April, foresees a structural adjustment of 0.3 percent of GDP in the medium term. But it considers that this strategy is based on “unrealistic macro-economic assumptions” and that “budgetary policy must be anchored in a annual primary structural adjustment of 0.5 percent of GDP.”
To that end, the report argues, the authorities should press ahead with a spending review, “focussing in particular on better ways to control social benefits, on the reduction of health costs and on controlling pensions and salaries in the public sector.” The IMF recommends that the government introduce “annual spending objectives”, to implement a budgetary adjustment based on the rationalisation of spending.
It is specific on some measures: that the government should exempt the health sector from the implementation of the 35-hour weekly limit on working hours in the public sector, and continue to consolidate the school network in line with the reduction in the school-age population, increase the rate of natural wastage in public employment to reduce the workforce, reduce the salary premium relative to the private sector by rationalising bonuses and supplements, and maintain the freeze on career progression beyond 2018.
In its response to the IMF, the government reiterates its commitment to the objectives laid down in the Stability Programme, of a public sector deficit of 1.4 percent of GDP in 2017 and the reduction of the public sector wage bill through natural wastage and limits on hiring, and expressed confidence in the results from a recently launched spending review.
On pensions, it states that “any alterations … will take into consideration the sustainability of the system in the long term and the rights of current beneficiaries”. On its part, the IMF concludes that the 2017 budget objectives are “ambitious” and that achieving them will require “facing significant challenges of implementation”.
