Portugal needs greater spending efficiency and investment to strengthen public finances and growth
Portugal’s recovery has slowed in the face of high energy and living costs, as well as global uncertainty. Decisive policy action and structural reforms are needed to shore up public finances, uphold living standards and ensure that growth remains on a sustainable and resilient path, according to a new OECD report.
While high tax revenues during the initially strong post-COVID-19 recovery allowed the government to take measures to cushion the impact of Russia’s war of aggression against Ukraine, the latest OECD Economic Survey of Portugal says support should now be scaled back and targeted to those not sufficiently covered by the general social protection system.
More efficient public spending will be needed more broadly to counteract spending pressures from population ageing, to continue to lower public debt and to create fiscal space for the sizeable public investment needed to drive the green and digital transitions. Investing in innovation and workforce skills would help to raise productivity, which will be key for future growth given the rapid decline in the working-age population.
Following a strong recovery with GDP growth at 6.7% in 2022, the Survey sees Portugal’s GDP growth declining to 2.5% in 2023 and 1.5% in 2024 amid weaker consumer and business confidence, high inflation and increasing financing costs.
With tight financial conditions and high uncertainty holding back private investment, the Survey says EU funds will be fundamental for boosting public investment. Portugal’s National Plan for Recovery and Resilience (RRP), and the Portugal 2030 Strategy, outline structural reforms in public administration, health, education, and competition aimed at removing obstacles to growth and facilitating investments in green, digitalised growth. Yet successful implementation of these plans will require decisive policy action and an effective public administration.
The Survey recommends Portugal take steps to strengthen its budgetary framework and systematically reassess its spending priorities through reviews and evaluations, to ensure the best balance between spending on, say, social programmes and investment in infrastructure, education and health. Raising productivity should be another priority, notably by lowering barriers to entry in sectors where competition is weak, such as retail and professional services, by streamlining regulations.
The RRP includes investments to improve the efficiency and responsiveness of the health system. Reforms are planned that aim to move away from a largely hospital-based public health system to one that will better integrate primary, community and long-term care. While measures of health sector performance are good overall – life expectancy remains above the OECD average – Portugal would benefit from improving access to and quality of care. The health system faces mounting pressure from population ageing and needs to address a legacy of underinvestment, staff shortages and long waiting lists, which built up during the pandemic.
The Survey recommends taking steps to make budgeting and human resources management more efficient. Strengthening primary care and prevention measures should be an urgent priority. Finally, expanding the number of general practitioners and streamlining the different payment schemes for primary care centres would improve both access and quality.