news blog from Dortha

Oct 13 2011

Portugal seen toughening austerity in 2012 budget

* Must include more new measures to meet fiscal targets-analystsBy Sergio GoncalvesLISBON, Oct 13 (Reuters) - Portugal’s centre-right government will need to go further in 2012 than the budget austerity set out in its international bailout if it wants to meet tough fiscal goals, analysts said as the government prepared to approve next year’s budget.The 2012 draft budget, which should be approved by the cabinet on Thursday and presented to parliament on Monday, is likely to include tougher austerity than originally planned because of shortfalls this year which the government is set to plug with one-off measures.The government does not plan to immediately release any budget details.The coalition government took over in June backed by a solid parliament majority, which can easily pass the budget even if no other party supports it. The vote is scheduled for Nov. 29.But shortly after taking office in June, the government identified a shortfall of 2 billion euros, or 1.5 percent of GDP, due to lower-than-expected cuts in public sector jobs and the island of Madeira’s failure earlier to report the full scale of its debt.Under Portugal’s 78-billion-euro bailout from the European Union and IMF, the country needs to cut next year’s budget deficit to 4.5 percent of gross domestic product from 5.9 percent this year. In 2010 the deficit reached 9.8 percent.”This (2012) budget is key because if Portugal does not meet the goals set by the ‘troika’, it is just a question of time before falling into a similar situation to Greece, with a second bailout and eventual default,” said Filipe Garcia, head of Informacao de Mercados Financeiros consultancy in Porto.”But cutting the 2012 deficit to 4.5 percent requires tougher measures, both on the revenue and spending side, than what was agreed with the troika,” he said.The steps under the bailout include cutting the number of public servants by 2 percent by 2014, freezing civil servants’ wages following this year’s 5 percent cut, cutting subsidies and fiscal benefits and raising value-added tax on some products to the maximum 23 percent rate from previously lower rates.The government has already slapped a one-off 50 percent tax on year-end salary bonuses and brought forward a tax hike on electricity and natural gas. It is also set to transfer the pension funds run for some banks’ employees to state coffers to cover the shortfall.PRIMARY CUTSWhile the banks’ pension funds have enough cash to guarantee that this year’s budget gap goal is met even if the slippage turns out to be bigger, such transfers are not the structural measures the “troika” of the EU, IMF and European Central Bank are looking for.Rui Bernardes Serra, chief economist at Montepio bank, also said the tax burden was already too high in Portugal, threatening to send the economy into a recessive tailspin, and the government had to focus its efforts on spending cuts.”The government has to, at least, meet the target of cutting its primary current spending by 10 percent, which implies a 15 percent cut in non-salary spending, and this cut has to be across the board,” he said.Analysts say there will have to be drastic cuts in healthcare — in terms of medicine costs, excessive use of services and overtime payments to staff — as well as education and social security benefits. Unemployment is already at a 3-decade high of 12 percent.”Tax hikes would have to be surgical, aimed at certain types of fairly inflexible consumption, but they cannot be excessive as they create growing incentives for tax evasion,” Bernardes Serra said, adding that such tax hikes could involve tobacco and municipal real estate levies.

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