EU cuts Lisbon more slack on deficit as economy wilts

The IMF and the European Union have agreed to allow Portugal to ease its deficit-reduction target for 2012 and give the country another year to bring the shortfall back within the EU ceiling of three percent of GDP, Finance Minister Vítor Gaspar said Tuesday.

In the face of a deepening recession that the government now expects to continue into next year, Gaspar said the target for this year has been raised to five percent of GDP from 4.5 percent, which will now be the goal for 2013. Lisbon also got an extension on complying with the EU ceiling from 2013 to the following year when it expects the shortfall will come in at 2.5 percent of GDP.

Gaspar said the government now expects the domestic economy to shrink one percent next year, compared with an earlier forecast of growth of 0.2 percent. It is sticking to its estimate for this year of a contraction of three percent. GDP declined 3.3 percent on annual basis in the second quarter of the year after falling 2.3 percent in the first three months of the year.

The revisions were agreed during a visit to Lisbon by the so-called troika of the IMF, the EU and the European Central Bank as part of their monitoring of the terms of Portugal’s 78-billion-euro bailout.

This is a very serious moment; Europe as a whole must respond in the right way”

Gaspar said the troika acknowledged the “significant progress” made by the government in tackling Portugal’s economic and financial imbalances.

The revisions were announced after Prime Minister Pedro Passos Coelho in a televised address on Friday told the country that workers’ income would be effectively cut by an increase in the rate applied for their social security contributions to 18 percent from 11 percent. Companies will now pay 18 percent instead of 23.75 percent.

Warning of “catastrophic risks” if the deficit were to balloon further, Gaspar announced that further austerity measures would be required to meet the revised targets. In terms of this year, this will require budget measures worth 4.9 billion euros.

“This is a very serious moment and we will only overcome it if each member state and Europe as a whole knows how to respond in the right way,” the minister said.

The new measures mentioned by Gaspar include a “significant reduction” in the number of brackets in the progressive personal income tax system to bring effective rates in line with the average in the rest of Europe. Gaspar said the top 46.5-percent bracket will remain in place.

The tax on capital gains and dividends will also be raised to 26.5 percent from 25 percent. Stamp duty on high-value property is also being raised as will taxes on luxury goods. The government will also extend its privatization program.

Gaspar said Portugal still intends to return to the primary debt market in September of next year.