Portugal Faces Constitutional Court Ruling on Coelho Budget

Portuguese Prime Minister Pedro Passos Coelho faces a Constitutional Court ruling on the legality of some elements in this year’s budget that may challenge the government’s ability to meet deficit targets.

The judges will announce their decision this afternoon, the court said in an e-mailed statement today.

President Anibal Cavaco Silva and various political groups asked the court in January to review some points of the budget, including taxes on pensions. On Oct. 3, Finance Minister Vitor Gaspar announced an “enormous” increase in taxes on wages and other income for 2013. He also plans to cut spending by about 4 billion euros ($5.2 billion) in the three years through 2015.

Abebe Aemro Selassie, head of the International Monetary Fund’s mission to Portugal, said in a Jan. 18 conference call that the court had been asked to review a “relatively small part” of the budget’s measures and that he didn’t think the review could bring the whole program “off course.”

Even so, the decision may have a significant effect on Portugal’s budget as there is limited room for the government to increase taxes or cut spending if the budgetary gap is large, BNP Paribas economist Ricardo Santos said in an April 3 note.

‘Cause Trouble’

“Some adjustments to the budget may be possible, but larger ones could cause trouble” with the so-called troika of the IMF, the European Union and the European Central Bank, Christian Schulz, an economist at Berenberg Bank, said in a note. That might “undermine the hard-earned trust of financial markets in the government,” he said.

The yield on Portugal’s 10-year bond slipped 4 basis points today to 6.359 percent at 4:59 p.m. in London. Portugal’s two-year note yield rose 2 basis point to 2.968 percent.

Rejection would be an embarrassment for Coelho’s government and “could cause instability in the otherwise very stable coalition,” Schulz said. Even so, Portugal and the euro region should be able to deal with any problems that may arise from political instability, with risks being contained by the “safety net” of the ECB’s bond-buying pledge, he said.

Coelho told parliament today that the government isn’t preparing a second bailout. The government forecasts debt will peak at 123.7 percent of gross domestic product in 2014.

Deficit Targets

Coelho, battling rising joblessness and lower demand from European trading partners, raised taxes to meet the terms of a 78 billion-euro aid plan from the EU and the IMF. The government announced wider deficit targets on March 15 as it forecast the economy will shrink twice as much as previously estimated this year.

The Constitutional Court last year blocked planned reductions in state workers’ pay for 2013 and 2014 and allowed those cuts in 2012, with projected savings of 2 billion euros, or more than 1 percent of the country’s output.

In response, the government decided to only withhold one of the two public-sector salary payments it had planned to cut in 2013 and in October announced alternative measures including tax increases to meet its deficit target this year.

One of the measures being reviewed by the court this year is a plan to tax pension income of more than 1,350 euros a month at between 3.5 percent and 10 percent. The government estimated in its budget proposal that this measure would raise 420.7 million euros.

The government targets a deficit equivalent to 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the European Union’s 3 percent limit in 2015, when it aims for a 2.5 percent gap.

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