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13 May 2011

Commission forecast for Portugal

Unfavourable developments in public finances and a bleak outlook for economic growth had led to a deterioration of confidence and rising pressures in sovereign bond markets.

The banking sector, which is heavily dependent on external financing, became increasingly cut off from market funding and resorted extensively to funding from the Eurosystem. Failure to achieve parliamentary approval for the Stability Programme triggered the resignation of PM Sócrates’s minority government.

The coming years are expected to be marked by very sizeable efforts to reduce the government deficit and bring the public debt-to-GDP ratio on a downward path. After a notified outturn of 9.1 per cent of GDP in 2010, the government deficit is expected to be 5.9 per cent of GDP in 2011 and 4.5 per cent of GDP in 2012.

The plans for 2011 rely on a consolidation package amounting to about 5¾ per cent of GDP as defined in the 2011 Budget, as well as on some additional consolidation measures taken more recently. The consolidation effort is broad-based and supported by a wide range of measures to reduce spending and to increase revenue. Measures on the expenditure side include an average cut of 5 per cent in government wages, reductions in government payroll lists, cuts in social transfers (such as unemployment benefits and family allowances), and a freeze of all other social outlays. Additional measures are targeted at reining in spending in a number of other areas, including, for instance, the health sector, and transfers to State-Owned Enterprises or public investment. Consolidation efforts on the revenue side consist mainly of an additional rise of 2 percentage points of the standard VAT rate on 1 January 2011. In addition, revenue proceeds will reflect the carry-over effect of the tax hikes of mid-2010.

Full forecast (Portugal)

© European Commission

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