Portugal Plans $4.3 Billion of Spending Cuts in 2014

Portugal plans to cut spending by 3.2 billion euros ($4.3 billion) next year to meet budget deficit targets as it tries to exit its bailout program.

The 2014 budget was handed in to parliament yesterday and includes 1.3 billion euros of cuts to personnel costs, Finance Minister Maria Luis Albuquerque told reporters in Lisbon last night. Salaries of state workers earning more than 600 euros a month will be cut by between 2.5 percent and 12 percent.

“About 86 percent of the permanent adjustment effort introduced by this budget is on the spending side,” Albuquerque said.

Prime Minister Pedro Passos Coelho has to trim spending in 2014 after relying mainly on tax increases this year to meet targets set in the aid program from the European Union and International Monetary Fund. Portugal is trying to regain full access to debt markets with the end of the 78 billion-euro rescue plan approaching in June.

The country’s net financing needs in 2014 will be 11.7 billion euros, Secretary of State for Treasury Isabel Castelo Branco said. The government plans gross bond issuance of 10.5 billion euros next year, when financing from the so-called EU and IMF troika will be 7.9 billion euros, she said.

The Social Security Fund plans to increase its holdings of Portuguese debt securities by 2 billion euros this year and 2 billion euros next year, Albuquerque said. The fund was authorized to increase its holdings of government bonds in July.

New Taxes

Portugal’s 10-year bond yield has climbed since May, when the rate reached the lowest since 2010 and the country last sold bonds. Portugal’s 10-year bond yield is at 6.22 percent and the country pays 3.2 percent on its bailout loans. Its debt is ranked below investment grade by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.

The 2014 budget also includes measures on the revenue side totaling 994 million euros, including a new charge on diesel-fueled passenger cars and higher taxes on tobacco and alcohol. About 80 percent of the 5.3 billion-euro deficit-trimming effort in the 2013 budget came from revenue gains, including 3.7 billion euros of higher taxes.

The government next year plans to finish selling its shares in REN-Redes Energeticas Nacionais SA, which operates the country’s electricity and natural gas grids. It will also monitor market conditions to try to resume the sale of airline TAP SGPS SA, according to the 2014 budget proposal. This year it plans to sell as much as 70 percent of postal operator CTT-Correios de Portugal, partly through an initial public offering.

Constitutional Court

Albuquerque yesterday reaffirmed budget deficit targets of 5.5 percent of gross domestic product for this year and 4 percent for 2014. The government forecasts debt will peak at 127.8 percent of GDP this year.

If the country’s Constitutional Court blocks some measures planned for 2014 “the government would need to reformulate the draft budget in order to meet the agreed deficit target,” the EU and IMF said in a joint statement on Oct. 3. “This, however, would imply increasing risks to growth and employment and would reduce the prospects for a sustained return to financial markets.”

The court on Aug. 29 blocked a proposal to end some state workers’ labor contracts that was part of a government plan to “requalify” some public-sector employees. The government on Sept. 12 presented changes to that plan to address the ruling.

Portugal on Oct. 3 raised its 2014 growth forecast to 0.8 percent from 0.6 percent. It expects GDP will shrink 1.8 percent this year. The unemployment rate will be 17.7 percent in 2014. Portugal’s economy expanded in the second quarter for the first time since 2010 as export growth accelerated.

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