Portugal may get an additional year to narrow its budget deficit as the country’s economic outlook worsens, Finance Minister Vitor Gaspar said.
Gaspar estimates the gross domestic product forecast for 2013 may be revised downward by about 1 percentage point in the seventh review of Portugal’s bailout plan. During the study of the European Union-led aid program, Portugal will assess carrying out “contingent” budget savings announced in October that represent 0.5 percent of GDP, he said in parliament today.
“The economic revision also has implications for the pace of adjustment in subsequent years,” Gaspar said. The European Commission may propose a one-year extension for Portugal to “correct the excessive budget-deficit situation.”
Prime Minister Pedro Passos Coelho is battling rising joblessness and lower demand from European trading partners as he raises taxes to meet the terms of a 78 billion-euro ($104 billion) aid plan from the EU and the International Monetary Fund. Portugal was given more time in September to narrow its budget gap after tax revenue missed forecasts, and the economy is set to contract for a third year in 2013.
Gaspar announced an “enormous” increase in taxes on Oct. 3 to narrow the budget deficit to 4.5 percent of GDP in 2013 and below the EU’s 3 percent limit next year, when he targets a 2.5 percent gap. The government also plans to cut spending by about 4 billion euros in the two years through 2014, when it forecasts debt will peak at 122.3 percent of GDP after reaching 122.2 percent in 2013.
Portugal’s economy shrank for a ninth straight quarter in the three months through December as export growth slowed with the euro area’s deepening recession. GDP slid 3.2 percent in 2012 after shrinking 1.6 percent in 2011.
The government’s last forecast was for GDP to contract 1 percent in 2013. The recession has hurt Portugal’s tax revenue, which dropped 6.1 percent in 2012 as disposable income fell.
“It’s necessary to weigh the effects of budget adjustment on economic activity and on the sustainability of public debt,” Gaspar said. “Considering a change in the budget adjustment profile is only viable due to the accumulation of credibility and trust that Portugal has obtained from its international partners.”
EU Economic and Monetary Commissioner Olli Rehn said on Jan. 22 that he favors giving Portugal and Ireland more time to pay back bailout loans. A cut in the loan rates is also up for debate, and Rehn said experts will make proposals for a March meeting of European finance ministers.
The seventh review of Portugal’s bailout program will start on Feb. 25 and the government will also discuss financing for businesses and investment, including tax incentives for new investment, Gaspar said today. “The seventh review marks the beginning of the end of the adjustment program,” he said.