LISBON: Portugal’s Socialist government is planning a sharp cut in its budget deficit next year, as it tries to convince its eurozone partners and the markets that it remains committed to fiscal discipline.
In a stability report that must be sent to the European Union’s executive arm by the end of the month, Portugal said it is targeting a deficit of 1.4% of gross domestic product for 2017, down from a 2.2% goal this year, which Brussels has already considered to be too ambitious. Under EU rules, countries are required to have a deficit of below 3% of GDP, a target Portugal has never achieved. Its deficit stood at 4.4% of GDP last year, but that included a one-off capital injection into a failed lender that accounted for 1.4 percentage points. In a news conference, Finance Minister Mario Centeno said the 2017 goal would be reached through spending cuts, including a reduction in the number of civil servants and cuts in red tape.
Portugal’s government, which is backed in parliament by three antiausterity far-left parties, took power late last year. Socialist Prime Minister António Costa has increased the minimum wage and vowed to reverse some austerity measures imposed by the previous center-right government, but still stick to EU budget requirements.
Under its 2016 budget plan, the government will reverse salary cuts in the public sector and phase out a special tax on income. Brussels has said those and other measures that increase spending and lower revenue will make achieving the budget target difficult.
Mr. Centeno said Thursday the government continues to be confident about its plan. Credibility is key for the small Iberian country, which needs to tap credit markets to refinance its high debt load, which amounts to 129% of GDP. Portuguese bond yields have fallen sharply since the European Central Bank started its sovereign-bond-buying program early last year.
Portugal’s eligibility to participate in that program, however, is hanging by a thread. Under its rules, the ECB can only purchase a country’s debt if it is rated investment grade by at least one of the four main ratings firms. Canada’s DBRS Ltd., the only agency to rate Portugal’s debt above junk, may re-evaluate its rating next week.
If there is a downgrade, the interest rates investors charge to hold the country’s debt would likely rise sharply. That wouldn’t only hurt Portugal’s funding ability, but also that of its banks and companies. Such a difficulty led Portugal to request a three-year €78 billion ($88 billion) bailout in 2011.
