Bloomberg News

Portugal’s Central Government Deficit Narrows on Cuts, Taxes

June 20, 2011

(Updates with figures for deficit in second paragraph.)

June 20 (Bloomberg) -- Portugal’s central government deficit narrowed in the five months through May from a year earlier as tax revenue increased and spending fell with the implementation of austerity measures.

The deficit, which includes “autonomous funds and services” such as the national health system, fell to 1.03 billion euros ($1.47 billion) from 3.38 billion euros, the Finance Ministry said in a statement today. State spending declined 7.2 percent and tax revenue increased 6 percent.

The social-security surplus through May increased 3.2 percent to 743 million euros.

Portugal’s new government, which is due to be sworn in tomorrow, will have to implement an austerity plan that was a condition of the 78 billion-euro financial aid package from the European Union and the International Monetary Fund. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in April in seeking a bailout.

The Social Democratic Party of incoming Prime Minister Pedro Passos Coelho defeated the Socialist Party of Jose Socrates in June 5 elections. Socrates’ minority government fell in March after lawmakers rejected his proposed deficit-cutting plan as he struggled to avoid a bailout.

Salary Freeze

The EU-IMF aid package calls for spending reductions for 2012 and 2013 amounting to 3.5 percent of gross domestic product, while revenue increases will represent 1.4 percent of output. The government will freeze public-sector workers’ salaries through 2013 and cut pensions of more than 1,500 euros a month, while tax deductions will be limited. Portugal also agreed to phase out rent control and merge some of its municipalities.

The three-year aid plan set goals for a budget deficit of 5.9 percent of GDP this year, 4.5 percent in 2012 and 3 percent in 2013. Portugal had the fourth-biggest gap in the 17-country euro region last year at 9.1 percent of GDP.

Portugal’s public debt swelled to 93 percent of GDP in 2010 from 68 percent in 2007. The European Commission forecasts Portugal’s debt will increase to 101.7 percent this year and 107.4 percent in 2012. The debt ratio will start declining from 2013, according to outgoing Finance Minister Fernando Teixeira dos Santos.

--Editors: Eddie Buckle, Fergal O’Brien

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net.


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