Portugal Cuts Economic Growth Forecasts, Sees Higher Debt Ratio

  • Finance Ministry lowers GDP outlook in 2017 budget proposal
  • Government will add taxes on property wealth, sugary drinks

The Portuguese government cut its growth outlook and said the budget deficit and debt ratio will be higher than previously forecast.

The economy will grow 1.2 percent in 2016 and 1.5 percent in 2017, lower than estimates announced in April for expansion of 1.8 percent in each year, the Finance Ministry said in its 2017 budget proposal. The budget deficit will narrow to 1.6 percent in 2017 from 2.4 percent in 2016, which is wider than the 2.2 percent target announced in April for this year. Still, it’s within the 2.5 percent limit set by the European Commission.

Debt is projected to increase to 129.7 percent of gross domestic product in 2016 from 129 percent in 2015, before falling to 128.3 percent in 2017. The finance ministry’s previous forecast was for a ratio of 124.8 percent this year. In September it announced plans to inject as much as 2.7 billion euros ($3 billion) in state-owned bank Caixa Geral de Depositos SA.

Prime Minister Antonio Costa is increasing pensions and reversing state salary cuts faster than the previous administration proposed as he tries to help the economy recover, while raising indirect taxes. Costa’s minority Socialist government has been propped up in parliament by the Left Bloc, Communists and Greens, which haven’t followed his party in backing European budget rules in the past.

“This budget bets on the recovery of income with a reduction of the tax burden, particularly of direct taxes on income,” Finance Minister Mario Centeno said at a press conference in Lisbon on Friday night. “It’s a budget that considers that the recovery of income has to be based on an economy that generates jobs.”

While the economy may be growing slower than Costa previously forecast, unemployment is dropping faster. The government sees the jobless rate declining to 10.3 percent in 2017 from 11.2 percent in 2016.

The budget includes a plan to gradually end an income tax surcharge during 2017. Meanwhile, the government is introducing a new tax on property wealth exceeding 600,000 euros per owner that’s expected to raise 160 million euros next year. It’s also adding a tax on certain sugary drinks that will raise 80 million euros, according to the proposal.

An initial vote on the budget is scheduled for Nov. 4.

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