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25/09/2016

Portugal adopts anti-austerity budget despite concerns

Euro & Finance

Portugal adopts anti-austerity budget despite concerns

António Costa

[European Council]

Portugal’s Socialist-led lawmakers on Tuesday (22 February) approved a 2016 budget that pledges to reverse unpopular austerity measures but is seen as high-risk by critics and investors, with Lisbon under EU pressure to stay on a disciplined path.

“This budget proves it is possible to live a better life in Portugal,” socialist Prime Minister António Costa said.

The vote came a few weeks after the European Commission approved Portugal’s draft, but warned that more efforts would be needed by the government to avoid a breach of EU rules on spending.

Portuguese budget gets green light – after last-minute adjustments

The EU Commission accepted on Friday (5 February) the draft proposal from Portugal for the country’s 2016 budget – but only after Lisbon included last-minute adjustments and following an intense discussion in an extraordinary meeting the college of commissioners.

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In response, Portugal cut its budget deficit target for 2016 to 2.2% of gross domestic product (GDP) from a previously announced target of 2.6%.

Last year, Portugal’s budget deficit came in at 4.3%, well above the EU’s 3% limit.

The conservative opposition lashed out at the new budget Tuesday, branding it “unrealistic and populist”.

“It is a poisoned gift for the Portuguese,” said former prime minister Pedro Passos Coelho.

Portugal received a massive international debt bailout in 2011 that saved it from defaulting, but in return the country had to introduce a string of austerity measures.

In four years, over 78,000 public sector jobs were cut – more than 10% of the total – alongside other steps the creditors said were needed to return the public finances to balance and put the economy back on track.

Portugal’s public debt is forecast to hit 130% of GDP.

True to the socialists’ campaign promises that brought them to power in November, Costa’s budget restores civil servants’ salaries, eases a surtax tax on employees’ incomes, and breathes new life into the welfare system.

However, in a bid to appease Brussels’ demands, the government also announced a hike in taxes on fuel, vehicles and tobacco.

Analysts were sceptical however that the plan would actually work.

“The budget seeks an impossible balance. It is doomed. It will neither put an end to austerity, nor will it meet the deficit objectives,” said Joao Cesar das Neves, an economics professor.

Background

Following the elections on 4 October, a three-party coalition led by the Socialist Party came to power in Portugal. The new government failed to submit its draft budget for 2016 by 15 October, as the EU’s fiscal rules said, and sent the draft proposal only on 22 January 2016.

After assessing the first draft, the Commission concluded that the budget was “in clear breach of the Stability and Growth Pact”, and requested more measures.

Portugal has been in the corrective arm of the Stability and Growth Pact since December 2009 and was asked to bring the deficit to below 3% of GDP by 2015. For 2016, the Council recommended that Portugal should make a structural effort of 0.6% of GDP. According to Portugal's national budget and the Commission's winter forecast, the general government deficit is expected to have been 4.2% in 2015.