Bloomberg News

Portugal Sees Economy Shrinking 2.3% This Year, 1.7% in 2012

July 14, 2011

(Updates with comment from finance minister in second paragraph.)

July 14 (Bloomberg) -- Portugal’s government expects the economy to shrink more than was forecast by the previous administration and the central bank, it said today.

Gross domestic product will drop 2.3 percent this year and 1.7 percent in 2012, according to projections published in Madrid. That compares with the 2 percent decline forecast by the previous government and the Bank of Portugal.

Portugal will only see a “expressive economic recovery from 2013,” Finance Minister Vitor Gaspar said at a press conference. The forecasts aim to be more in line with those included in the bailout plan approved in May, which saw GDP shrinking 2.2 percent in 2011 and 1.8 percent in 2012, he said.

The Bank of Portugal revised its outlook for the economy this week. It forecasts a 2 percent contraction this year and 1.8 percent in 2012 after expansion of 1.3 percent in 2010. In March, it predicted a 1.4 percent contraction this year and 0.3 percent growth in 2012.

Portugal’s new government is committed to an austerity plan that was a condition of a 78 billion-euro ($110 billion) 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 austerity plan aims to reduce the deficit to the EU ceiling of 3 percent of GDP by 2013 from 5.9 percent in 2011 and last year’s 9.1 percent.

Christmas Tax

Prime Minister Pedro Passos Coelho announced June 30 he was planning a one-time income-tax surcharge this year, equal to 50 percent of the Christmas supplements all workers receive, excluding the amount below the national minimum wage, to help reach the budget-deficit target. The Christmas payment is equal to a month’s salary.

The measure will represent an additional annual tax rate of 3.5 percent, Gaspar said today. He expects to raise 1.03 billion euros this year and in 2012 with the surcharge on salaries, pensions and capital gains.

The government needs additional measures worth about 2 billion euros to meet this year’s target, Passos Coelho said June 30, adding the government was planning additional measures of about 1 billion euros in spending cuts. The tax surcharge will raise 840 million euros this year, Gaspar said today. Last year’s deficit was 15.8 billion euros, the National Statistics Institute said June 29.

The government aims to bring forward to the third quarter some of the measures included in the bailout program, including a restructuring of state-owned companies and state-asset sales. Passos Coelho will seek to sell its holdings in electricity company EDP-Energias de Portugal SA and power-grid operator REN- Redes Energeticas Nacionais SA in the third quarter.

--Editor: Fergal O’Brien

To contact the reporters on this story: Anabela Reis in Lisbon at areis1@bloomberg.net; Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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