Portugal was given more time to narrow its budget deficit as the government set a wider target for borrowing this year after tax revenue missed forecasts and the economy heads for a third year of contraction in 2013.
The government aims to reach a deficit of 5 percent of gross domestic product in 2012 instead of the previous goal of 4.5 percent, Finance Minister Vitor Gaspar said in Lisbon today after European Union and International Monetary Fund officials agreed on the new targets. It aims for a deficit of 4.5 percent in 2013 rather than 3 percent. It will only cut the deficit below the European Union’s 3 percent limit in 2014, when it targets a 2.5 percent gap.
Gaspar now projects GDP will shrink 1 percent next year. He previously estimated GDP growth of 0.2 percent for 2013. He kept a forecast for a contraction of 3 percent this year.
Prime Minister Pedro Passos Coelho is battling rising joblessness and a deepening recession as he cuts spending and raises taxes to meet the terms of the 78 billion-euro ($100 billion) aid plan from the EU and IMF. As the country’s borrowing costs surged, Portugal last year followed Greece and Ireland in needing a bailout.
“Portugal’s economic adjustment program avoided the bankruptcy of the Portuguese state,” Gaspar said in Lisbon today at a press conference on the completion of the fifth quarterly review of the country’s aid program. “The program opens the way for the return to the bond market, in normal financing conditions.”
The Portuguese government plans to carry out debt market operations as it aims to regain access to bond markets by September 2013, said Maria Luis Albuquerque, the secretary of state for treasury and finance.
The IMF, EU Commission and European Central Bank said in a joint statement today that the program of measures attached to Portugal’s bailout is “broadly on track.”
“Overall, this review confirms that the program is making progress, albeit against strong headwinds,” the so-called troika said. “Provided the authorities persevere with strict program implementation, euro-area member states have declared they stand ready to support Portugal until full market access is regained.”
To meet the new deficit targets, the government plans to increase taxes on real-estate assets valued at more than 1 million euros from this year. For 2013, it plans to raise taxes on dividends, capital gains and private airplanes. It will also set new rules for awarding unemployment benefits and pensions will be cut, Gaspar said.
Portugal on Sept. 7 announced plans to raise the social-security rate paid by workers while curbing the charge on companies as the government tries to narrow the budget deficit and fight surging unemployment. The social-security rate paid by public and private-sector employees will increase by 7 percentage points to 18 percent next year, while the rate companies pay will drop to 18 percent to encourage hiring.
The government forecasts the unemployment rate will rise to about 16 percent in 2013 from 15.5 percent this year. Economic growth has averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers.
Gaspar reaffirmed a plan to complete the sales of airport operator ANA-Aeroportos de Portugal SA and carrier TAP SGPS SA by the end of this year. In the first quarter of 2013, Portugal plans to start the sale of postal operator CTT-Correios de Portugal and of a waste-management unit of water utility Aguas de Portugal, followed by rail freight company CP Carga in the second quarter.
Portugal’s debt will peak below 124 percent of GDP, “remains sustainable and will be on a firm downward trajectory after 2014,” the troika said in their statement.
The IMF in July said it projected Portugal’s debt would peak at about 118.5 percent of GDP in 2013. The projection assumed annual economic growth of 2 percent and medium and long-term borrowing costs of 7 percent when the country regains access to markets in 2013, declining gradually to 5 percent over the next four years.
The approval of the conclusion of the fifth review will allow the disbursement of 4.3 billion euros under the bailout. That could take place in October, pending approval of the IMF board and of European officials, the statement said.