• Government to shift tax burden from direct to indirect taxes
  • Taxes on cars, fuel, banks among those that will increase

Portugal said it will increase indirect taxes more than planned earlier and cut the growth outlook presented two weeks ago.

The government lowered the 2016 economic growth forecast to 1.8 percent from the 2.1 percent announced on Jan. 21, when it presented an initial draft of the budget. Total tax revenue will represent about 25 percent of gross domestic product this year, little changed from 2015, and the government will increase taxes on fuel, cars and banks, according to the 2016 budget proposal. Unemployment will fall to 11.3 percent.

“This tax burden is more favorable to employment and growth, and that’s achieved through less direct taxes and more indirect taxes,” Finance Minister Mario Centeno said in Lisbon on Friday as he presented the updated plan. “The policy we present today is balanced and sustainable. It adjusts the tax burden and bets on the recovery of income.”

Prime Minister Antonio Costa was sworn in at the end of November and his minority Socialist government plans to reverse state salary cuts, easing austerity measures faster than the previous administration proposed. Costa says he can do that and keep the budget deficit within the European Union limit of 3 percent of GDP through 2019.

The budget deficit will narrow to 2.2 percent in 2016 from 4.3 percent last year, and the government sees the structural deficit shrinking 0.3 percent, Centeno said on Friday. Debt is forecast to decline to 127.7 percent of GDP in 2016 from 128.8 percent last year.

The European Commission earlier on Friday told Portugal to adopt measures to ensure its 2016 budget complies with the provisions of the EU’s stability and growth pact, while stopping short of rejecting the plan. The government already had to provide additional measures worth as much as 845 million euros ($942 million) to the commission after submitting the initial draft of the budget on Jan. 22.

Costa says his government will be propped up in parliament by the Left Bloc, Communists and Greens, which haven’t followed the Socialists in backing EU budget rules in the past. The government also plans to reinstate four holidays and reduce the working week for state workers as it tries to remove some measures introduced during the three-year bailout program that ended in 2014.

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