In the context of a strong recession from which the economy only emerged in 2014, total investment in Portugal has been low, reducing the economy’s growth potential. Without stronger investment, growth performance is bound to decline over the next years, but raising investment also matters for wage and productivity developments. Low investment is related to both financing constraints and a lack of competitiveness. Many Portuguese corporates are heavily indebted and are facing strong deleveraging needs, which places strong limits on their capacity to invest, while banks’ lending capacity may be curtailed by large amounts of non-performing loans. The regulatory stance could be used to strengthen incentives for banks to resolve long-standing NPLs, in combination with public support for banks’ efforts to offload legacy loans from their balance sheets. The costs of doing so could be reduced by improvements in insolvency rules which are vital for the recovery values of collateral. Stronger investment incentives could result from a better business climate, possibly as a result of further efforts to simplify dealing with the licenses, the public administration and the judicial system. Reducing entry restrictions in professional services would be one way to improve access to non-tradable inputs, which affect the competitiveness of Portuguese firms, as would be further efforts to reduce rents in the electricity sector or stronger competition in the ports sector. Implicit barriers to the entry of new firms, which often turn out to invest strongly as they grow, could be reduced through reforms in wage bargaining mechanisms and changes in the support measures for research and development.

Despite significant progress made, improving skills remains one of Portugal’s key challenges for raising growth, living standards and well-being. Upskilling the adult population remains a priority and lifelong learning activities should focus more on the low skilled. While active labour market policies have increased their training content in recent years, spending per unemployed is still low. A systematic monitoring of the different programmes would allow concentrating resources on the policies that are more effective in raising skills and employment prospects. In the education system, successive increases in compulsory education have not eliminated early school leaving, and a significant share of youth is left without completed secondary education, thus facing poor labour market prospects and a risk of falling into poverty. Another challenge for the education system is to reduce the link between learning outcomes and socio-economic backgrounds. This could be achieved by providing earlier and individualised support to students at risk of falling behind, strengthening teachers and principals training and exposure to best practices, and creating incentives to attract the more experienced teachers to disadvantaged schools. Vocational education and training (VET) has received less attention than general education until recent years and has suffered from fragmented management. This has curtailed the employment prospects of youth not wishing to pursue tertiary education. Establishing a single VET system and reinforcing work-based learning in companies would address this issue. Tertiary education has expanded considerably over recent years but could have a stronger focus on labour market needs, including by developing tertiary technical education. Enhanced support for business research activities could be coupled with strengthening management skills and the ties between businesses and researchers, for example by creating incentives for academics to co-operate with the private sector.