The International Monetary Fund (IMF) foresees a Portuguese economic growth of 2.6% this year and a stabilization around 2% in the medium term, pointing to an inflation rate of 5.6% in 2023.
In the report of the IMF’s Article IV mission to Portugal, released today, the institution states that after the 6.7% growth of the Portuguese economy in 2022, “significantly higher” than the 3.5% in the euro zone, “real GDP [Gross Domestic Product] growth is expected to decelerate the rest of the year to an average of 2.6% in 2023 and inflation to decline to 5.6%.
Last April 11th, in its update of world economic forecasts, the IMF had pointed to a GDP growth of 1% for the Portuguese economy this year, forecasting an inflation rate of 5.7%. The government, on the other hand, foresees a 1.8% growth in 2023.
“High inflation and tighter financial conditions are weakening the economy,” the IMF maintains, considering that “the higher cost of living should penalize domestic demand growth and lower global and eurozone growth should weaken export growth,” leading to “growth stabilizing around 2% over the medium term.”
As energy prices retreat, the institution anticipates that inflation should continue to decline, but points out that core inflation – which excludes food and energy – “is likely to be more persistent due to labor market rigidities and high profit margins.”
In this context, the IMF recommends that fiscal policy this year should remain “non-expansionary, in order to preserve room for fiscal maneuver and support monetary policy,” but should at the same time be “flexible in case shocks occur.”
Considering that the fall in energy prices “provided an opportunity to phase out more far-reaching measures and to target support to the most vulnerable households,” the institution argues that if growth “weakens considerably, automatic stabilizers should be fully implemented,” avoiding the use of “additional fiscal measures.
“Additional fiscal supports should be reserved only for severe adverse scenarios and designed to be temporary, not price-distorting, and well-targeted,” he maintains.
Stressing that “the recent successive adverse shocks highlight the need to create fiscal space in good times and to increase fiscal resilience to contingent risks”, the IMF points to “fiscal consolidation combined with strong medium-term growth” as “central elements for a sustained reduction in public debt and the maintenance, simultaneously, of public investment, even after the end of the Next Generation EU funds”.
Thus, the IMF mission recommends that the government focus on “measures to increase revenue performance in a sustained manner and improve the composition and efficiency of expenditure.
“Tax reforms should go towards eliminating distortions, reversing reduced VAT rates, and rationalizing tax expenditures. Modernizing the tax system, including digitizing tax administration, would improve tax efficiency. Higher property taxes would increase revenue and help ease house price pressures. Lower energy prices leave open the possibility of an increase in carbon taxes,” he says.
The IMF also advocates an “increase in the share of public investment – namely in the implementation of the Recovery and Resilience Plan – in current spending, reversing recent trends.”
As “top priorities” he highlights the sustainability of pensions, containing the increase in the public sector wage bill, strengthening the financial situation and efficiency of the National Health Service (NHS), and further improvements in the targeting of social support.
“Structural fiscal reforms to improve public sector efficiency, governance, and fiscal sustainability of SOEs should continue. Full implementation of the 2015 Budgetary Framework Law will strengthen the medium-term fiscal framework,” he adds.
