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OECD Economic Surveys Portugal 2010 2010 ed. Edition
Oecd Digital Instant Download
Author(s): OECD
ISBN(s): 9789264083332, 9264083332
Edition: 2010 ed.
File Details: PDF, 2.96 MB
Year: 2010
Language: english
OECD Economic Surveys
portugal
Volume 2010/16
September 2010
OECD Economic Surveys:
Portugal
2010
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
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Series: OECD Economic Surveys

ISSN 0376-6438 (print)
ISSN 1609-7513 (online)
OECD Economic Surveys Portugal

ISSN 1995-3348 (print)
ISSN 1999-0405 (online)
Also available in French.
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TABLE OF CONTENTS
Table of contents
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Assessment and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Chapter 1. Rebalancing the economy towards sustainable growth . . . . . . . . . . . . . . . . 19

Portugal was hit hard by the global crisis, which exacerbated
underlying weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Policies to restore a sustainable growth path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Labour market policies in the aftermath of the crisis . . . . . . . . . . . . . . . . . . . . . . . . . 35
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Annex 1.A1. Progress in structural reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Annex 1.A2. Fiscal consolidation measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Chapter 2. Towards a less distortive and more efficient tax system . . . . . . . . . . . . . . . 57

Main challenges of the Portuguese tax system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Making the tax system more supportive to growth and competitiveness . . . . . . . . 65
Avenues for raising the efficiency of tax collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Annex 2.A1. Transport externalities and road pricing . . . . . . . . . . . . . . . . . . . . . . . . . 87
Chapter 3. Policy priorities to restore productivity growth. . . . . . . . . . . . . . . . . . . . . . . . 93

Restoring productivity growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Improving the business environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Addressing infrastructure bottlenecks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Reaping the benefits of education is key to restore productivity growth . . . . . . . . . 113
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Annex 1.A1. Results of the productivity analysis by sector . . . . . . . . . . . . . . . . . . . . . 133
Annex 1.A2. Progress in structural reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Boxes
1.1. Measures to support the financial sector and recent developments . . . . . . . . . . 22
1.2. Labour market measures taken to deal with the rise in unemployment . . . . . . 43
1.3. Main recommendations on rebalancing the economy
towards sustainable growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.1. Major tax reforms since 2000 and the tax structure in more detail . . . . . . . . . . . 60
2.2. Decomposing the relative importance of consumption taxes. . . . . . . . . . . . . . . . 63
OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010 3

TABLE OF CONTENTS
2.3. Tax reform in times of crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

2.4. Administrative costs of tax collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
2.5. Summary of recommendations on reforming the tax system . . . . . . . . . . . . . . . 82
2.A1.1. Key elasticities applied in the simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.1. Productivity growth in Portugal: a shift-share analysis . . . . . . . . . . . . . . . . . . . . . 95
3.2. Climbing-up the value added chain: the example of the footwear industry. . . . 99
3.3. Achieving stronger education performance and inclusion:
quantifying the gains in Portugal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
3.4. Directing resources to disadvantaged schools in Portugal . . . . . . . . . . . . . . . . . . . 126
3.5. Summary of recommendations on productivity and competitiveness:
setting the priorities for an appropriate growth strategy. . . . . . . . . . . . . . . . . . . . . 127
Tables
1.1. Portugal: Demand, output and prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.2. Portugal’s share in selected import markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.3. Shares in Portuguese exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.4. Direct effects of fiscal consolidation measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.1. The Portuguese tax structure in more detail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.2. Accounting for the importance of consumption taxes. . . . . . . . . . . . . . . . . . . . . . 63
2.3. Labour costs per employee per sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.4. Simulation of changes in transport sector taxation . . . . . . . . . . . . . . . . . . . . . . . . 70
3.1. Decomposition of annual productivity growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3.A1.1. Sectoral contributions to productivity growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Figures
1.1. General developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.2. Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.3. Competitiveness indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.4. Unit labour costs in manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.5. Ratio of services to industrial goods prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.6. Countries’ competitiveness rankings based on firm-level indicators . . . . . . . . . 27
1.7. Export performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.8. Current account imbalances and external indebtedness. . . . . . . . . . . . . . . . . . . . 30
1.9. Financial debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.10. Projections of pension spending in EU countries . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1.11. Growth in GDP per capita in a comparative perspective . . . . . . . . . . . . . . . . . . . . 33
1.12. Contributions to GDP per capita growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1.13. The rise in unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
1.14. The long-term impact of a unit increase in unemployment
on its long-term component. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.15. The decrease in labour force participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1.16. Temporary employment in a comparative perspective . . . . . . . . . . . . . . . . . . . . . 39
1.17. The generosity of unemployment benefits: youth versus older workers . . . . . . . 41
2.1. Total tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
2.2. Structure of tax revenues in Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.3. Structure of tax revenue in the OECD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.4. Labour tax wedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.5. Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
4 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

TABLE OF CONTENTS
2.6. Local government tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

2.7. Transport fuel taxes in EU countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
2.8. Hours spent preparing, filing and paying taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
2.9. Number of tax payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
2.10. Personal income tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2.11. Owner occupation rates in EU countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
2.12. Statutory and effective corporate tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
2.13. Value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
2.A1.1. Road network utilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
2.A1.2. Toll revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
3.1. Productivity growth in manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
3.2. Average net profit margin in the textile sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
3.3. Productivity growth in market services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
3.4. Average firm size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.5. Traffic volumes versus GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.6. Greenhouse gas emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
3.7. Educational gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.8. Educational and income gaps, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
3.9. Simulating the contribution of education to the Portuguese
labour productivity gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
3.10. Returns to education based on household data . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
3.11. Dropout rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
3.12. Present value of bringing all to a level of minimum proficiency for the OECD . . 120
3.13. Educational outcomes and educational expenditure . . . . . . . . . . . . . . . . . . . . . . . 125

TABLE OF CONTENTS
This Survey is published on the responsibility of the Economic and

Development Review Committee of the OECD, which is charged with the
examination of the economic situation of member countries.
The economic situation and policies of Portugal were reviewed by the
Committee on 6 July 2010. The draft report was then revised in the light of the
discussions and given final approval as the agreed report of the whole Committee on
23 July 2010.
The Secretariat’s draft report was prepared for the Committee by Orsetta Causa,
Álvaro Pina and Guida Nogueira under the supervision of Pierre Beynet. Statistical
research was provided by Agnès Cavaciuti, Desney Erb and Sylvie Foucher-Hantala.
The survey also benefited from external consultancy work.
The previous Survey of Portugal was issued in June 2008.
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BASIC STATISTICS OF PORTUGAL, 2009
THE LAND
Land area (thousand km2) 91.5 Major cities, resident population in thousands
Greater Lisbon 2 033
Greater Porto 1 285
THE PEOPLE
Population (thousands) 10 638 Civilian labour force (thousands) 5 553
Number of inhabitants per km2 116 Civilian employment in 2008 (thousands) 5 167
Net increase 2008-09 (thousands) 16.4 As a percentage of total
Agriculture 11.5
Industry 29.4
Services 59.0
PRODUCTION
Gross domestic product (billion EUR) 167.6 Gross fixed capital formation (per cent of GDP) 19.5
Gross domestic product per head (EUR) 15 757.4 Gross fixed capital formation per head (EUR) 3 071.8
THE GOVERNMENT
Public consumption (per cent of GDP) 21.1 Composition of Parliament
General government total expenditure 48.1 (Number of seats, September 2009)
(per cent of GDP) Socialist Party (PS) 97
General government total revenue 38.8 Social Democratic Party (PSD) 81
(per cent of GDP) Democratic and Social Centre – People’s Party (PP) 21
Public debt (per cent of GDP) 76.3 Leftwing Block (BE) 16
Unitarian Democratic Coalition (CDU) 15
Total 230
FOREIGN TRADE
Exports of goods and services (per cent of GDP) 28.0 Imports of goods and services (per cent of GDP) 35.6
THE CURRENCY
Monetary unit: euro Currency unit per USD, average of daily figures:
Year 2009 0.7198
June 2010 0.8190
EXECUTIVE SUMMARY
Executive summary
P ortugal has made significant progress in modernising its economy over recent years. However, the already
weak potential growth is likely to have been hit by the global crisis. Besides, widening sovereign spreads, if
persistent, may put the economic recovery at risk. In these circumstances, the immediate challenge is to foster
investor confidence by rapidly consolidating the public finances. The next challenge is to achieve a sustained
reduction in the large external deficit. 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.
● Credible fiscal consolidation is the key to restoring investor confidence. The authorities’ decision
to frontload consolidation was appropriate and it is essential that the consolidation measures continue to
be implemented swiftly. In this context, adopting a comprehensive medium-term expenditure framework
supported by an expenditure rule would enhance the sustainability, and hence the credibility, of the fiscal
adjustment. Nonetheless, as the required consolidation is sizeable, the government should stand ready to
raise taxes further, focusing on those that are the least distorting to growth, such as consumption (VAT)
and property taxes. Broadening the tax base should also help consolidation while reducing economic
distortions.
● The sizeable current account deficit needs to be progressively reduced. Notwithstanding the
ongoing policies to reduce energy dependence, a sustained correction of the external imbalance depends
crucially on restoring competitiveness through improved productivity and rebalancing growth from
consumption to exports. On the financing side, reliance on domestic savings, both public and private, must
be enhanced. The adjustment can be speeded up by keeping public sector wages at bay to encourage
economy-wide wage restraint and shifting taxation from employers’ social security contributions to
consumption (and property) taxes.
● Labour market dualism should be reduced. The authorities need to combat the segmentation of the
Portuguese economy, which is reflected in a two-tier labour market where flexibility is essentially achieved
at the margin. The authorities should further reduce employment protection legislation on regular
contracts. Pursuing labour market reform should reduce the risk that the cyclical increase in unemployment
and reduction in the labour force become structural. To foster labour supply while providing appropriate
income support during unemployment spells, Portugal should revise the architecture of unemployment
benefits (UB): UB duration and replacement rates should not be related to age and benefits should be a
decreasing function of unemployment duration for all workers.
● Further structural reforms are necessary to restore productivity growth. The business
environment needs to be further enhanced, with tax system simplification as one of the priorities, and the
authorities should help develop transport infrastructure, while basing projects on transparent and careful
cost-benefit analysis. Above all, ongoing efforts to upgrade the competencies and skills of the population
should be consolidated. Better educational outcomes cannot be achieved without raising the equity of
educational opportunities, which would help to close the educational gap while also reducing
socioeconomic disadvantages. As the scale of the Portuguese training programmes has expanded, efforts
should focus on evaluation tools, even more in the context of tight budget constraints. Portugal should
reduce high rates of school-year repetition and further strengthen monitoring mechanisms of those at risk
of dropping out.

OECD Economic Surveys: Portugal
Subtitle Book
© OECD 2010
Assessment and recommendations
The fragile economic recovery needs

to be buttressed by a comprehensive strategy
to restore sustainable growth
In 2009, Portuguese GDP fell by 2.6%, a deep recession but nonetheless milder than in the euro
area as a whole. Helped inter alia by the absence of a real estate bubble in the years preceding the
crisis and low exposure to toxic assets, the financial sector has remained sound. However, growth
prospects remain weak. Growth resumed in 2010 but it is set to remain sluggish in the medium
run, as already weak potential growth is likely to have been hit by the global crisis. Portugal has not
escaped recent financial market turbulence: debt has been downgraded and spreads have
widened, putting at risk the recovery if the situation were to worsen. Against this backdrop, the
immediate challenge is to restore investor confidence by rapidly consolidating public finances. The
next challenge is to narrow macroeconomic imbalances, which is a necessary condition for a
sustained reduction of the large external deficit, notably through improved competitiveness.
Finally, Portugal needs to resume its convergence towards higher income-level countries. It
stopped catching up from the early 2000s onwards and needs to nurture stronger potential growth.
This will help to restore fiscal sustainability over the long run.
Rapid fiscal consolidation is the key

to foster investor confidence
The fiscal consolidation strategy, aiming at bringing the deficit from 9.3% of GDP in 2009 down
to 3.0% in 2012 and 2.0% in 2013, is appropriate. The decision taken by the government in
May 2010, with support from the main opposition party, to frontload the consolidation path – the
deficit target was adjusted to 7.3% of GDP in 2010 and then 4.6% in 2011 – was the right way to
foster foreign investor confidence in the current circumstances of high market stress on sovereign
risk, and it did help. Hence, it is essential that the announced consolidation measures continue to be
implemented as planned, even if cyclical developments turn out more adverse than now expected. It is also
important to maintain a strong political consensus for fiscal consolidation: if acute market stress
were to resurface, further fiscal tightening measures may need to be contemplated.
The consolidation package is mostly expenditure-based, especially for the outer years, which
is usually the most efficient way to achieve sustainable fiscal consolidation. Efforts should focus on
those expenditure components where restraint is the least detrimental to potential growth. To
ensure a long-lasting expenditure restraint, institutional arrangements should be improved.
Portugal should adopt a comprehensive medium-term expenditure framework, as envisaged by the
government, supported by an expenditure rule. This would help to improve the targeting of social
transfers, which have been growing rapidly for some years, and, more generally, the efficiency of
9
ASSESSMENT AND RECOMMENDATIONS
public expenditures. Further, the fiscal implications of pluriannual contractual spending commitments
(e.g. Private Public Partnerships, PPPs) should be fully transparent. Finally, the authorities should ensure
that expenditure restraint efforts are shared across all tiers of government.
The necessary degree of fiscal consolidation requires measures on the revenue side also, but
negative impacts on potential growth should be minimised. Hence, revenue gains should mainly rely
on those taxes which are the least distortive to growth and on curbing tax expenditures. The recent
decision to increase the VAT rate and announcements to reduce tax expenditures in direct taxes
are positive in this respect. Eventually, the government should consider moving further towards a
more growth-friendly and equitable tax system, an issue taken up in this Survey.
Reducing external imbalances by rebalancing

growth
Large current account deficits led to high external debt, fuelled mainly by excessive private
sector borrowing. Current account deficits mainly reflect a disproportionate reliance on
consumption to support growth, weak export performance until 2005 and still high reliance on
energy imports, despite the recent improvement in domestic energy production owing to the
development of renewable sources. Since the mid-1990s, a faster rise in unit labour costs compared
to core European countries, especially before 2006, eroded competitiveness. To reduce external
imbalances, growth should be rebalanced from consumption to exports, as recognised by the
government. This will require increased competitiveness through productivity gains in the
medium term, but also by keeping labour costs at bay in the short-run. The latter could be
encouraged by public sector wage restraint – as public wages have a strong influence on the private
wage-setting process – and by reducing non-wage labour costs in a fiscal-revenue-neutral way, for
example by a shift from labour to consumption taxes. Wage negotiations should take care to
ensure that wage growth does not exceed productivity growth. Productivity gains could be
achieved by further deepening structural reforms, in particular in the area of education,
infrastructure, and the business environment. To resume convergence towards higher income
countries, Portugal also needs to reduce labour market dualism to favour job reallocation towards
more dynamic sectors.
Preventing cyclical unemployment from becoming

structural
Since the late 1990s, the country has experienced a trend increase in the structural rate of
unemployment and there is the risk that the current downturn will worsen this situation. One of
the key policy priorities going forward will be to avoid the cyclical decrease in participation and the
rise in unemployment becoming structural, which would further reduce potential output over the
medium term. This makes it even more important to pursue labour market reform. Government
measures, such as job subsidies and short-time working, have helped to support labour demand.
But to avoid hindering the efficient reallocation of workers and constraining productivity growth,
it is important that labour demand support measures taken during the crisis remain temporary. The
government decision to withdraw many of these measures is thus welcome.

Making the most of active labour market policies
The authorities have been increasingly relying on multiple actors (municipalities, social
partners, etc.) to support the unemployed. While this can compensate for the excess case-loads of
the public employment services and enhance the speedy provision of activation services, Portugal
should monitor the quality and the effectiveness of these alternative counselling services. As the training
programmes for the unemployed are experiencing a lower take-up than budgeted, continuing to
improve information exchange between the public employment services and training centres is needed.
Obligatory participation in training programmes after a specified duration of unemployment should be
introduced, as in a number of other OECD countries.
Reforming the unemployment benefits system,

in particular by reducing the gap between
the treatment of youth and older workers
Against the background of a potential rise in structural unemployment, the government

should implement a fundamental revision of its unemployment benefits (UB), to provide adequate
social safety supports while promoting employment. In early 2010, Portugal reduced the
contributory period to access UB from the rather ungenerous 450 days to 365 days of salaried work,
but the authorities recently withdrew this measure. However, most OECD countries require lower
contributory periods, often less than 6 months. Given the high proportion of workers under temporary
contracts in Portugal, the authorities should consider cutting back again on the contributory period to
access UB. To encourage return to work, the government recently imposed a cap on replacement
rates. Nonetheless, UB generosity remains related to age, which induces a striking gap between the
treatment of youth and older workers. UB duration and replacement rates should not be related to age
and benefits should be a decreasing function of unemployment duration for all workers.
Reducing labour market dualism
Reducing labour market dualism should be at the top of the agenda to favour worker
relocation and support productivity growth. The share of temporary contracts in total employment
has been increasing since the early 1990s, particularly after the 1998 reform reducing employment
protection legislation (EPL) for temporary contracts. The rising share of temporary contracts has
led to strong segmentation of the labour market, with the young and low skilled being the most
exposed. The recently introduced labour code, by reducing EPL for regular contracts, is an
important step in the direction of reducing labour market dualism, as will the new Contributory
Code of Social Security. However, employment protection legislation for regular contracts should be eased
further to reduce the gap between protection of regular and temporary workers. Another structural feature
of the Portuguese labour market is that adjustment tends to occur exclusively by employment
– and almost exclusively temporary employment. Building on the recent amendments to the
Labour Code, Portugal should continue improving flexibility in working-time regulations, which would help
reduce cyclical employment losses and promote productivity growth.

The tax system should be more supportive to

growth with a switch from labour to consumption
taxes…
Pursuing fiscal consolidation while seeking to step up the poor long term economic
performance provides an opportunity to implement tax measures to improve efficiency and
rebalance the economy. As fiscal consolidation progresses, the tax system can be made more
growth friendly by shifting the tax burden from labour taxation towards less distortive taxes, such as taxes
on consumption and property, while ensuring that the reform is non-revenue-decreasing. Besides the
standard growth benefits, such a change in the tax structure could also help Portugal improve its
competitiveness in the short-run. While wage moderation is key to ensure a long-lasting reduction
of unit labour costs, a cut in employers’ social security contributions (SSC) can smooth the
adjustment by lowering labour costs to firms, at least in the short-run. The rebalancing in the tax
system could also yield sizeable employment gains if larger SSC cuts are given to low wage earners.
Portugal should target the largest reductions of employers’ SSC on low wage workers. For this purpose, the
government could consider making employers’ contributions progressive in the level of wages, as opposed to
the current use of a flat rate.
Owing to the fiscal consolidation constraints, a switch from labour to consumption and
property taxes should be at least revenue neutral. This could be facilitated by the particularly large
VAT base, which reflects the sizeable share of consumption in the economy, and the high
proportion of goods enjoying reduced rates. Hence, VAT and property taxes should be raised sufficiently
to, at least, fully finance cuts in employers’ SSC. In this context, Portugal would need to adjust social security
financing, making it less reliant on contributions and more on general revenues. Further, additional revenue
from property taxes, which currently accrue to municipalities, should either belong to the central government
or be compensated through smaller grants to local governments.
… an increased reliance on property taxes…
Despite a recent upward trend, property taxation in Portugal remains below the OECD average,
especially as regards the least distortive components: recurrent taxes on immovable property (IMI)
carry below-average weight, and inheritance or recurrent net wealth taxes virtually do not exist. In
contrast, the highly distortive real estate transaction taxes (IMT) have an above-average weight,
inflating prices and discouraging geographical mobility. Portugal should levy IMT only on the initial
transactions of property, while abolishing many of its exemptions. In the longer term, the authorities could
consider replacing IMT by VAT on new house sales. Furthermore, despite a reform of property taxes
in 2003, IMI taxable values often remain far below market prices (updating mainly occurs when
dwellings are sold). Besides, IMI is also undermined by numerous exemptions. Portugal should
substantially increase its reliance on IMI revenues, primarily by broadening the base by removing most
exemptions and regularly updating property values. However, an increase in tax rates is also likely to
prove necessary, especially in the context of the tax rebalancing reform. In this context, potential
interactions with the rental housing market and housing prices should be taken into account.
… and reduced complexity and compliance costs
Portuguese tax laws are complex and frequently changed, adding to high day-to-day
compliance costs. While filing and payment were made much easier in recent years through the

use of electronic communications, the preparation of tax returns often remains burdensome, in
particular for small and medium sized firms. Regarding SSC and personal income tax (PIT)
withheld from employees’ pay, companies currently file separate monthly returns for different
agencies, whose databases are not integrated. Hence, building on the recent improvements in the
exchange of information, there is scope for enhanced co-operation between tax and social security
agencies. A new SSC Code, due to come into force in 2011, brings some convergence of SSC taxable
labour income towards the PIT tax base, though the former base remains somewhat narrower.
Portugal should complete the convergence in labour income tax bases between SSC and PIT. Firms’ tax
returns for SSC and withheld PIT should be unified, and agencies’ databases integrated and shared. In the
longer term, the authorities could consider moving towards a single revenue agency for direct taxes and social
contributions.
Compliance costs are high in the case of disputes and litigation. Administrative review
mechanisms have traditionally been slow, contributing to higher court litigation, although
decisions on taxpayers’ initial complaint mechanism (reclamação graciosa) have become much
faster recently. The authorities should extend progress to the administrative appeal mechanism (recurso
hierárquico), and foster greater openness by the tax administration to reverse a previous decision when
assessing an appeal. Recently announced plans to introduce binding arbitration as an alternative mechanism
to the courts should be gradually implemented, starting with small cases, which clog tax courts the most.
Enhance tax efficiency by reducing

tax expenditures
The Portuguese tax system is characterised by extensive tax expenditures, which narrow tax
bases and hence require higher-than-otherwise tax rates. This result in tax collection losses and
less dynamic growth. Further, tax expenditures are frequently a costly way to pursue equity
objectives, and may even induce regressivity. Authorities have introduced a time limit to some tax
expenditures (those under the Estatuto dos Benefícios Fiscais), which are set to expire at the end
of 2011. However, their underlying concept of tax expenditure is narrow (e.g. it does not include the
main expense-related personal income tax credits). The authorities should use the automatic expiry
rule as a device for base broadening, and go further in cutting tax expenditures by extending its definition in
line with international standards.
Expense-related personal income tax (PIT) credits reach substantial amounts and are often
inequitable or distortive. For example, Portuguese households can deduct 30% of their mortgage
interest payments (up to a ceiling), which distorts investment towards the housing sector. Also, tax
credits exist for education expenses at all levels (e.g., books, tuition fees) and health care
expenditure (e.g., doctor payments, medicine). All are regressive as they benefit higher income
earners most. Expense-related tax credits should be reduced or eliminated. In Portugal, both pensioners
and the self-employed tend to pay less PIT than salaried workers. Pensions enjoy a more generous
allowance than salaries, with no evident justification. Therefore, to further strengthen the
convergence of allowances already envisaged by the government, pension allowances should be set at
the same level as for salary income. Concerning independent workers, the income declared tends to
be low, as they remain hard to tax. Portugal should step up tax audit of independent workers to avoid
significant losses in PIT and SSC revenues.
Though the statutory rate of the Portuguese corporate income tax rate (CIT) is above the EU19
average, effective rates are comparatively lower, due to numerous base narrowing provisions. Many
of these tax expenditures increase administrative and compliance costs, and further hamper

productivity through the dispersion of effective tax rates and the ensuing distortions of
investment. Significant progress has been made in fighting fraud and evasion, but several
indicators suggest that the scope for increasing tax compliance is far from exhausted. The
authorities should streamline CIT provisions, abolishing inefficient tax expenditures and promoting base
broadening. The statutory rate, which retains some importance for investment decisions due to its high
visibility, could eventually be decreased, after sufficient fiscal consolidation has been achieved.
Portugal makes extensive use of reduced VAT rates. The resulting revenue losses are among
the highest in the EU. Further, applying reduced rates to some sectors, such as the hospitality
industry, is a poor way of targeting low-skill workers. Reduced rates for restaurants are also
recognised as ineffective in increasing demand. The authorities should substantially extend the scope of
application of the VAT standard rate. The potential regressive impact of this reform could be compensated by
targeted income support to poor households.
A three-layer strategy to climb the productivity

ladder at a faster
A strategy to increase productivity and competitiveness should be effective at delivering

productivity growth from the short to the long term. In the short term, there are significant margins
to increase productivity by encouraging the entry of efficient firms and the exit of inefficient firms,
particularly so in non tradable services. In the medium term, further productivity gains can be
achieved by continuing climbing the value-added chain in the traditional exporting industries, such
as textile and tourism. In the long run, structural policies should favour the reallocation of resources
to the high productivity growth sectors such as the skill and technology intensive industries.
Improving transport infrastructure, as soon as financial conditions permit, but more importantly
closing the country’s substantial educational gap should help in that direction.
Further enhancing the business environment
The government has already made significant progress in improving the business
environment through a wide range of reforms, including simplifying administrative procedures to
do business and easing labour protection legislation. Consolidation of these reforms is essential,
which implies addressing some remaining bottlenecks. Portugal should ease licensing procedures
further, notably at the local level. The length of the judicial process and the instability of the tax system
should be reduced. To foster regional competitiveness, the “Competitiveness and Technology Hubs”
initiative is a promising approach and should be pursued further. Portugal should expand industrial
clusters and further develop co-operation programmes between firms and the R&D sector, but the
effectiveness of such programmes should be evaluated. The government announced in its Stability and
Growth Programme 2010 a number of measures to rationalise state-owned enterprises (SOEs).
Portugal should further reduce the scope of the public enterprise sector by resuming the privatisation process
as soon as the financial market conditions improve. The authorities should also increase efficiency in the SOEs
by expanding performance monitoring mechanisms.

Addressing infrastructure bottlenecks to foster

productivity while promoting green growth
For a small peripheral country like Portugal, transport infrastructure is fundamental to

achieve higher competitiveness. The government has launched a number of ambitious measures
to enhance Portugal’s transport infrastructure, notably via an ambitious integrated approach in
high-speed railway and port platforms, partly aimed at enhancing the connections with Spain. Due
to budgetary pressures, some of the projects have been postponed, notably the construction of the
new Lisbon airport. While postponing costly investment projects given current market pressure is a
legitimate decision, the authorities should resume the new airport construction as soon as the financial
conditions permit. Nonetheless, transport infrastructure project selection should be based on transparent
and careful cost-benefit analysis based on cautious demand forecasts.
Reducing greenhouse gas (GHG) emissions from the transport sector is a major challenge for
Portugal. These emissions have nearly doubled since 1990. Furthermore, the transport sector
imposes other external costs, such as congestion, an important problem in urban and
metropolitan areas. The need to reduce the overreliance on road transportation has been
acknowledged by the authorities, who should pursue policy initiatives to eliminate the bias in favour of
road transportation. But more fiscal tools should also be introduced to address externalities from the
road sector. Although fuel taxes are comparatively high and car taxes feature strong CO2-based
differentiation, the use of price-based instruments to address externalities other than GHG
emissions is very limited. For instance, user charges in road transportation (essentially tolls) are
only differentiated according to vehicle type. Portugal should consider addressing transport sector
externalities through extended infrastructure use charges – for instance, tolls differentiated according to
location, time and vehicle environmental efficiency, or smart parking pricing. Some of these could provide a
new source of revenue for local governments. The authorities also need to improve the supply and governance
of metropolitan public transportation.
Education policies: achieving stronger

performance and inclusion
Education should remain on top of the agenda to boost productivity. The government has been
extremely proactive in reforming the education system to up-skill the labour force and to reduce
the level of early school leaving. However, Portugal’s educational gap is compounded by a lack of
equity with respect to educational opportunities. Achieving equity in education can be a goal in
itself, but it is also desirable from an economic perspective. The economic benefits from education
are large, and particularly so in Portugal, where returns to education are the highest among
European OECD countries. Education also improves economic outcomes indirectly because it is
associated with better health, and with successful parental and civic participation. Finally,
achieving higher inclusion through better equity in the education system can help address the
dual and segmented nature of the Portuguese economy.

Focusing on vocational education and training

is key to reducing dropouts and upskilling
the population
The government’s focus on diversifying educational offerings, in particular through the

promotion of vocational educational, is a major development in Portugal in the current context. It
is key to prevent failure at school and drop-outs, and an effective tool to upgrade adults’
qualifications. The authorities have been strengthening the supply of technical education, VET
(vocational education and training), adults’ qualification and several higher education
programmes. Major reforms under this strategy are gathered under the Novas Oportunidades
programme, launched in 2005. There has been a large expansion of the network of VET providers
and a dramatic diversification in the supply of vocational education and training courses at the
upper-secondary level. The government now needs to enhance information on the various VET courses. The
authorities should support the creation of a comprehensive career guidance website. Going further, Portugal
should rely more on professionally-oriented training and apprenticeships systems. There are currently
more than one million candidates enrolled in the adult axis of the Novas Oportunidades centres.
Portugal’s experience is quite unique in this respect. It is crucial at this stage of implementation that the
quality of services provision matches the needs of participants in the programme and that training meets
labour market demand. The authorities should further expand evaluation tools to monitor the effectiveness
of the programme.
Reforming schools to achieve higher educational

quality
In 2009, Portugal raised the age of compulsory education from 15 to 18 years old. Widening
mandatory school comes as a corollary to all the work developed on the diversification of the
educational supply. This strategy has the advantage of providing a clear signal about the
importance of education. It is essential to provide training to school managers and teachers to address
increased diversity and heterogeneity in the student body. Raising compulsory schooling should not
come at the cost of educational quality. Portugal should closely monitor the impact of the rise of the
compulsory age of education, including on schools’ performance, taking into account the socioeconomic
context in which schools operate.
Over the last three years, important measures have been taken to strengthen teachers’ skills
and improve the quality of teaching. In particular, Portugal is introducing teacher performance
evaluation at the primary and secondary level. It will be important to implement training for teacher
evaluation systematically within schools. As teacher evaluation takes place at the school level, Portugal
should ensure appropriate articulation between school evaluation and teacher evaluation. To improve the
quality of education and the efficiency of educational expenditure, Portugal should further increase school
autonomy and accountability.
School repetition in Portugal is among the highest in OECD countries, even though grade
retention is known to be ineffective and to pose risks for equity. This is an issue of concern for
Portugal as the impact of family background on school achievement is among the highest of OECD
countries. Portugal should reduce high rates of school-year repetition and continue strengthening monitoring
mechanisms of those at risk of dropping out, particularly at transition points in secondary school.

Targeted interventions should help prevent

underachievement
More than in other OECD countries, Portugal displays poor educational outcomes in
socio-economically disadvantaged schools. This suggests that general increases in resources may
not be very effective in raising equality of opportunity. Portugal has recently introduced a number
of measures to target education spending to disadvantaged schools and pupils. One of the most
important measures is “Educational Territories of Priority Intervention” (TEIP). External evaluation
mechanisms should be reinforced in every school to properly evaluate the effectiveness of the TEIP
programme. There should be incentives for qualified teachers to work in difficult schools. Consideration
should also be given to incentive-based pay for teachers. More broadly, Portuguese schools should be given
more autonomy for hiring staff in the context of stronger accountability.

OECD Economic Surveys: Portugal
© OECD 2010
Chapter 1
Rebalancing the economy

towards sustainable growth
Since the early 2000s, Portugal has seen its convergence process towards more
developed OECD economies come to a halt. Slow trend growth has mostly reflected
the imbalances of the Portuguese economy. Over-reliance on consumption, weak
labour productivity gains and insufficient wage moderation have led to a marked
deterioration of competitiveness, especially until 2006, and sizeable external
indebtedness. The economic crisis is likely to have worsened the situation as
potential growth has probably taken a hit and fiscal sustainability has deteriorated,
which has fuelled a rise in sovereign spreads. To rebalance the Portuguese economy
and move towards a higher and sustainable growth path, rapid consolidation of the
public finances is essential. Consolidation measures should continue to be strictly
implemented, preferably through expenditure restraints, but the government should
stand ready to curb tax expenditures and raise the least distortive taxes if needed.
The opportunity to make the tax system more growth-friendly should be seized, as
analysed in Chapter 2. Policies to boost potential growth should be pursued, in part
because stronger growth will help to restore fiscal sustainability over the long run.
To boost labour utilisation, the authorities should revise the unemployment benefit
structure and reduce the dualism of the labour market. Raising labour productivity
is also a challenge and is addressed in Chapter 3.
19
1. REBALANCING THE ECONOMY TOWARDS SUSTAINABLE GROWTH
Portugal was hit hard by the global crisis, which exacerbated underlying
weaknesses
A deep recession in 2009, which will have a lingering impact on growth prospects
The need to correct imbalances will slow the recovery
After several years of sluggish growth, the Portuguese economy entered into recession
in late 2008 as a consequence of the global crisis. GDP fell by 2.6% in 2009 (Figure 1.1), the
worst outcome since 1975 but nonetheless a smaller contraction than in the euro area as a
whole (–4.1%). The absence of a real estate bubble in the years preceding the crisis and the
overall good shape of the financial sector, as confirmed for the main banks by the recent
EU-wide stress tests (Box 1.1), partly explains this relative resilience. In addition, the larger
weight of Portuguese private consumption (Figure 1.2) and a vigorous increase in public
consumption helped cushion the fall in foreign demand.
The fiscal deficit started to deteriorate in 2008 and reached 9.3% of GDP in 2009. This
followed a large fiscal consolidation in 2005-07 and, to some extent, was induced by
measures that were not directly related to the crisis, such as a cut in VAT and a sizeable (2.9%)
wage increase for civil servants in 2009. The stimulus packages per se included cuts in direct
and property taxes, faster VAT refunds, a temporary increase in social and employment
support, increased public investment, subsidies to promote the use of renewable energy
sources and other forms of support to economic activity, such as credit lines to small and
medium-sized enterprises (SMEs). Worsening public accounts also arose from the automatic
stabilizers, compounded by adverse compositional effects in private consumption (a large
fall in durables), which further depressed tax revenues. Finally, a residual set of factors
played a role in the deterioration in the budget deficit, such as the absence in 2009 of the
significant temporary proceeds witnessed in 2008, and a fall in VAT revenues beyond what
can be accounted for by macroeconomic developments and policy measures.
While the large size of consumption and the fiscal stimulus helped stabilise the
economy in the short term, they both pose problems for the future. A rebalancing of
growth from private consumption to external demand will be needed to correct external
imbalances. Relatively high public indebtedness (Figure 1.1) combined with weak potential
growth makes fiscal consolidation a pressing concern to prevent the development of a
snowball effect. With general market nervousness in the peripheral euro area countries,
investors became more reluctant to buy Portuguese debt in spring 2010 and spreads peaked
in early May 2010 (Figure 1.1). As a response, the government revised its fiscal
consolidation programme by making it more frontloaded. The authorities decided to
postpone some major investment projects, such as the new Lisbon airport, and set more
ambitious deficit targets from 2010 to 2013, announcing additional consolidation measures
and bringing forward some measures initially scheduled for 2011.
In the coming years, growth is projected to remain modest (Table 1.1). Fiscal
consolidation will constrain public consumption and household income growth. Private
consumption is also hampered by high indebtedness, an already low saving rate and

Figure 1.1. General developments

% change % ch, annual rate
7 6
6 A. Real GDP B. Inflation
5
4 4
3
2
1
2
0
-1
-2 Portugal Portugal, HICP
-3 Euro area 0
Euro area, HICP
-4
-5
-6 -2
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Per cent Per cent % of GDP
10 75
C. Labour market D. Public accounts 51
9 Unemployment rate (left scale) 74 Government expenditure
49
Employment rate (right scale) Government revenue
8 73 47
7 72 45
43
6 71
41
5 70
39
4 69
37
3 68 35
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
% of GDP Basis points
800
155 E. Gross public debt F. Spread on 10-year treasury bonds
vis-à-vis Germany, monthly values 700
140 Portugal Ireland
Spain Germany Portugal Ireland 600
125 Greece Italy Spain Italy
Greece
500
110
400
95
80 300
65 200
50 100
35 0
20 -100
1998 2000 2002 2004 2006 2008 2007 2008 2009 2010
Source: OECD, OECD Economic Outlook and Main Economic Indicators Databases.
1 2 http://dx.doi.org/10.1787/888932330441
unfavourable labour market conditions, with the unemployment rate expected to remain
above 10%. Ample spare capacity and expectations of weak demand continue to depress
investment, and concerns about sovereign risk are weighing on credit conditions more
generally. Despite the recovery in external demand, poor competitiveness undermines
export growth: both the rise in labour costs during the crisis and weak productivity make it
unlikely that Portugal will regain significant market share in 2010 and 2011. A large
negative output gap will keep price and wage inflation low, which is needed to restore
competitiveness. The current account deficit may only be reduced slowly, however, as the
net investment income balance is expected to worsen.

Box 1.1. Measures to support the financial sector and recent developments
In the last quarter of 2008, at the climax of the financial crisis, the Portuguese authorities
took several measures to reinforce financial stability. These measures included the provision
of state guarantees to securitise debt issues by Portuguese banks (up to 20 000 million euros),
funds for bank recapitalisation (up to 4 000 million euros, within the preceding 20 000) and a
four-fold increase in deposit guarantees (from a maximum of 25 000 to 100 000 euros per
depositor and per institution). Only around a quarter of the ceiling for state guarantees has
been used so far, and none has been provided since April 2009. Further, no private institution
has taken advantage of the recapitalisation facility, which to date has only been activated for
a 1 000 million euro capital increase of the State-owned Caixa Geral de Depósitos (CGD), held
in 2009 to further strengthen CGD’s sound capital ratios. The government has extended the
debt guarantees and recapitalisation schemes until the end of 2010, while the increase in
deposit insurance will expire one year later.
Insolvency problems were confined to two small banks, Banco Português de Negócios
(BPN) and Banco Privado Português (BPP), which at the end of 2007 accounted for only 1.8%
and 0.5% of the banking system total assets, respectively (Banco de Portugal, 2010). In both
cases, the global crisis may have worked as a detonator of latent fragilities induced by
alleged mismanagement and fraud. Fearing systemic repercussions, the authorities
nationalised BPN in November 2008 and placed it under CGD management. BPN
reprivatisation procedures are under way. The smaller BPP received from six Portuguese
banks a 450 million euro loan which benefitted from a state guarantee, and a provisional
administration was entrusted with preparing and submitting to the authorities a recovery
plan for the bank. The ensuing proposals were deemed unsatisfactory, and a decision to
liquidate the institution was taken in April 2010.
The fact that the Portuguese banking sector has weathered relatively well the global
crisis can be attributed to the absence of a real estate speculative bubble in Portugal, as
well as to no substantial exposure to subprime-related complex assets. Portuguese banks
did not have to shrink their balance sheets in either 2008 or 2009. Credit to households and
non-financial firms has continued to expand, though with a very marked slowdown since
mid-2008. During 2009, these developments were made possible by a gradual
normalisation in wholesale debt markets and by a strong increase in banks’ capital,
moving up the overall capital adequacy ratio and the Tier I ratio. Participation in the
Eurosystem’s one-year fixed-rate refinancing operations with full allotment was also
sizeable. Non-performing loans reached historically high but still manageable levels, with
some stabilisation or even mild reversal in late 2009 and early 2010. Information pertaining
to the first quarter of 2010 broadly confirms 2009 trends (Banco de Portugal, 2010).
Despite its overall resilience and good performance, the Portuguese financial sector
continues to face non-negligible risks. Renewed tensions in the sovereign bond market will
affect the price and availability of banks’ wholesale funding. Stock market fluctuations are
another source of market risk, with implications for profitability and solvency both
through banks’ own portfolios and via those of their pension funds. Finally, greater
materialisation of credit risk cannot be ruled out either, associated inter alia to the short-
run contractionary impact of fiscal consolidation and to the likely gradual increase in
interest rates, and thus debt service costs, from their current historically low levels. Credit
and market risks, on which the recent EU-wide stress tests have mainly focused, remain
nonetheless manageable: the four Portuguese banking groups involved in the stress test
exercise (accounting together, directly or indirectly, for almost two thirds of the banking
system total assets in 2009) have displayed a high degree of resilience to the test’s adverse
scenario, with therefore no need for recapitalisation.

Figure 1.2. Private consumption

As a percentage of GDP
80 80
Portugal United States
Germany Euro area
75 Italy OECD 75
Spain
70 70
65 65
60 60
55 55
50 50
1996 1998 2000 2002 2004 2006 2008
Source: OECD, OECD Economic Outlook Database.

Table 1.1. Portugal: Demand, output and prices1

2006 2007 2008 2009 2010 2011
Current prices
Percentage changes, volume (2000 prices)
EUR billion
Private consumption 101.6 1.6 1.7 –0.8 1.5 0.1

Government consumption 32.1 0.0 1.1 3.5 –0.9 –1.0
Gross fixed capital formation 33.8 3.1 –0.7 –11.1 –5.4 1.1
Final domestic demand 167.5 1.7 1.1 –2.1 –0.2 0.0
Stockbuilding2 0.7 0.1 0.3 –0.4 0.3 0.0
Total domestic demand 168.2 1.7 1.3 –2.5 0.0 0.0
Exports of goods and services 48.2 7.8 –0.5 –11.6 5.3 5.3
Imports of goods and services 61.0 6.1 2.7 –9.2 1.9 2.3
Net exports2 –12.8 0.0 –1.4 0.1 1.0 0.8
GDP at market prices 155.4 1.9 0.0 –2.7 1.0 0.8
GDP deflator – 3.0 2.0 1.2 0.7 1.2
Memorandum items
Harmonised index of consumer prices – 2.4 2.7 –0.9 0.9 1.1
Private consumption deflator – 2.7 2.6 –1.8 1.3 1.4
Unemployment rate 8.0 7.6 9.5 10.6 10.4
Household saving ratio3 – 6.1 6.4 8.8 6.9 6.4
General government financial balance4, 5 – –2.7 –2.9 –9.4 –7.4 –5.6
Maastricht definition of general government gross public debt4 – 63.6 66.3 76.8 84.9 88.5
Current account balance4 – –9.4 –12.0 –10.3 –10.2 –10.3
1. National accounts data and definitions refer to base 2000, and are hence prior to the recent updating to base 2006.
2. Contribution to changes in real GDP.
3. As a percentage of disposable income.
4. As a percentage of GDP.
5. Based on national accounts definition.
Source: OECD, OECD Economic Outlook 87 Database.
The crisis will durably affect potential output

The economic crisis is likely to result in a permanent loss in the level of potential
output in Portugal so that, even as the recovery takes hold, GDP may not attain its pre-crisis
level for some time. The last Economic Outlook projections (OECD, 2010a) incorporated

reductions in potential output mainly due to increased capital costs and higher structural
unemployment, but also from reduced labour force participation. The bulk of the total loss
is estimated to come about as a consequence of changes in potential labour input.
Although the extent of this loss is uncertain,1 it will be large enough to put additional
pressure on already strained public finances as it will also mean a reduction of taxable
capacity as well as some increase in social transfers. This suggests that structural policy
responses to the crisis can either amplify or dampen the negative impact of the crisis on
potential output and have important implications for Portugal: well-designed labour
market policy can reduce the risk that the economic crisis results in a permanent and long-
lasting loss of potential output (see below).
Underlying weaknesses of the Portuguese economy have been exacerbated

Poor external competitiveness…
Eroded external competitiveness lies at the heart of Portuguese macroeconomic
problems. Since the mid-1990s the real exchange rate has persistently appreciated, leading
to a growing wedge in manufacturing unit labour costs relative to core European countries
(Figure 1.3, Panel A), especially until 2006.2 Though successive years of low growth and
rising unemployment over the past decade have led to more moderate cost increases than
in other countries, such as Spain, Portugal has failed to reverse the real appreciation trend,
and hence to regain any competitiveness. Indicators also suggest that profitability in
sectors exposed to international trade deteriorated, as the cumulated increase in relative
export prices of less than 20% since 1996 (Figure 1.3, Panel B) was smaller than that of costs
(more than 30%; Figure 1.3, Panel A). Competitiveness developments relative to most
central and eastern European countries have also been adverse, leading to a comparatively
high level of unit labour costs in manufacturing (Figure 1.4).3
Increases in unit labour costs have been due both to a disappointing productivity
performance and to insufficient wage moderation, where pressures from the sheltered
sectors (including the public sector) are likely to have played a major role. Indeed, the relative
price of non-tradables to tradables has risen markedly (Figure 1.5), mainly reflecting the
former sectors’ greater ability to pass labour costs onto prices. There is indeed evidence of
weak competitive pressure in services in Portugal (Chapter 3 and OECD, 2010b).
Alternative measures of manufacturing competitiveness, with a wider breadth than
the price and cost dimension, also point to Portugal’s weaknesses. Recent work based on
firm-level data for the years 2002-03 present indicators to evaluate the competitiveness of
European firms in terms of efficient use of available inputs, given the institutional and
market setup in which they operate (Ottaviano et al., 2009). According to the first indicator,
called “overall competitiveness”, Portugal ranks in the last position among 12 European
countries (Figure 1.6).
The same analysis provides a second indicator called “producer competitiveness” to
assess whether a country’s competitiveness is due to geography or factors that can be
influenced by policy. Portugal’s ranking is not altered by this adjustment (Figure 1.6), which
suggests that the country’s position is not the outcome of geographical location, but rather
of institutional and technological disadvantage. Sweden is similarly located on the periphery
of Europe, as Portugal, and it ranks only eighth in terms of overall competitiveness. However,
it ranks second in terms of producer competitiveness, which implies that a good institutional
environment can counteract the negative effect of geography.

Figure 1.3. Competitiveness indicators
Index 1996=100 Index 1996=100

170 170
160 A. Unit labour costs in manufacturing, relative to Germany 160
150 Portugal Spain 150

France Greece
140 Italy Ireland 140
130 130
120 120
110 110
100 100
90 90
80 80
70 70
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Index 1996=100 Index 1996=100

150 150
B. Exports of goods and services, deflator, relative to Germany
Portugal Spain
140 140
France Greece
Italy Ireland
130 130
120 120
110 110
100 100
90 90
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

… led to unsustainable external imbalances…

Deteriorating competitiveness cut export market shares; Portugal’s cumulative losses
since the mid-1990s come close to 20% (Figure 1.7), though with a broad stabilisation as
from 2006. A high specialisation in low-technology industries (such as textiles and
clothing) which are heavily exposed to competition from low-cost non-European producers
accounts for part of those losses, especially in 2004 and 2005. However, market share losses
in recent years also took place in medium-high technology sectors, such as electrical
machinery or transport equipment (Amador and Cabral, 2008), where Portugal faces strong
competitive pressure from central and eastern European countries. Indeed, there is
evidence of some association between cost competitiveness and market shares at the
sectoral level, not only in traditional sectors but also in more modern industries (OECD,
2008a). More encouraging developments took place in exports of services, where double-
digit real growth in 2006 and 2007 played an important role in stabilising overall goods and
services market shares.

Figure 1.4. Unit labour costs in manufacturing1
80 80
2006 2000-2006 changes
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
POL HUN SVK BGR ROU CZE SVN PRT
1. Levels. Annual unit labour costs (ULCs) are calculated as the quotient of total labour costs and real output.
Source: OECD, OECD Unit Labour Costs – Annual Indicators Database.
Figure 1.5. Ratio of services to industrial goods prices

Index 1996=100 Index 1996=100
160 160
150 Portugal Spain 150

France Greece
140 Germany Ireland 140
Italy
130 130
120 120
110 110
100 100
90 90
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Eurostat.
Over the past decade, Portuguese exporters have gone some way in tapping
opportunities in fast-growing emerging markets, which nonetheless remain far from fully
explored. Sizeable losses were recorded in mature European markets, with the notable
exception of Spain (Table 1.2), and greater geographical diversification of exports has
occurred, with the weight of non-EU15 destinations progressing by almost 10 percentage
points (Table 1.3). However, more than half of this increase is accounted for by the very fast
growth of sales to a single country, Angola. In the absence of soaring exports to Angola, the
aggregate market share indicator (Figure 1.7) would actually have further deteriorated,4
rather than broadly stabilised, from 2005 onwards. In contrast, the presence of Portuguese
firms in the largest emerging markets, such as China or India, remains residual.
Overall, a large and persistent goods and services imbalance, reflecting excessive
consumption, weak export performance until 2005 and relatively high energy imports
(addressed below), has been the main driving force behind large current account deficits,5

Figure 1.6. Countries’ competitiveness rankings based on firm-level indicators
14 14
12 Overall competitiveness ¹ 12
Producer competitiveness ¹
10 10
8 8
6 6
4 4
2 2
0 0
BEL FIN NLD DEU FRA AUT DNK SWE GBR ITA ESP PRT
1. Firm-level indicators. A high value indicates low competitiveness.

Source: Ottaviano, G., D. Taglioni and F. di Mauro (2009), “The Euro and the Competitiveness of European Firms”,
Economic Policy, January 2009.
Figure 1.7. Export performance1

Index 1996=100 Index 1996=100
180 180
Portugal Spain
160 France Greece 160
Germany Ireland
140 Italy 140
120 120
100 100
80 80
60 60
40 40
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1. Exports of goods and services relative to export market.

the subsequent deterioration in the net international investment position, and the
resulting growing net investment income deficit (Figure 1.8). To a smaller extent, the
current account has also worsened due to shrinking surpluses in current and capital
transfers, which reflect the decreasing importance of migrants’ net remittances and, more
recently, also of EU structural funds inflows. The current account deficits of the past fifteen
years are clearly unsustainable, as weak potential growth would lead to a snowball effect
on foreign indebtedness. In 2009, the negative international investment position already
stood at –109.0% of GDP, higher than in Spain, Greece or Ireland.
Portugal’s large energy balance deficit (4.4% of GDP in 2008, against 3.3% in the EU19) is
due inter alia to structural features such as above-average energy dependence and energy
intensity (Amador, 2010), and entails an enhanced vulnerability to oil price shocks, as
witnessed in 2008. To tackle these problems, as well as to reduce CO2 emissions (see
Chapter 3), the government has been actively promoting stronger reliance on renewable

Table 1.2. Portugal’s share in selected import markets

As a percentage
2000 2008
Angola1 17.3 16.5

Spain 2.7 3.3
France 0.9 0.9
Germany 1.1 0.5
United Kingdom 0.8 0.5
Netherlands 0.5 0.4
Italy 0.4 0.4
Brazil 0.3 0.4
Belgium 0.8 0.4
Russian Federation 0.1 0.1
United States 0.1 0.1
China 0.02 0.03
India 0.02 0.02
1. Mirror data (Angola’s imports are inferred from the exports of reporting
countries).
Source: Comtrade Database, UNCTAD (2010).
energy sources and higher energy efficiency. The ambitious targets for 2020 set in the recent
National Energy Strategy, which include a 20% reduction in final energy consumption and a
fall in energy dependence to 74%,6 are expected to reduce net energy imports by around
2 000 million euros (slightly above 1% of GDP) relative to 2010. Estimating the overall impact
on the current account is nonetheless more complex: the fall in energy imports and the
development of energy-related industrial clusters with export potential need to be weighed
against more expensive electricity from renewable sources (at least at current oil prices) and
the opportunity cost of resources channelled into renewable energy.
Current account deficits have mirrored the shortfall in saving relative to investment, to
which both households and non-financial companies have contributed. In the second half of
the 1990s, booming housing and firms’ investment decreased households’ net lending, and
increased corporations’ net borrowing. These developments took place in an environment of
rapidly falling interest rates, and could plausibly be interpreted at the time as a largely
benign private sector response to a new macroeconomic regime (Blanchard, 2007). Since the
turn of the century, however, despite a decline in investment, indebtedness has continued to
grow. Household saving has decreased markedly, as a consequence of robust private
consumption. Saving by companies has also declined, mainly due to growing dividend
distribution and, more recently, to higher interest payments as well. Portuguese banks have
continued to borrow abroad to finance the huge credit demand from domestic private
agents, which in the case of firms has overwhelmingly been channelled to non-tradable
sectors.7 As a result, households’ and especially companies’ debt-to-GDP ratios are now
among the largest in the euro area (Banco de Portugal, 2010 and Figure 1.9).
… whose unwinding will require sustained medium-term austerity efforts

Halting the rising trend in foreign indebtedness will require a major improvement in
the goods and services balance, which would prove disruptive if it were to be fully achieved
in the short term. In arithmetic terms, stabilising the international investment position (as
a share of GDP) at the 2009 level would require an immediate and permanent improvement
of the “primary” current account (i.e., net of the income balance) close to 7 percentage

Table 1.3. Shares in Portuguese exports

As a percentage
1990 2000 2009
EU15 80.6 80.3 70.3

Of which:
Spain 13.5 19.3 26.3
Germany 16.7 18.1 13.0
France 15.5 12.7 12.1
1
Former African colonies 3.4 2.5 8.5
Of which:
Angola 2.5 1.4 7.2
European Union new members + Turkey 0.42 1.7 3.3
United States + Canada + Japan 6.7 6.8 3.6

Of which:
United States 4.8 5.8 3.0
Latin America (without Brazil)3 0.3 0.8 1.5

Of which:
Mexico 0.0 0.2 0.6
2
BRICS 0.9 1.3 2.1
Brazil 0.3 0.8 0.9
China 0.2 0.2 0.6
Russian Federation 0.1 0.3
South Africa 0.2 0.2 0.2
India 0.2 0.1 0.1
MENA (Middle East and North Africa)4 0.9 1.2 2.5

Of which:
Morocco 0.3 0.4 0.7
Algeria 0.1 0.1 0.6
Tunisia 0.0 0.1 0.4
Saudi Arabia 0.1 0.2 0.2
ROW 6.8 5.4 8.2
1. Angola, Cape Verde, Guinea-Bissau, Mozambique, São Tome and Principe.

2. Data for 1990 excludes Czech Republic, Slovenia, Slovak Republic, Estonia, Latvia, Lithuania and Russian
Federation.
3. Argentina, Bolivia, Mexico, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador,
Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela.
4. Algeria, Morocco, Tunisia, Libyan Arab Jamahiriya, Egypt, Bahrain, Djibouti, Islamic Republic of Iran, Iraq, Jordan,
Kuwait, Lebanon, Oman, Occupied Palestinian Territory, Qatar, Saudi Arabia, Syrian Arab Republic, United Arab
Emirates, Yemen and Sudan.
Source: OECD, International Trade by Commodity Statistics Database (ITCS).
points of GDP.8 A more orderly unwinding of current account imbalances can be envisaged
in the medium term if external demand is supportive, market share losses are reversed, or
at least halted, and the ratio of consumption to GDP gradually declines. Fiscal policy can
contribute to this adjustment process by switching taxes from labour to consumption, in a
revenue-neutral way (see also Chapter 2) and by setting the tone for the private sector in
terms of wage restraint.
The adjustment of macroeconomic imbalances can be speeded up by keeping public
sector wages at bay to encourage economy-wide wage restraint. Indeed, public wages have
a relatively strong influence on the wage-setting process in Portugal, compared to other
European countries (Lamo et al., 2008). Moreover, there is strong evidence, when comparing
like for like, that the wages of civil servants are set at a figure far above the private sector

Figure 1.8. Current account imbalances and external indebtedness
% of GDP % of GDP
10
-10
5
-30
0
-50
-5
-70
-10 -90
Income balance (left scale)
Current transfers (left scale)
Capital transfers (left scale)
-15 Energy balance (left scale) -110
Non-energy balance (left scale) Goods and services balance
Current account including capital transfers (left scale)
International investment position (right scale)
-20 -130
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Banco de Portugal and OECD, OECD Economic Outlook Database.

Figure 1.9. Financial debt1

150 Households and non-profit institutions serving households 150
2009
2000 ²
100 100
1996
50 50
0 0
ITA FRA GRC DEU ESP PRT IRL
250 Non-financial corporations 250
200 2009 200

2000 ²
150 1996 150
100 100
50 50
0 0
DEU GRC ITA FRA ESP PRT IRL
1. Financial debt is calculated as the sum of loans and securities other than shares using consolidated amounts
except for Ireland. The latest available year is 2008 for France, Italy and Spain.
2. Data refer to 2001 for Ireland.
Source: Eurostat and OECD, OECD Economic Outlook Database.

(Portugal and Centeno, 2001). Against this background, the authorities should extend the
freeze in nominal public sector wages until 2013 (while retaining performance-based
bonuses) and encourage medium-term agreements between social partners to restore cost
competitiveness. Recent evidence suggests that the responsiveness of real wages to
unemployment has declined over the last decade. The indication of a fall in the cyclical
sensitivity of wages may be associated to the nature of the mechanisms of wage
determination in a low-inflation environment, in particular under severe nominal rigidity
of wages, as observed in Portugal (Marques et al., 2009; Portugal, 2006). To some extent, the
low cyclicality of wages might also reflect the widespread use of extension mechanisms
applied in collective agreements (Marques et al., 2009; OECD, 2004).9 Economic research
suggests that administrative extension is a potential device to stifle competition in labour
and product markets (Bassanini and Duval, 2006; Traxler et al., 2001). Portugal should
consider reducing the recourse to legal extension procedures in the wage-setting process.
Policies to restore a sustainable growth path

Fiscal consolidation is a pre-condition for a sustainable recovery
The consolidation strategy aims at bringing down the deficit from 9.3% of GDP in 2009
to 3.0% in 2012 and 2.0% in 2013. The strategy is mostly expenditure-based, especially in
the outer years, with strong restraint in wage and non-wage public consumption, social
transfers and public investment. The contribution from the revenue side, initially modest,
was significantly scaled up by the additional measures announced in May 2010 (Table 1.4).
These have included, besides the earlier phasing out of all the anti-crisis stimulus
measures and further expenditure cuts, a 1 percentage point increase in all VAT rates and
hikes in personal and corporate direct taxes. Annex 1.A2 details the main consolidation
measures – both initial and additional – and their estimated direct budgetary impacts.
Table 1.4. Direct effects of fiscal consolidation measures

2010 2011 2012 2013
Decrease in expenditure 0.5 2.0 2.7 3.4

March 2010 Stability and growth programme (SGP) measures – 1.2 2.1 2.7
May 2010 additional measures1 0.5 0.8 0.7 0.7
Increase in revenue 0.6 2.1 2.1 2.2

March 2010 Stability and growth programme (SGP) measures – 0.6 0.7 0.8
May 2010 additional measures1 0.6 1.4 1.4 1.4
Total effects 1.2 4.1 4.9 5.6
1. Effects in 2010 also include the frontloading of some SGP measures.

Source: Portuguese Ministry of Finance.
Continuing to implement the consolidation measures in a strict way is essential to

secure fiscal sustainability, even if the cyclical situation turns out worse than expected.
Otherwise, the financing conditions for both the public and private sectors may deteriorate
substantially, with a sharp increase in risk premia and severe consequences for economic
growth. It is also important to maintain a strong political consensus for fiscal
consolidation: if acute market stress were to resurface, threatening debt sustainability and
potentially the credit supply to the economy, further fiscal tightening measures may need
to be contemplated. Provided immediate consolidation is successfully carried out and

spreads subside, medium-term fiscal sustainability should not be threatened by the

financial sector, which is considered as sound (Box 1.1). Also, the projected long-run
increase in pension spending (as well as total ageing costs) is below the EU average
(Figure 1.10), owing to major pension reforms carried out from 2005 onwards whose
implementation pace is being accelerated in the recent SGP.
Figure 1.10. Projections of pension spending in EU countries1

2010-60 change, in percentage points
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
POL ITA SWE FRA PRT DEU FIN CZE NOR IRL MLT SVN LUX
EST DNK LVA AUT HUN GBR SVK NLD BEL LTU ESP GRC
1. Pension spending includes gross public pensions (i.e. before taxes and compulsory social security contributions)
and is expressed as a percentage of GDP.
Source: Eurostat.
Thoroughly reforming the budgetary process will enhance the credibility of the fiscal
adjustment and help improve the efficiency of public spending, therefore making
expenditure cuts more sustainable from an economic and social point of view. In a
welcome step, the authorities have announced the intention to revise the Budget
Framework Law in the near future, which should be used as an opportunity to adopt a
comprehensive medium-term expenditure framework supported by an expenditure rule,
in line with the OECD’s Review of Budgeting in Portugal (OECD, 2008b). A way to achieve
this would be to enshrine in the Framework Law an expenditure ceiling (Loureiro et al.,
2008). Regularly conducting sectoral expenditure reviews would foster efficiency in
important areas of public policy and would thus also help underpin aggregate budget
discipline. In line with the decision taken in May 2010 to reduce transfers to local and
regional governments, whose spending growth has tended to outpace that of central
authorities, budget rules should ensure that expenditure restraint is shared across all tiers
of government. Though often outside general government, more efficient management of
state-owned enterprises (see Chapter 3) is also important for public spending control
through reduced subsidies and capital transfers, as envisaged by the authorities.
Fiscal consolidation should attempt to minimise any negative impacts on potential
growth. From this perspective, an expenditure-based consolidation is generally regarded as
preferable to a revenue-side one, leading to more sustainable fiscal consolidation.
Nonetheless, as the magnitude of the necessary fiscal adjustment in Portugal is sizeable,
the government should stand ready to raise taxes further, if needed. However, it is
important to minimise the negative impacts of a higher tax burden on employment and
productivity. Though increases in the rates of personal and corporate direct taxes, such as

those recently adopted, help deliver a rapid deficit reduction, a reform of the tax system
needs to be eventually implemented (Chapter 2), as revenue gains should mainly rely on
consumption and property rather than on labour, and on base broadening rather than on
higher marginal rates.
As further analysed in Chapter 2, base broadening can be pursued both by curbing tax
expenditures and by fighting tax evasion and fraud. The Portuguese tax system offers a
very large scope for the former. Recent announcements by the authorities to reduce tax
expenditures in direct taxes are hence welcome, though still lacking full specification. In
turn, estimates of a comparatively large shadow economy in Portugal (Feld and Schneider,
2010)10 suggest that tackling tax evasion, despite significant progress in recent years, also
remains an important avenue towards base broadening.
Restoring a higher growth path

After joining the EU in 1986, Portugal undertook a wide range of reforms which
contributed to economic growth and allowed the country’s living standards to converge with
those in richer OECD countries. GDP per capita rose from below 60% the OECD average
in 1986 to close to 70% in 2000. However, in the early 2000s, GDP growth in Portugal fell
compared to the OECD average. Growth in GDP per capita averaged 0.4% between 2001
and 2008, and GDP per capita relative to the OECD average fell back over the same period.
A number of OECD countries, similarly lagging behind in the mid 1990s, managed to achieve
significant convergence in a rapidly changing global environment. Portugal experienced a
notable deceleration in its income growth and its catching-up process and a subsequent
deterioration of its relative position, similar in that respect to Italy (Figure 1.11).
Figure 1.11. Growth in GDP per capita in a comparative perspective1

Percentage change at annual rate
7 7
1995-2000
6 2001-2008 6
5 5
4 4
3 3
2 2
1 1
0 0
ITA PRT ESP HUN GRC CZE POL SVK
-1 -1
1. GDP in constant prices, constant purchasing power parities.

Source: OECD, National Accounts Database.
The deceleration in output per capita growth since the beginning of the 2000s was due
to a marked slowdown in trend productivity growth (Figure 1.12). Over the two sub-periods,
labour utilisation remained a relatively minor component of growth. While employment
growth continued to have a positive impact on GDP per capita growth after 2000s, the share
of working age population in total population started exerting a negative impact (OECD,
2008a). In the future, population ageing is expected to result in a negative contribution of

Figure 1.12. Contributions to GDP per capita growth

Total economy, percentage change at annual rate
1995 - 2000
Growth in GDP per capita = Growth in GDP per hour worked + Growth in labour utilisation ¹
IRL
POL
LUX
FIN
HUN
MEX
ISL
PRT
ESP
KOR
NLD
SVK
SWE
CAN
NOR
USA
GBR
GRC
AUT
AUS 2
OECD
BEL
DNK
FRA
TUR
DEU
ITA
CHE
CZE
NZL
JPN
-2 0 2 4 6 8 10 -2 0 2 4 6 8 10 -2 0 2 4 6 8 10
2001 - 2006
Growth in GDP per capita = Growth in GDP per hour worked + Growth in labour utilisation ¹
TUR
SVK
HUN
CZE
KOR
POL
GRC
IRL
LUX
SWE
FIN
ISL
GBR
NZL
AUS
USA
NOR
MEX
CAN
ESP 2
OECD
JPN
DNK
BEL
AUT
NLD
FRA
CHE
DEU
PRT
ITA
-2 0 2 4 6 8 10 -2 0 2 4 6 8 10 -2 0 2 4 6 8 10
1. Labour utilisation is measured as total hours worked per capita.
2. OECD aggregate does not include Poland and Turkey.
Source: OECD, Labour Productivity Database.

labour to growth. Against this background, the next section focuses on how to improve
labour market settings in Portugal so as to respond to the current job crisis while boosting
potential labour in the medium to long run. Resuming the convergence process will also
require structural policies to restore labour productivity growth, as discussed in Chapter 3.
Labour market policies in the aftermath of the crisis

The risk of reduced potential labour input
The risk of rising structural unemployment
Portugal has been facing a steady increase in unemployment since 2002, when it was
about 5.1%. Unemployment fell slightly in 2007, with a low of 7.8% in December 2007,
before rising again as a result of the economic crisis; this deterioration is not as severe as
in some countries, notably those that experienced large housing price bubbles. However,
unemployment has currently reached one of the highest levels in the OECD (Figure 1.13)
and there is great uncertainty looking forward.
Figure 1.13. The rise in unemployment1

OECD harmonised unemployment rates as a percentage of labour force, seasonally adjusted
20 20
18 December 2007 June 2010 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
FIN
NOR
AUS
JPN
NZL
SVN
ITA
OECD
BEL
USA
TUR
GRC
IRL
KOR
AUT
NLD
MEX
ISL
CZE
GBR
G7
CHL
POL
EU27
FRA
HUN
PRT
SVK
ESP
CHE
LUX
DNK
DEU
CAN
SWE
Euro area
1. March 2010 for Greece; May 2010 for Chile and Sweden; April 2010 for Norway, Turkey and United Kingdom;
2007Q4 and 2010Q1 for Switzerland and New Zealand; 2007Q4 and 2010Q2 for Iceland and 2007Q4 for Mexico.
Source: OECD, Main Economic Indicators Database.
The current crisis increases the risk that much of the substantial increase in
unemployment is transformed into higher structural unemployment as a result of so-
called “hysteresis” effects. This might arise because workers who remain unemployed for
a long period may become less attractive to employers, as a result of declining human
capital or because their intensity of job search diminishes (Machin and Manning, 1999).
This risk is particularly high in Portugal, given the significant prevalence of long-term
unemployment in a comparative perspective: 67.8% when long-term unemployment is
defined for 6 months and 48.3% when it is defined for 12 months and over, compared with
respectively 54 and 38.6% in the EU15 on average (2008 data from OECD, 2009a). In Portugal,
the impact of an increase in unemployment on its structural component is relatively
strong in a cross-country perspective: after a permanent shock to unemployment, it is
estimated that 71% of the unemployed eventually become long-term unemployed
(Figure 1.14, see OECD, 2009b).

According to recent estimates (OECD, 2010a), the current downturn could imply a peak
increase in the non-accelerating inflation rate of unemployment (NAIRU) of more than two
percentage points over the period 2007-11.11 This large increase may reflect unfavourable
institutional settings in Portugal – in particular generous long term unemployment
benefits and less competitive product market regulation. Addressing the potential rise in
structural unemployment is particularly challenging because there is some evidence that
the trend increase in structural unemployment started well before the crisis. Centeno et al.
(2009a) stimate that the NAIRU was around 5.5% until the late 90s and increased thereafter
to slightly above 7%; empirical work suggests that part of this trend increase might be
related to the generosity of the unemployment benefit (UB) system (Centeno et al., 2009a;
Bassanini and Duval, 2006).
Figure 1.14. The long-term impact of a unit increase in unemployment

on its long-term component
Effect of 1% rise in unemployment rate on long-term unemployment
1.0 1.0
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0.0 0.0
TUR
IRL
ITA
LUX
NOR
GRC
DNK
FIN
CAN
CHE
DEU
ISL
AUT
FRA
NLD
PRT
POL
CZE
ESP
SVK
NZL
JPN
BEL
SWE
KOR
MEX
HUN
GBR
USA
AUS
Source: OECD (2009), “Adjustments to the OECD’s Method of Projecting the NAIRU”, OECD Economic Outlook, No. 85.
The risk of lower trend labour force participation

The current downturn might also have long-lasting adverse effects on trend labour
force participation, which would further reduce potential output over the medium term.
Discouragement effects seem to be weighing on the Portuguese labour market, as
suggested by analysis of alternative measures of labour market slack (OECD, 2010c). These
effects arise as some workers withdraw from the labour force, as employment opportunities
diminish in a recession. Portugal experienced a decrease of 0.6 percentage points in the
participation rate between 2008 and 2010 (annual data, Figure 1.15).12 One of the key policy
priorities going forward is to avoid a protracted period of labour market slack and to reduce
the risk that the rise in unemployment and the decrease in participation may become
structural. This makes all the more important and urgent to pursue labour market reform
in Portugal (see below).
It is too early to judge what the long-lasting effects will be, but Portugal displays a
relatively high cyclical labour force responsiveness (OECD, 2010a), which can be explained by
a number of sources, including demographic and institutional factors that influence
attachment to the labour force of various categories of the population. Strict employment

Figure 1.15. The decrease in labour force participation

Change between 2008 and 2009
Percentage points Percentage points

3 3
2 2
1 1
0 0
-1 -1
-2 -2
SWE FIN NOR PRT KOR BEL GBR EU19 JPN CZE POL LUX
ISL IRL ITA USA CAN NZL AUS ESP DEU NLD FRA
Source: OECD, Labour Force Statistics Database.

protection legislation (EPL) may help limit job losses in the early stages of the downturn, but
may also hamper hiring in the subsequent recovery, with adverse consequences for
unemployment and participation. This latter effect appears to dominate, so that the adverse
effect on trend labour market participation seven to eight years after a severe downturn is
estimated to be about ½ percentage point more for the countries with the strictest EPL
compared to those with the least strict (OECD, 2010a). Considerable changes in the labour
code over the last two years brought Portugal closer to the OECD average in terms of the
overall rigidity of EPL (2.84 in 2009 versus 2.23 on average in OECD countries). More needs to
be done, however. Protection of permanent workers against (individual) dismissal is still the
strongest among OECD countries (3.51 in 2009 versus 2.09 on average in OECD countries).
The uneven impact of the recession in a dual labour market

There are significant differences across workforce groups and sectors in the way
employment and average working hours respond to the business cycle. In all countries,
already disadvantaged groups, such as youths, immigrants, low-skilled and temporary
workers, bear the brunt of rapidly falling demand for total hours worked.13 A particularly
important reason why some groups may be affected more than others is differences in
their turnovercosts, that is, the costs that employers incur when they replace existing
employees with new recruits (Lindbeck and Snower, 1988, 2001).14 The relative sensitivity
of disadvantaged groups is particularly strong in Portugal in a comparative perspective, due
to the dual nature of the Portuguese labour market.
Historically, workers on a temporary contract have been the most sensitive to changes
in the business cycle in Portugal (OECD calculations based on OECD, 2009a). Their business
cycle sensitivity is almost 6 times higher than that of the national average, suggesting that
they have borne the bulk of labour market adjustment in the downturn. Youths are also
extremely vulnerable: business cycle sensitivity is more than 4 times as high for youths as
for individuals aged between 25 and 54 and 160% above the national average: again,
relative vulnerability is much stronger in Portugal than in other OECD countries. These
effects reinforce each other, given that youth tend to be overrepresented among temporary
workers. The share of youths (15-24) among temporary workers was 23% in the second

quarter of 2009, while their share in overall employment was 8%. Over the same period,
50% of youth were employed under temporary contracts, similar to other European
countries characterised by comparable levels of dualism, such as Spain and Poland (OECD,
2009a and 2010c).
Available labour market indicators confirm the historical patterns.In particular, the
non-renewal of fixed term contracts is by far the most important reason of entry in
unemployment: recent 2010 data show that non-permanent contracts are responsible for
65% of all quarterly transitions from salaried employment to unemployment (Labour Force
Survey data). Total employment fell by 3% from the fourth quarter of 2008 to the fourth
quarter of 2009, with youth and low skilled employment falling respectively by 15% and 7%
(OECD, 2010c). Because youth and low skilled workers are over-represented among
temporary workers, the reductions in temporary youth employment and in temporary low-
skilled employment were large, with both categories declining by 11%. Migrants are also a
particular vulnerable in Portugal and they are also more likely than natives to be in
temporary employment (OECD, 2009c). In 2007, the share of immigrants in temporary
employment exceeded that of the native-born by 60%.
The share of temporary employment in total employment has been increasing since
the early 1990s, with a particularly marked increase since 1998, after the reduction of EPL
for temporary contracts (Kahn, 2007; Boeri, 2010). This feature of the Portuguese labour
market is associated with the recognized issue of labour market segmentation and dualism
(Vieira et al., 2005). Portugal displays one of the highest shares of temporary workers among
OECD countries: most of them are low-skilled, which is partly the reflection of the Portuguese
educational gap (Figure 1.16).15 While the rising share of temporary employment has been
associated with increasing job and workers flows, it has led to strong segmentation and
polarisation of the labour market, which can be assessed by the significant and increasing
incidence of fixed-term contracts and self-employment among specific groups, such as the
young and low skilled, who have less stable job trajectories and are more exposed to labour
market fluctuations.
During the first half of the decade, fixed-term contracts have become the largest, and
at times the sole, contributor to employment growth. According to estimates based on
microeconomic data from Quadros de Pessoal (Centeno et al., 2008), average hiring rates
under fixed-term contracts and open-ended contracts were respectively 46.4% and 9%
in 2005. Net job creation was negative for permanent contracts and positive and increasing
for fixed term contracts, rising from 8.3% in 2003 to 13.2% in 2005. Employment growth has
been concentrated in low quality occupations. Net job creation rates of workers in the first
quintile of the wage distribution and the fifth quintile of the wage distribution were
respectively 1.5% and –0.5% in 2005. Fixed-term contracts have rarely been an entry into
stable employment. According to 2005 data presented in Centeno et al. (2009b), around one
quarter of fixed-term contracts were converted into open-ended contracts in Portugal, a
lower proportion than in other OECD countries; for example, in France the equivalent
figure was 37%.
The widespread use of temporary contracts in Portugal might strengthen the impact
of the current downturn on the labour market, compared with previous recessions. Indeed,
empirical analysis presented in OECD (2009a) suggests that the increased use of temporary
contracts has led to an increase of almost 24% in average aggregate labour market volatility
in Portugal, compared to 9% on aggregate in OECD countries.16 The segmented nature of

Figure 1.16. Temporary employment in a comparative perspective1

% %
25 25
A. Share of temporary employment in total employment
20 20
15 15
EU19 average²
10 10
5 5
0 0
SVK TUR HUN BEL GRC DNK FIN SWE NLD POL
GBR CZE IRL NOR AUT ITA FRA DEU PRT ESP
% %
120 B. Share of temporary employment by education groups 120

Low-skilled Medium-skilled High-skilled
100 100
80 80
60 60
40 40
20 20
0 0
% %
120 C. Share of temporary employment by age groups 120

Youth: 15-24 Prime age: 25-54 Older workers: 55-64
100 100
80 80
60 60
40 40
20 20
0 0
1. Data refer to 2009Q1.

2. EU19 average excludes Luxembourg.
Source: European Union Labour Force Survey (EULFS) from Eurostat for all the European countries and National
labour force surveys for the other countries.

the Portuguese labour market makes it all the more important to address labour market
heterogeneity by ensuring that the system protects the most vulnerable while at the same
time it supports labour supply.
The introduction of the new labour code in 2009, by reducing EPL for regular contracts,
is an important step in the direction of reducing labour market dualism, as will the new
Contributory Code of Social Security. More needs to be done, however. The authorities have
acknowledged the need to continue reforming the labour market and are currently
discussing a new strategy with the social partners. EPL for regular contracts should be
reduced further, which would reduce the gap between the protection of regular and
temporary workers.
Responding to the jobs crisis while supporting strong potential employment

in the long run
Making the most of income support policies: reforming the UB system
Portugal should consider a fundamental revision of its unemployment benefits (UB)
system, to provide adequate social safety supports during downturns while promoting
employment. In early 2010, the authorities reduced the contributory period to access UB
from the rather ungenerous 450 days to 365 days of dependent work, but this measure was
withdrawn in May 2010, owing to its fiscal cost. However, most other OECD countries
require lower contributory periods, often less than 6 months. Given the high proportion of
workers under temporary contracts, who are less likely to meet contribution requirements,
the authorities should consider reducing again the contributory period to access UB and
make this change permanent. The government should concomitantly expand monitoring
and evaluation mechanisms aimed at avoiding opportunistic behaviour (such as creating a
job only lasting the minimum eligibility period).
In parallel to easing entitlement criteria to access unemployment benefits, Portugal
should continue to encourage return to work by both reinforcing activation policies and
reducing the generosity of the system, especially for older workers.17 The government
already took a step in the right direction defining a new frame on replacement rates and
reinforcing sanctions associated with lack of job search in May 2010. Nonetheless,
UB generosity remains related to age, which induces a striking gap between the treatment
of youth and older workers. A peculiar feature of the system is the definition of the
entitlement period, which is partly determined by the individual’s age at the beginning of
the unemployment spell: duration increases with age and contributory record following
the last unemployment spell. This feature is quite rare and it is one of the main factors that
explain the current regressivity of the system, since in practice, longer durations of
subsidized unemployment are observed for individuals with higher pre-unemployment
income. Hence, the UB system has a degree of inequality that is larger than wage
inequality (Centeno and Novo, 2007).
UB can be conducive to weak labour supply for older workers due to the relatively high
replacement rates and very long benefit duration. Indeed, net unemployment replacement
rates of older workers are in Portugal the highest among OECD countries, and for older
workers they do not decrease with unemployment duration (Figure 1.17). This has
prompted some labour market analysts to criticise the current system for excessive moral
hazard that weakens labour supply. There is abundant empirical evidence on the
substantial impact of unemployment benefits on both unemployment duration and
reservation wages in Portugal (Portugal, 2008; Addison et al. 2008; Addison et al., 2009).

Figure 1.17. The generosity of unemployment benefits:

youth versus older workers
Net replacement rates at different points during an unemployment spell, 2007
100 100
A. Average across five years of unemployment
90 90
Per cent Youth Older workers
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
KOR USA ITA TUR POL HUN PRT ESP MEDIAN ISL SWE FIN DEU IRL BEL
JPN NLD GRC SVK CZE CAN LUX CHE GBR NZL AUS FRA DNK AUT NOR
100 100
B. First year of unemployment
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
JPN NLD USA SVK GRC ITA HUN IRL CAN DNK FIN DEU SWE NOR CHE
KOR GBR POL CZE NZL AUS TUR MEDIAN ISL AUT ESP BEL FRA PRT LUX
100 100
C. Fifth year of unemployment
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
CHE TUR USA ESP NLD SVK SWE POL DNK HUN GBR FIN NZL IRL BEL
ITA KOR GRC PRT JPN ISL LUX MEDIAN CZE CAN FRA DEU AUS AUT NOR
Source: OECD, Tax-Benefit Models.


Portugal’s unemployment is historically high in a comparative perspective for older

workers: unemployment rates for men aged 55 to 64 was 7.3% in 2008, whereas the OECD
European average was 5.1%. Moreover, the average duration of completed unemployment
spells for older workers is in Portugal 32.8 months in Portugal, compared to 24.4 months on
average across OECD countries (data from OECD, 2009d). The UB system can also be
conducive to early retirement. Indeed, older workers on long-term unemployment,
whether they receive benefits from unemployment insurance or from unemployment
assistance, have special conditions to access early retirement. In practice, therefore, long-
term senior unemployed have no incentives to take a new job and use the system as a
bridge to the Old Age Pension.
The gap between the treatment of youth and older workers should be reduced,
allowing the former to receive adequate support during unemployment spells and the
latter to be given effective incentives to come back to work. UB duration and replacement
rates should not be related to age and benefits should be a decreasing function of
unemployment duration for all workers. Reforming the UB system to make it more equally
distributed by age and supportive of labour supply should be combined with continued
efforts to improve the credibility of activation policy for the unemployed, in the spirit of the
“flex security” model.
A second category of atypical workers is the so-called “falsely self-employed”, who are
in fact often temporary employees and thus at high risk of unemployment. They are not
counted as temporary workers in the official statistics and would be difficult to quantify,
but anecdotal evidence suggests that they represent a non-negligible proportion of the
employed.18 There are several reasons that explain the reliance on this contractual
arrangement in Portugal: i) the strong protection of permanent workers creates incentives
for firms to employ less formal workers; ii) compared to employees, the self-employed are
currently subject to lower social security contributions; on this respect, it should however
be noted that the new Contributory Code of Social Security (which is expected to come into
force in 2011) should limit the incentives for both workers and employers to rely on these
arrangements; iii) the increase in the share of employment in the services sector has
generated a concomitant rising demand for low cost external service provision. At the end
of 2009, only slightly more than 60% of the unemployed were receiving unemployment
benefits (unemployment insurance or unemployment assistance).19 While reducing the
contributory period for UB should allow protecting job losers on temporary contracts, it
will not provide income support to other forms of atypical job losers such as the “falsely
self-employed”. The authorities should ensure the availability and adequacy of lower-tier
assistance benefits, such as social assistance under the Minimum Income support, for
those categories of unemployed not covered by the system.
Making the most of active labour market policies

As most OECD countries, Portugal expanded spending on ALMP as a result of the crisis.
Expansion of ALMP during the downturn is desirable and Portugal should be proactive in
maintaining as much as possible the capacity to provide adequate case-management and re-
employment services. Most of the planned increase is temporary, and a number of measures
were already phased out in May 2010 due to fiscal pressure. Box 1.2 summarises the main
labour market measures taken through the Iniciativa para o Investimento e o Emprego.20

Box 1.2. Labour market measures taken to deal with the rise
in unemployment
The package Iniciativa para o Investimento e o Emprego (IIE) was approved by the
government in January 2009. Most of the measures were extended at the beginning of 2010
but some were withdrawn during the course of the year. The programme is targeted at the
most vulnerable workforce groups: youth, low-skilled, temporary and older workers, and
long-term unemployed. Major measures can be summarised as follows:
● Measures to stimulate labour demand:
❖ Reductions in non-wage labour costs:
– Reductions in employer social security contributions applying to continuing workers
(3 p.p. reductions in 2009 for micro and small firms and older workers, and 1 p.p.
reduction in 2010 for low wage workers). The reduction depends on maintaining the
level of employment during the year. The first measure was withdrawn in May 2010.
– Reductions in employer social security contributions and hiring subsidies applying
to new hires (fixed-term contracts for long-term unemployed, youth, and senior
unemployed).The hiring incentives are conditional on net employment creation
and the maintenance of employment for the duration of the contract of
employment created.
❖ Expansion of short-time working schemes (STW) in the automotive, textiles, clothing,
tourism, furniture and trade sectors. STW is associated with subsidized training. This
measure was withdrawn in May 2010.
● Re-employment measures for jobseekers: the expansion of job search assistance offered
by local actors (municipalities, entrepreneurs and social partners association, non-
profitable organisations.)
● Expansion of training and work experience programmes: for existing workers under
STW schemes, for youth in apprenticeships schemes, for young unemployed and
unemployed who have improved their qualifications.
● Income support for job losers: 6 months extension of the entitlement to unemployment
benefit and reduction in the contributory period to access UB, from 450 to 365 days of
dependent work. These measures were withdrawn in May 2010.
Labour demand support measures should be targeted and temporary

One of the goals of ALMP is to keep all unemployed persons engaged with employment
related activities. In this context, the labour demand support measures enacted in Portugal
as a response to the jobs crisis – reductions in employer social security contributions for
workers and new hires of designated disadvantaged groups, targeted job subsidies and
expansion of short time working schemes – are in principle an effective backstop to
activation regimes through a period of market slack, in part because they have been
targeted to the most vulnerable. Portugal needs keep monitoring carefully the effectiveness
of these measures once the expansion is underway, since if they remain in place too long
they might inhibit a recovery of employment.
As a response to the labour market crisis, Portugal introduced an important number of
temporary measures to stimulate labour demand. Most of them are targeted reductions in
non-wage labour costs for continuing workers or new hires of disadvantaged groups (see
Box 1.2). Reductions in employers’ social security contributions applying to continuing

Exploring the Variety of Random
Documents with Different Content
Old Hezekiah leaned hard on his hoe
And squinted long at Eben, his lank son.
The silence shrilled with crickets. Day was done,
And, row on dusky row,
Tall bean poles ribbed with dark the gold-bright afterglow.
Eben stood staring: ever, one by one,
The tendril tops turned ashen as they flared.
Still Eben stared.
O, there is wonder on New Hampshire hills,

Hoeing the warm, bright furrows of brown earth,
And there is grandeur in the stone wall’s birth,
And in the sweat that spills
From rugged toil its sweetness; yet for wild young wills
There is no dew of wonder, but stark dearth,
In one old man who hoes his long bean rows,
And only hoes.
Old Hezekiah turned slow on his heel.

He touched his son. Thro’ all the carking day
There are so many littlish cares to weigh
Large natures down, and steel
The heart of understanding. “Son, how is’t ye feel?
What are ye starin’ on—a gal?” A ray
Flushed Eben from the fading afterglow:
He dropped his hoe.
He dropped his hoe, but sudden stooped again

And raised it where it fell. Nothing he spoke,
But bent his knee and—crack! the handle broke,
Splintering. With glare of pain,
He flung the pieces down, and stamped upon them; then—
Like one who leaps out naked from his cloak—
Ran. “Here, come back! Where are ye bound—you fool?”
He cried—“To school!”
II
Now on the mountain morning laughed with light—
With light and all the future in her face,
For there she looked on many a far-off place
And wild adventurous sight,
For which the mad young autumn wind hallooed with might
And dared the roaring mill-brook to the race,
Where blue-jays screamed beyond the pine-dark pool—
“To school!—To school!”
Blackcoated, Eben took the barefoot trail,

Holding with wary hand his Sunday boots;
Harsh catbirds mocked his whistling with their hoots;
Under his swallowtail
Against his hip-strap bumping, clinked his dinner pail;
Frost maples flamed, lone thrushes touched their lutes;
Gray squirrels bobbed, with tails stiff curved to backs,
To eye his tracks.
Soon at the lonely crossroads he passed by

The little one-room schoolhouse. He peered in.
There stood the bench where he had often been
Admonished flagrantly
To drone his numbers: now to this he said good-bye
For mightier lure of more romantic scene:
Good-bye to childish rule and homely chore
Forevermore!
All day he hastened like the flying cloud

Breathless above him, big with dreams, yet dumb.
With tightened jaw he chewed the tart spruce gum,
And muttered half aloud
Huge oracles. At last, where thro’ the pine-tops bowed
The sun, it rose!—His heart beat like a drum.
There, there it rose—his tower of prophecy:
The Academy!
III
They learn to live who learn to contemplate,
For contemplation is the unconfined
God who creates us. To the growing mind
Freedom to think is fate,
And all that age and after-knowledge augurate
Lies in a little dream of youth enshrined:
That dream to nourish with the skilful rule
Of love—is school.
Eben, in mystic tumult of his teens,

Stood bursting—like a ripe seed—into soul.
All his life long he had watched the great hills roll
Their shadows, tints and sheens
By sun- and moonrise; yet the bane of hoeing beans,
And round of joyless chores, his father’s toll,
Blotted their beauty; nature was as naught:
He had never thought.
But now he climbed his boyhood’s castle tower

And knocked. Ah, well then for his after-fate
That one of nature’s masters opened the gate,
Where like an April shower
Live influence quickened all his earth-blind seed to power.
Strangely his sense of truth grew passionate,
And like a young bull, led in yoke to drink,
He bowed to think.
There also bowed their heads with him to quaff—

The snorting herd! And many a wholesome grip
He had of rivalry and fellowship.
Often the game was rough,
But Eben tossed his horns and never balked the cuff;
For still through play and task his Dream would slip—
A radiant Herdsman, guiding destiny
To his degree.
IV
Once more old Hezekiah stayed his hoe
To squint at Eben. Silent, Eben scanned
A little roll of sheepskin in his hand,
While, row on dusky row,
Tall bean poles ribbed with dark the gold-pale afterglow.
The boy looked up: here was another land!
Mountain and farm with mystic beauty flared
Where Eben stared.
Stooping, he lifted with a furtive smile

Two splintered sticks, and spliced them. Nevermore
His spirit would go beastwise to his chore
Blinded, for even while
He stooped to the old task, sudden in the sunset’s pile
His radiant Herdsman swung a fiery door,
Thro’ which came forth with far-borne trumpetings
Poets and kings,
His fellow conquerors: there Virgil dreamed,

There Cæsar fought and won the barbarous tribes,
There Darwin, pensive, bore the ignorant gibes,
And One with thorns redeemed
From malice the wild hearts of men: there surged and streamed
With chemic fire the forges of old scribes
Testing anew the crucibles of toil
To save God’s soil.
So Eben turned again to hoe his beans,

But now, to ballads which his Herdsman sung,
Henceforth he hoed the dream in with the dung,
And for his ancient spleens
Planting new joys, imagination found him means.
At last old Hezekiah loosed his tongue:
“Well, boy, this school—what has it learned ye to know?”
He said: “To hoe.”
The Forum Percy MacKaye
The Forum Percy MacKaye
THE MARVELOUS
MUNCHAUSEN
The snug little room with its brazier fire aglow,
And Piet and Sachs and Vroom—all in the long ago,—
Oh, the very long ago!—o’er their pipes and hollands seen;
And on the wall the man-o’-war, and firelight on the screen!
Their flowered, bulging waistcoats that wrinkle when they chuckle;

The baron, much-mustachioed, and gay with star and buckle,
And bristling in a uniform as scarlet as his cheeks,
With choker lace beneath his chin, and splendid, yellow breeks!
The smoke drifts blue, and bluer through that window, all abreeze,
Are glinting sky and glistening sea beyond the Holland quays.
Blue tiles, red bricks, the bustling wharves, with color’s oriflamme;
Starched caps and rosy-posy cheeks—the girls of Amsterdam!
The snug little room with its brazier fire aglow!

Oh, listen, will he tell them, as he told them long ago,—
Oh, very long ago, a-laughing in his sleeve!—
The marvelous Munchausen, with the fables I believe?
* * * * *
“When I had sown the Turkey beans that reachéd to the moon,
And lifted all Westminster in the sling from my balloon
(Swung over the Atlantic,
They peered from windows, frantic),
When, eagle-back, I’d scanned the pole in broad, eternal noon,
“In Queen Mab’s chariot I ventured on the sea.

’Twas like a mammoth hazelnut, with matchless orrery
A-sparkle on its ceiling,
With planet systems wheeling
And giddy comets sizzling all about the head o’ me.
“The nine bulls drew it, as stout as those of Crete,

And all were shod with horrid skulls that clattered on their feet
And all were shod with horrid skulls that clattered on their feet.
Rich banners waved behind ’em,
While on their backs, to mind ’em,
Postilion crickets chirruped them, all chirping loud and sweet.
“Ghost of the Cape I warn you of, for he is bottle-blue.

We split his Table Mountain. He gibbered and he flew.
The bulls straight showed disfeature
With gazing on the creature,
Stampeding in their harness when I gave the view-halloo.
“Though wrecked on Egypt’s obelisks, disaster I defied,

And harnessed Sphinx, the emperor’s gift, to tow an ark as wide
As great Westminster;
With beau and bell and spinster,
And cleric, clerk, and coronet all tête-à-tête inside.
“‘Good folk, we sail for Africa,’ said I to all my train.

‘When bold Munchausen leads you forth, what laggard dares remain
In slippered ease, uncaring
To share my deeds of daring?’
Their cheers amazed my modesty, and more had made me vain.
“‘The sultan’s bees I’ve shepherded. I’ve hornpiped at Marseilles,

Where gulped me down, well nigh to drown, the liveliest of whales.
I’m riskiest of riskers,
But, blow my grizzled whiskers!’
I cried, ‘May jackals gnaw my bones if now Munchausen fails!’
“By night the lions roared at us. By day the simoons came
And swept across our caravan in sandy clouds of flame;
But naught dismayed our temper, or
The genial Afric emperor
Had missed my handsome greeting, to his long-abiding shame.
“The people of the Mountains of the Moon I wined and dined.

I reigned at Gristariska when His Majesty declined.
Reforms I wrought untiring
Reforms I wrought untiring,
With Gog and Magog squiring,
And Frosticos, my bosom friend, who lent a legal mind.
“For last superb achievement,—bright tears may Envy shed!—

I built a bridge, from Africa to distant England spread:
No edifice of fable,
Nay, not the Tower of Babel,
Surpassed its mammoth glory in the heavens overhead.
“So back across its noble arch my retinue and I

Advanced with blaring trumpets through the regions of the sky.
Clouds lingered to enwreathe us,
Earth’s kingdoms far beneath us,
And martial music cheered our march from all the birds that fly.”
* * * * *
The snug little room with its brazier fire aglow,

And Piet and Sachs and Vroom all sleeping long ago,—
Oh, so very long ago!—and, chuckling in his sleeve,
Still, o’er the slumbering table,
Drone-droning on his fable,
The marvelous Munchausen, with the stories I believe!
Century William Rose Benét
TRAIN-MATES
Outside hove Shasta, snowy height on height,
A glory; but a negligible sight,
For you had often seen a mountain-peak
But not my paper. So we came to speak.
A smoke, a smile,—a good way to commence
The comfortable exchange of difference!—
You a young engineer, five feet eleven,
Forty-five chest, with football in your heaven,
Liking a road-bed newly built and clean,
Your fingers hot to cut away the green
Of brush and flowers that bring beside a track
The kind of beauty steel lines ought to lack,—
And I a poet, wistful of my betters,
Reading George Meredith’s high-hearted Letters,
Joining betweenwhile in the mingled speech
Of a drummer, circus-man, and parson, each
Absorbing to himself—as I to me
And you to you—a glad identity!
After a while when the others went away,
A curious kinship made us want to stay,
Which I could tell you now; but at the time
You thought of baseball teams and I of rhyme,
Until we found that we were college men
And smoked more easily and smiled again;
And I from Cambridge cried, the poet still:
“I know your fine Greek Theatre on the hill
At Berkeley!” With your happy Grecian head
Upraised, “I never saw the place,” you said.
“Once I was free of class, I always went
Out to the field.”
Young engineer,
You meant as fair a tribute to the better part
As ever I did. Beauty of the heart
Is evident in temples. But it breathes
Alive where athletes quicken airy wreaths,
Which are the lovelier because they die
Which are the lovelier because they die.
You are a poet quite as much as I,
Though differences appear in what we do,
And I an athlete quite as much as you.
Because you half-surmised my quarter-mile
And I your quatrain, we could greet and smile.
Who knows but we shall look again and find
The circus-man and drummer, not behind
But leading in our visible estate,
As discus-thrower and as laureate?
Yale Review Witter Bynner
THE KALLYOPE YELL
[Loudly and rapidly with a leader, College yell fashion]
Proud men
Eternally
Go about,
Slander me,
Call me the “Calliope.”
Sizz . . . . .
Fizz . . . . .
II
I am the Gutter Dream,
Tune-maker, born of steam,
Tooting joy, tooting hope.
I am the Kallyope,
Car called the Kallyope.
Willy willy willy wah hoo!
See the flags: snow-white tent,
See the bear and elephant,
See the monkey jump the rope,
Listen to the Kallyope, Kallyope, Kallyope!
Soul of the rhinoceros
And the hippopotamus
(Listen to the lion roar!)
Jaguar, cockatoot,
Loons, owls,
Hoot, Hoot.
Listen to the lion roar,
Listen to the lion roar,
Listen to the lion r-o-a-r!
Hear the leopard cry for gore,
Hail the bloody Indian band,
Hail, all hail the popcorn stand,
Hail to Barnum’s picture there,
People’s idol everywhere,
Whoop, whoop, whoop, whoop!
Music of the mob am I,
Circus day’s tremendous cry:—
I am the Kallyope, Kallyope, Kallyope!
Hoot toot, hoot toot, hoot toot, hoot toot,
Sizz, fizz . . . . .
III
Born of mobs, born of steam,
Listen to my golden dream,
Listen to my golden dream,
Listen to my g-o-l-d-e-n d-r-e-a-m!
Whoop whoop whoop whoop whoop!
I will blow the proud folk low,
Humanize the dour and slow,
I will shake the proud folk down,
Popcorn crowds shall rule the town—
Steam shall work melodiously,
Brotherhood increase.
You’ll see the world and all it holds
For fifty cents apiece.
Every day a circus day.
What?
Well, almost every day.

Nevermore the sweater’s den,
Nevermore the prison pen.
Gone the war on land and sea
That aforetime troubled men.
Nations all in amity,
Happy in their plumes arrayed
In the long bright street parade.
Bands a-playing every day.
What?
Well, almost every day.

I am the Kallyope, Kallyope, Kallyope!
Hoot, toot, hoot, toot,
Wh h h h
Whoop whoop whoop whoop,
Sizz, fizz . . . . .
IV
Every soul
Resident
In the earth’s one circus tent!
Every man a trapeze king
Then a pleased spectator there.
On the benches! In the ring!
While the neighbors gawk and stare
And the cheering rolls along.
Almost every day a race
When the merry starting gong
Rings, each chariot on the line,
Every driver fit and fine
With the steel-spring Roman grace.
Almost every day a dream,
Almost every day a dream.
Every girl,
Maid or wife,
Wild with music,
Eyes a-gleam
With that marvel called desire:
Actress, princess, fit for life,
Armed with honor like a knife,
Jumping thro’ the hoops of fire.
Making all the children shout
Clowns shall tumble all about,
Painted high and full of song
While the cheering rolls along,
Tho’ they scream,
Tho’ they rage,
Every beast
In his cage,
Every beast
In his den
That aforetime troubled men.
V
I am the Kallyope, Kallyope, Kallyope,

Tooting hope, tooting hope, tooting hope, tooting hope;
Shaking window-pane and door
With a crashing cosmic tune,
With the war-cry of the spheres,
Rhythm of the roar of noon,
Rhythm of Niagara’s roar,
Voicing planet, star and moon,
Shrieking of the better years.
Prophet-singers will arise,
Prophets coming after me,
Sing my song in softer guise
With more delicate surprise;
I am but the pioneer
Voice of the Democracy;
I am the gutter-dream,
I am the golden dream,
Singing science, singing steam.
I will blow the proud folk down,
I am the Kallyope, Kallyope, Kallyope,
Tooting hope, tooting hope, tooting hope, tooting hope,
Hoot toot, hoot toot, hoot toot, hoot toot,
Whoop whoop, whoop whoop,
Whoop whoop, whoop whoop,
Sizz .....
Fizz .....
The Forum Nicholas Vachel Lindsay
THANKSGIVING FOR OUR
TASK
The sickle is dulled of the reaping and the threshing-floor is bare;
The dust of night’s in the air.
The peace of the weary is ours:
All day we have taken the fruit and the grain and the seeds of the
flowers.
The ev’ning is chill,

It is good now to gather in peace by the flames of the fire.
We have done now the deed that we did for our need and desire:
We have wrought our will.
And now for the boon of abundance and golden increase,

And immurèd peace,
Shall we thank our God?
Bethink us, amid His indulgence, His terrible rod?
Shall we be as the maple and oak,

Strew the earth with our gold, giving only bare boughs to the sky?
Nay, the pine stayeth green while the Winter growls sullenly by,
And doth not revoke
For soft days or stern days the pledge of its constancy.

Shall we not be
Also the same through all days,
Giving thanks when the battle breaks on us, in toil giving praise?
O Father who saw at the dawn,

That the folly of Pride would be the lush weed of our sin,
There is better than that in our hearts, O enter therein,
A light burneth, though wan
And weak be the flame, yet it gloweth, our Humility!

Ah, how can it be
Trimmed o’ the wick,
And replenished with oil to burn brightly and golden and quick?
For deep in our hearts

For deep in our hearts
We wish to be thankful through lean years and fat without change,
Knowing that here Thou hast set for the spirit a range:
We would play well our parts,
Making America throb with the building of souls and the glory of
good;
Yea, and we would,
And before the last Autumn we will
Build a temple from ocean to ocean where deeds never still
Melodiously shall proclaim

Thanksgiving forever that Thou hast set here to our hand
So wondrous a mystical harvest, that Thou dost demand
Sheaves bound in Thy name,
Yea, supersubstantial sheaves of strong souls that have grown

Fain to be known
As the corn of Thine occident field:
O Yielder of All, can America worthily thank Thee till such be her
yield?
In the mellowing light

Of the goldenest days that precede the gray days of the year,
We sing Thee our harvesting song and we pray Thee to hear,
In the midst of Thy might:
Labor is given to us,

Let us give thanks!
Power worketh through us,
Let us give thanks!
Not for what we have
(So might speak a slave),
Not for the garnering,
Gratefully we sing,
But for the mighty thing
We must do, travailing!
For our task and for our strength;
For our task and for our strength;
For the journey and its length;
For our dauntless eagerness;
For our humbling weariness;
For these, for these, O Father,
Let us give thanks!
For these, O Mighty Father,
Take Thou our thanks!
The Forum Shaemas OSheel
A LIKENESS
Portrait Bust of an Unknown, Capitol,
Rome
In every line a supple beauty—
The restless head a little bent—
Disgust of pleasure, scorn of duty,
The unseeing eyes of discontent.
I often come to sit beside him,
This youth who passed and left no trace
Of good or ill that did betide him,
Save the disdain upon his face.
The hope of all his House, the brother

Adored, the golden-hearted son,
Whom Fortune pampered like a mother;
And then—a shadow on the sun.
Whether he followed Cæsar’s trumpet,
Or chanced the riskier game at home
To find how favor played the strumpet
In fickle politics at Rome;
Whether he dreamed a dream in Asia

He never could forget by day,
Or gave his youth to some Aspasia,
Or gamed his heritage away;
Once lost, across the Empire’s border
This man would seek his peace in vain;
His look arraigns a social order
Somehow entrammelled with his pain.
“The dice of gods are always loaded”;

One gambler, arrogant as they,
Fierce, and by fierce injustice goaded,
Left both his hazard and the play.
Incapable of compromises,
Unable to forgive or spare,
The strange awarding of the prizes
He had no fortitude to bear.
T i k d b th f f thi t i l
Tricked by the forms of things material—
The solid-seeming arch and stone,
The noise of war, the pomp imperial,
The heights and depths about a throne—
He missed, among the shapes diurnal,
The old, deep-travelled road from pain,
The thoughts of men which are eternal,
In which, eternal, men remain.
Ritratto d’ignoto; defying

Things unsubstantial as a dream—
An Empire, long in ashes lying—
His face still set against the stream.
Yes, so he looked, that gifted brother
I loved, who passed and left no trace,
Not even—luckier than this other—
His sorrow in a marble face.
Scribner’s Willa Sibert Cather

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Assessment and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Chapter 1. Rebalancing the economy towards sustainable growth . . . . . . . . . . . . . . . . 19

Chapter 2. Towards a less distortive and more efficient tax system . . . . . . . . . . . . . . . 57

Chapter 3. Policy priorities to restore productivity growth. . . . . . . . . . . . . . . . . . . . . . . . 93

OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010 3

2.3. Tax reform in times of crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

4 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

2.6. Local government tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010 5

This Survey is published on the responsibility of the Economic and

This book has...

6 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

8 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

Assessment and recommendations

The fragile economic recovery needs

Rapid fiscal consolidation is the key

Reducing external imbalances by rebalancing

Preventing cyclical unemployment from becoming

10 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

Making the most of active labour market policies

Reforming the unemployment benefits system,

Against the background of a potential rise in structural unemployment, the government

Reducing labour market dualism

OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010 11

The tax system should be more supportive to

… an increased reliance on property taxes…

… and reduced complexity and compliance costs

12 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

Enhance tax efficiency by reducing

OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010 13

A three-layer strategy to climb the productivity

A strategy to increase productivity and competitiveness should be effective at delivering

Further enhancing the business environment

14 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

Addressing infrastructure bottlenecks to foster

For a small peripheral country like Portugal, transport infrastructure is fundamental to

Education policies: achieving stronger

OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010 15

Focusing on vocational education and training

The government’s focus on diversifying educational offerings, in particular through the

Reforming schools to achieve higher educational

16 OECD ECONOMIC SURVEYS: PORTUGAL © OECD 2010

Targeted interventions should help prevent