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Portugal Reforms Urged by OECD to Fix Economy’s ‘Achilles Heel’

Portugal needs further education reforms and should consider introducing changes in the tax system to help its economy, the Organization for Economic Cooperation and Development said.

“Despite the progress made, human capital remains the Achilles’ heel of the Portuguese economy,” the Paris-based OECD said in a report today. “Upgrading human capital will require further reforms of education and occupational training systems, as well as of the functioning of the labor market.”

The OECD said reducing the burden of taxes on labor in a “revenue-neutral” way by broadening the tax base and increasing environmental levies would help competitiveness and fairer income distribution. It also suggested lowering employers’ social security payments for low-wage workers to help create jobs.

Portugal’s economic growth has averaged less than 1 percent a year for the past decade, placing the country among Europe’s weakest performers.

Prime Minister Pedro Passos Coelho on May 3 announced measures intended to generate savings of about 4.8 billion euros ($6.2 billion) through 2015. They include reducing the number of state workers as he tries to meet the terms of a 78 billion-euro aid program from the European Union and International Monetary Fund.

‘Spending Efficiency’

“The efficiency of social spending needs to be increased so that poverty prevention schemes can continue to be sheltered from fiscal adjustment,” the OECD said. The reform of the state needs to include a strengthening of the framework for sustainable fiscal management, according to the OECD.

The OECD also recommends further reduction in the scope of state-owned companies and “spending efficiency” at the level of local government.

Portugal targets a budget deficit equivalent to 5.5 percent of gross domestic product this year and aims to narrow it to within the EU’s 3 percent limit in 2015. About 80 percent of the 5.3 billion-euro deficit-trimming effort in the 2013 budget comes from revenue gains, most of which are through tax increases. The government projects GDP will fall 2.3 percent this year before growing 0.6 percent in 2014.

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