Oct. 16 (Bloomberg) -- Portugal’s economy will barely expand next year as slowing growth in Europe and austerity measures to cut the euro-region’s fourth-biggest budget deficit choke the country’s economic recovery.
The Finance Ministry said today the 2011 spending plan forecasts an expansion of 0.2 percent, down from the 0.5 percent it forecast in May. Growth this year will reach 1.3 percent, almost twice the rate projected in May.
“The growth we expect for this year has a lot to do with the exporting sector, and we are counting on that to continue,” Finance Minister Fernando Teixeira dos Santos said at a press conference in Lisbon today. “It’s evident that the salary cuts in public administration and the increase in the value-added tax rate will have a negative impact.”
Teixeira dos Santos presented the spending plan to parliament late yesterday, including cuts to the public wage bill and increases in some taxes to trim the budget shortfall. Dos Santos said the measures are necessary to convince investors the country can control its deficit after Greece’s near-default led to a surge in borrowing costs.
“This is the budget that the country needs,” Teixeira dos Santos said. “It includes measures that allow the reduction of the deficit, but above all it will contribute to restoring the confidence of those that lend to Portugal.”
Debt to GDP
The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, rose to a record 441 basis points on Sept. 28 on concern Portugal wasn’t doing enough to tame the deficit and might need to follow Greece in seeking a European Union rescue. The next day, the government announced new austerity measures, with the spread since narrowing to 337 basis points.
The finance minister forecast public debt as a percentage of gross domestic product will increase to 86.6 percent in 2011 from an estimated figure of 82.1 percent this year. Teixeira dos Santos said he expects that ratio will “stabilize” in 2012 and start declining in 2013. He forecasts revenue from privatizations of 1.87 billion euros in 2011 ($2.6 billion).
The government estimates the state’s net financing needs in 2011 will be 10.7 billion euros, 31 percent lower than in 2010, according to the budget proposal.
“We are certainly going to see very weak growth as the fiscal tightening bites,” Laurence Mutkin, head of European fixed-income strategy for Morgan Stanley, said yesterday in an interview on Bloomberg Television’s “The Pulse” with Andrea Catherwood. “It’s a difficult balance for Portugal to strike.”
The plan includes a 5 percent cut to the wage bill for public workers earning more than 1,500 euros a month and a freeze on promotions and new hiring. The government will create a levy on the financial sector in line with an EU initiative, and the value-added tax rate will increase to 23 percent from 21 percent. The state plans to close or merge some government institutes.
Finance Minister Teixeira dos Santos today said the new budget measures will lead to a reduction in public spending of 3.7 billion euros and an increase in revenue of about 2 billion euros.
Now that the budget proposal has been officially presented to parliament, Prime Minister Jose Socrates needs to muster support from the opposition to turn the plan into law. He leads a minority government and has courted support from the opposition Social Democrats, who have threatened to oppose the budget because it contains tax increases.
The Social Democrats will only announce their position on the 2011 budget after they have documentation, Miguel Macedo, a parliamentary leader for the biggest opposition party, said on Oct. 14.
Europe’s sovereign debt crisis took hold at the end of 2009 after Greece’s newly elected socialist government said the budget deficit was twice as big as the previous administration had disclosed. In April, Greece asked to tap an EU-International Monetary Fund 110 billion-euro loan facility after being shut out of debt markets. The EU then passed a broader 750 billion-euro backstop for the rest of the euro region.
The Portuguese government is trying to cut its budget gap after posting a deficit of 9.3 percent of GDP in 2009, the highest in the 16-country euro region after Ireland, Greece and Spain. The government aims to narrow the shortfall to 7.3 percent this year, 4.6 percent next year, and intends to meet the EU limit of 3 percent in 2012.
Jorg Decressin, head of the International Monetary Fund’s world economic studies division, on Oct. 6 said that the Portuguese economy may contract 1.4 percent next year if new deficit-cutting measures are taken into account.
Standard & Poor’s on Oct. 4 said it expects the Portuguese economy to shrink 1.8 percent next year and stagnate in 2012. Portugal probably won’t default on its debt even as the economy fails to grow in the next two years, S&P said.
Portugal’s economic expansion has averaged less than 1 percent annually since 2000.
To contact the editor responsible for this story: Will Kennedy at email@example.com.