Portugal Government Rules Out More Tax Increases in Budget Plan

Portugal’s (PTGDPQOQ) government reiterated its forecast for the economy to return to growth in 2014 after a three-year recession and said it would focus on cutting spending.

“Financial restriction is of central importance since an additional tax increase would be counterproductive for the Portuguese economy,” the government said in its Budget Strategy Plan for 2013 to 2017 submitted to parliament yesterday.

The government maintained its predictions of a 2.3 percent economic contraction in 2013 and a 0.6 percent expansion in 2014. It also repeated its goals of a budget deficit equivalent to 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the European Union’s 3 percent limit in 2015, when it aims for a 2.5 percent gap.

The announcement took place as Prime Minister Pedro Passos Coelho struggles to find alternative measures to meet these targets, which are set in its 78 billion-euro ($103 billion) international aid program, after the country’s Constitutional Court on April 5 blocked a plan to suspend some payouts to state workers and pensioners. Those payments represented 1.3 billion euros of savings in 2013, or about 0.8 percent of the country’s gross domestic product of 164 billion euros.

The alternative measures will allow Portugal to complete the seventh review of its bailout plan by the EU, European Central Bank and the International Monetary Fund and secure an extension of rescue loans that was agreed upon in principle by EU finance ministers on April 12.

Budget Impact

The government is also preparing measures “with an impact on the budget” equivalent to 1.7 percent of GDP in 2014, or about 2.8 billion euros, 0.4 percent of GDP in 2015, or about 700 million euros, and 0.7 percent of GDP in 2016, or about 1.2 billion euros, according to the Budget Strategy Plan.

“Only then will it be possible to reduce the levels of public debt to the limits agreed at the European level,” according to the document. “This is a task that will last a generation.”

The extension of the maturities of Portugal’s aid loans and a drop in bond yields in the secondary market to the lowest levels since 2010 “opens the way” for the country to issue 10- year bonds, according to the document. The plan did not provide details on when Portugal plans to carry out the sale.

To contact the reporter on this story: Henrique Almeida in Lisbon at halmeida5@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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