The most recent International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) to address Portugal's fiscal transparency was published in 2003. According to this report, Portugal already complies with several aspects of the transparency code and is making progress in those areas where work is still required. The IMF found that there is a clear allocation of fiscal roles and responsibilities across the various levels of government and there is greater consistency in the budget policies followed by the diverse agencies of government. Nonetheless, the 2003 report found that significant improvements were still needed, particularly with regard to more fully integrating a medium-term budget framework into the budget preparation process. Additionally, Portugal needs to improve the quality of its budget projections and fiscal risk analysis. In its 2007 Article IV Consultation report, the IMF applauds Portugal's plans to enact certain fundamental reforms to its budget process, including an expressed intention to address the medium-term budget framework issue raised in the 2003 ROSC. The 2007 report does caution, however, that the target date for these reforms, set for 2010, may be too ambitious.

General Overview

The International Monetary Fund's (IMF) most recent fiscal module of the Report on the Observance of Standards and Codes (ROSC) for Portugal was published in 2003. At that time, Portugal was found to have made significant progress in its efforts toward improving fiscal transparency. The report specifically states that "Portugal meets the requirements of the fiscal transparency code in several areas," (p. 1). The IMF based its conclusions on a number of factors, including the clearly differentiated allocation of responsibilities across government levels, stable intergovernmental fiscal relations, a complex but consistently observed legal framework governing the budget and fiscal policy and practice, and a relatively open budget process. It further noted that "adequate mechanisms of internal and external control of government operations are in place; and audited accounts of all government entities are prepared and disseminated, albeit with fairly long lags" (p. 11). Portugal is a member of the European Monetary Union (EMU). As such, it is obligated to comply with the Stability and Growth Pact.

Despite the overall positive nature of the IMF's ROSC evaluation, deficiencies were noted in a number of areas. The IMF found that there was too little emphasis on transparency issues affecting public finance outside of the general government. State-owned enterprises and public-private partnerships, for example, were found to be in need of greater attention. The report also called for further strengthening the annual budget preparation process so that it more thoroughly integrated the medium-term budget framework. Additional improvements in the area of budget forecasting, risk analysis, and budget execution could be made. Reporting and accounting could be enhanced. The tax system could be simplified and rendered more transparent, and the tax administration could be more responsive to taxpayers.

The 2007 IMF Article IV Consultation report notes that there are plans to make fundamental reforms to the budget process, including a move toward "performance-based, medium-term budgeting with expenditure ceilings" (p. 16). By this means, public spending is expected to become more efficient and effective, and the government's fiscal activities should become more transparent. However, the IMF expresses caution that the target date of 2010 for full roll-out of the reforms may be too ambitious. In the Statistical Issues appendix to the 2007 report, the IMF finds that Portugal's recently accomplished transition to the 1995 edition of the European Standard of Accounts (ESA95) has resulted in numerous revisions to fiscal sector data, making it difficult to compare revenue and spending data from one year to the next. The report notes that "from 2001 onward, budgets have been presented in a manner consistent with recent changes in national and fiscal accounting methodology" (p. 4). The fact that some data reporting is done on a cash basis (e.g., intra-year budget data) whereas other data is reported on an accrual basis, first noted in the 2003 ROSC, remained the case as of the publication of the 2007 Article IV report.

The Principles

Clarity of roles and responsibilities.

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The 2003 IMF ROSC found that Portugal meets many of the requirements of the fiscal transparency code, and progress is ongoing in this regard. According to the ROSC, "the allocation of responsibilities between different levels of government is clearly defined" (p. 1). Because it is a member of the EMU, Portugal is obliged to comply with the Stability and Growth Pact. According to the report, Portugal's fiscal management is clearly grounded in the Budget Framework Law and the Budget Stability Law, along with the annual Budget Law and annual Budget Execution Decree. Tax law is complex, as are the laws governing regulation and administrative procedures. Nonetheless, they are "generally observed in practice, and taxpayer rights are protected" (p. 11). Still, the ROSC found that the taxation system could be improved through a simplification of the legislative regime and speeding up the response time of tax authorities to taxpayer queries. The Constitution also participates in the legislative underpinnings of fiscal policy by setting forth principles of intergovernmental relationships within the fiscal process. The rights of local governments to levy taxes are embodied in the Local Finance Law, while the Azores and Madeira are assured legislative and administrative autonomy by the provisions of the Finance Law of the Autonomous Regions. The autonomous regions generate their own taxes, approve their own fiscal system, and establish their own budget. By law, the Bank of Portugal is independent and its role does not include the conduct of quasi-fiscal activities. According to the ROSC, Portugal follows the ESA95 in the way that it defines the institutions of the general government.

The ROSC reported that Portugal's many state-owned enterprises (SOEs) are now structured as joint-stock companies in which the state participates as a as the majority owner and/or holding voting rights, and "government equity holdings are comparable in level to those of other EU economies" (p. 6). SOEs are supported by state subsidies in accordance with EU directives. Public-private partnerships are increasingly being employed, which has added a layer of confusion as to where the line is drawn between the public and private sectors. However, such partnerships are clearly dealt with in law. As the ROSC noted, "Decree Law, No. 86/2003 of April 26, 2003, established general rules and principles to be followed by all public entities at the national level in defining, conceptualizing, preparing, establishing, altering, budgeting, and exercising oversight over PPP [public-private partnership] projects" (p. 8).

Open budget processes

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The 2003 IMF ROSC asserted that "Portugal meets the requirements of the fiscal transparency code in several areas and has been making significant progress in strengthening fiscal management and transparency" (p. 1). The fiscal responsibilities falling to the various levels of government are clearly defined. Tax law, regulation, and administration, although complex, are "generally observed in practice" (p. 11). Most specifically, "the budget process is based on a clear legal framework and [is] relatively open" (p. 11). The ROSC particularly noted that new legislation had been recently enacted that was expected to significantly improve the transparency of budget execution. The new legislation provided for stronger reporting requirements across the board in the general government.

According to the ROSC, the Portuguese annual budget documentation must include a statement of its underlying assumptions regarding the economic environment, analyses of recent developments, and projections of the principal macroeconomic aggregates. The report cautioned, however, that the annual budget preparation process would be enhanced by "better integration of the medium-term framework including improved budget projections and fiscal risk assessment" (p. 17). Also included in budget documentation are statements of all newly instituted tax regulations, along with detailed projections of revenues and spending appropriations. The classification systems used for these data are "broadly in line with relevant international standards" (p. 16). In the case of revenue projections, these are classified by type of revenue and recipient.

The National Assembly lacks a formally constituted office of the budget, which has meant that budget execution is monitored to only a limited extent. The ROSC stated that such monitoring "has traditionally been limited to handling supplementary budgets, and does not reevaluate budget prospects on an ongoing basis" (p. 17). There is almost no breakdown of expenditures according to program or activity included in the budget document. The exception, data on capital expenditures that form a part of the Central Government Investment and Development Plan, occurs because European Union transfers complement the financing provided by the national budget. The ROSC noted that Portugal's fiscal authorities planned to come up with a classification system that would apply to program spending and would include performance benchmarks. The goal here is to improve the efficiency of budget allocations. Another effect of Portugal's EMU membership, and therefore its obligation to comply with EU directives, has been the improvement in the transparency and efficiency of the public procurement process. A nationwide system by which the procurement process would be conducted online was set to take effect in 2004.

Public availability of information.

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According to the 2003 IMF ROSC, "Portugal meets the requirements of the fiscal transparency code in several areas and has been making significant progress in strengthening fiscal management and transparency" (p. 1). Cash-based data on budget execution are published monthly. These data provide coverage of the central government and the social security administration, and can be accessed on the website maintained by the General Directorate for the Budget. In 2003 Portugal began publishing quarterly accounts of some of the local authorities. The final accounts of the general government are published by the National Statistics Institute (INE) after a two-year lag and can be accessed on the INE’s website. The ROSC reported that the Ministry of Finance and Public Administration's failure to closely monitor SOE activities and its only recent assumption of oversight over public-private partnerships has resulted in only limited information being available regarding the state's contingent liabilities. State debt data is published monthly, and the ROSC found these data to be both accurate and timely. The ROSC further noted that "formal commitments for timely publication of a broader coverage of fiscal data have been made" (p. 15). Some elements of general government data are done according to a cash basis, and these are available "with minimal delay" (p. 21). Accrual-based final fiscal data reporting, however, is subject to as much as a two-year lag, even though this lag time is required by the Budget Framework Law to be significantly reduced, to six months. The ROSC also mentioned a new reporting system created by the Ministry of Finance and Public Administration that would solicit quarterly local government data as to their ability to comply with debt limits set by the annual budget law.

The Budget Framework Law requires that the budget documentation include "detailed tax expenditure information, three-year revenue loss estimations, and on-year forecasts" (p. 15), the ROSC noted. Analyses of fiscal risks inhering to the state's pension and healthcare systems are published online by the Economic Research and Forecasting Department. The Budget Framework Law also requires that central government operations and social security data must be published quarterly, within 45 days of the end of the reference quarter, within the pages of the Official Journal of the Republic.

Portugal has been a subscriber to the IMF's Special Data Dissemination Standard (SDDS) since September 1997, and first complied with the Standard's specifications in December 2000, according to the IMF SDDS website. According to the website, Portugal meets or exceeds the requirements of timeliness, coverage, and periodicity for all required fiscal datasets, makes advance-release calendars and summary methodologies available, and releases its data simultaneously to all interested parties.

Independent assurances of integrity.

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The IMF's 2003 fiscal ROSC reported that, with regard to fiscal management and transparency, Portugal has made significant progress in recent years. In particular, the report cited the existence of "adequate mechanisms of internal and external control of government operations" and added that "audited accounts of all government entities are prepared and disseminated" (p. 11). Because of Portugal's membership in the European Monetary Union, the ROSC notes that "Portugal's fiscal policy must conform to the provisions of the Stability and Growth Pact" (p. 11). According to the report, budget documentation includes a presentation of the principle assumptions made with regard to the external environment, as well as analysis of recent events and projections for principle macroeconomic aggregates. The ROSC further noted that when actual GDP growth falls short of macroeconomic projections, the reconciliation of actual revenues to projections is accomplished by cutting investment spending. This means that the composition of actual spending will at times differ significantly from the spending set forth in the initial budget. There is a disparity in the accounting frameworks used across the various levels of government, a situation which has led to reporting delays and the need for numerous revisions in the fiscal data. The central government's reliance on cash accounting makes it difficult to achieve proper monitoring and control of payments in a timely manner. At the time of the ROSC, Portugal was also in the midst of a dispute with EUROSTAT as to the proper methodology for dealing with statistics on capital injections into SOEs that are operating at a loss. An annual external audit is carried out by the legally independent Court of Auditors. This report, along with recommendations, is submitted to the National Assembly for review. The ROSC cautioned, however, that there was only limited corrective action taken when deficiencies were identified.