Portugal Plans Deeper Cuts in Time of ‘National Emergency’

Portugal's Prime Minister Pedro Passos Coelho
Portugal's Prime Minister Pedro Passos Coelho. Photographer: Michele Tantussi/Bloomberg

Portugal plans to deepen budget cuts next year as it faces a moment of “national emergency,” Prime Minister Pedro Passos Coelho said.

“Next year the adjustment will have to be much deeper,” Passos Coelho said last night in a speech broadcast by television station RTP following a cabinet meeting to discuss the 2012 budget proposal. To meet its budget goals, Portugal has to do more than it initially planned, he said.

The overrun in carrying out the 2011 budget, relative to the financial aid program’s forecast, exceeds 3 billion euros ($4.1 billion), the prime minister said.

Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro aid plan from the European Union and the International Monetary Fund. The government has already announced a one-time income-tax surcharge to help cover the budget shortfall this year.

Portugal is “on track” to meet its 2011 deficit goal, a team of EU and IMF inspectors said on Aug. 12. A month later, the IMF said the government needed to improve control over expenditure and cut spending to meet its targets as it seeks to regain access to bond markets in 2013.

Summer, Christmas Payments

The 2012 budget includes a plan to eliminate the summer and Christmas salary payments for state workers earning more than 1,000 euros a month, Passos Coelho said last night. As mentioned in the financial aid program, tax deductions will be reduced and the government plans to increase the value-added tax rate of some goods.

The government will also consider an additional tax on companies with profit of more than 10 million euros, Passos Coelho said in parliament today.

Portugal will allow private sector working hours to increase by 30 minutes a day during the next two years and will adjust the holiday calendar as it tries to improve the economy’s competitiveness. It won’t go ahead with a plan to reduce employers’ social-security contributions for now, he said last night.

“We know we can count on our international partners beyond the current adjustment program, as long as we meet that program,” Passos Coelho said.

The additional austerity measures are intended to help the government meet its goal of trimming the budget deficit from 9.8 percent of gross domestic product in 2010 to 5.9 percent in 2011 and to the EU ceiling of 3 percent in 2013. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before starting to decline, the government predicted on Aug. 31. Debt was 93.3 percent of GDP in 2010.

‘Bold Measure’

“Clearly, the reduction in salaries is a bold measure,” Nuno Miguel Matias, an analyst at Espirito Santo Investment Bank in Lisbon, said today in a research note. “It will definitely have a negative impact on consumption.”

The government has forecast the economy will contract 2.2 percent this year and by 2.2 percent to 2.3 percent in 2012, before expanding 1.2 percent in 2013.

Borrowing costs have increased since the bailout was requested. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro-era record of 10.8 percentage points on July 12 and was at 9.46 today, up from 5.11 when former Prime Minister Jose Socrates sought the rescue on April 6. On June 6, the day after Passos Coelho defeated Socrates to take power, it was 6.70.

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