15 October 2013

FT: Lisbon unveils tough budget in effort to avert new bailout

Lisbon has unveiled a tough austerity budget for 2014 that is seen as a crucial step in government efforts to avert the need for a second bailout when Portugal's €78 billion rescue programme ends in June.

The proposals, including cuts of up to 12 per cent in public sector pay, are partly aimed at building investor confidence and preparing the way for Lisbon to return to international capital markets this year or early in 2014. But government ministers and EU officials have voiced concerns that Portugal’s constitutional court could overturn some of the proposals, threatening deficit targets agreed with international lenders.

Pedro Passos Coelho, the prime minister, has warned that there can be no let-up in deficit-reduction measures after international lenders rejected Lisbon calls to ease fiscal goals. The so-called troika of creditors – the European Commission, International Monetary Fund and European Central Bank – have insisted that Lisbon stick to a target of cutting its budget deficit from a projected 5.5 per cent of national output this year to 4 per cent in 2014.

Lisbon had pressed unsuccessfully for next year’s goal to be relaxed to 4.5 per cent of gross domestic product. But the troika has endorsed a cut in the corporate tax rate from 25 per cent to 23 per cent next year, a measure aimed at supporting an incipient economic recovery after three years of deep recession and high unemployment. The Portuguese government said it aimed to reduce the corporate tax rate gradually to below 19 per cent within three years.

Jeroen Dijsselbloem, the Dutch head of the eurogroup of finance ministers, said on Monday the ministers would discuss a strategy for Portugal’s exit from its bailout programme in the first quarter of next year. Until then, Portugal needed to maintain its current pace of reform and fiscal consolidation, he told reporters in Brussels.

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