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29 November 2010

Commission forecast for Portugal

The recession, the subsequent deterioration in labour market conditions, and the halt in fiscal consolidation attempts observed up to early 2008 have taken a heavy toll on public finances.

Portugal along with some other Member States came under increased scrutiny from sovereign debt markets, and increases in government bond yields put additional pressure on public finances. In an attempt to alleviate this pressure, the Portuguese authorities announced fiscal plans in May and September that were more ambitious than those set out in the March 2010 Stability Programme, with the new fiscal targets being underpinned by consolidation measures, part of which implemented in mid 2010.

In all, with such a large fiscal consolidation effort, the 2011 deficit may come to under 5 per cent of GDP, also taking into account the fact that the fading of the large one-off revenue recorded in 2010 will limit the deficit reduction in 2011. The current fiscal outlook hinges, on the one hand, upon the assumption that the ambitious expenditure plans outlined in the 2011 Budget Law will largely materialise and, on the other hand, upon a GDP outlook which is only mildly more subdued than the contraction of 0.7 per cent underlying the tax projections of the 2011 Budget. Thus, there are risks to this fiscal scenario. Notably, should the macro-economic outlook turn out to be bleaker than currently expected, fiscal prospects will be affected by lower tax revenues. Indeed, given the uncertainty on a number of external and financial variables, it cannot be excluded that the evolution of demand stays below the present scenario.

Based on unchanged policies, the government deficit is expected to remain essentially constant in 2012. Revenue is expected to continue to be affected by the weak economic momentum, while expenditure is projected to grow in excess of sluggish nominal GDP. In particular, interest spending is expected to increase rapidly. Measures put in place in earlier years to rein in spending are expected to work towards expenditure containment, but they will not yield a marked fall in the primary-spending-to-GDP ratio in a context of rather low nominal GDP growth. Government debt is projected to attain 92 per cent of GDP in 2012, up from 83 per cent of GDP in 2010. The rising debt levels should lead to a rapid increase in interest spending, which is expected to be the fastest-growing spending item and a major factor hindering improvements in the government balance in the coming years.

Full forecast (Portugal)

© European Commission

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