World Economy

Portugal to Lower Deficit, Scrap Austerity

Portugal to Lower Deficit, Scrap AusterityPortugal to Lower Deficit, Scrap Austerity

Portugal’s new Socialist government is promising to lower the country’s budget deficit this year, while also scrapping unpopular austerity measures.

A draft 2016 state budget presented to parliament on Friday puts the deficit target at 2.6%, down from an expected 3% last year, AP reported.

But the minority government, supported by the Communist Party and radical Left Bloc, still intends to cut the tax burden. That includes cutting sales tax at restaurants to 13% from 23% as part of an effort to stimulate consumption.

Critics say the government is attempting a balancing act that is bound to fail because of Portugal’s huge debts. It needed a €78 billion ($84.5 billion) bailout in 2011 to avoid bankruptcy.

The budget proposal requires approval from parliament and Portugal’s eurozone partners.

 A ‘Problem Child’

This week, Germany’s second largest bank, Commerzbank, declared that Portugal had once again become “a problem child” in the eurozone, and that the situation in the country could “quickly evolve into something very similar to what Greece lived through last summer.”

Access to the bond-buying program of the European Central Bank could be cut off, leading to the government having to seek a new rescue package, it warned. The report declared it had “little faith” in the claims made by Finance Minister Mario Centeno that “much stronger growth, coupled with tax revenues” would occur and therefore allow for more public spending.

Commerzbank bitterly criticized the minimal measures the new Socialist Party government has taken to partially undo measures imposed by the previous right-wing Social Democratic Party/Peoples Party government. The changes, part of the “left agreement” made with the Left Bloc and the Communist Party, include an increase in the monthly minimum wage to €589, the reinstatement of four public holidays, and a cut to an extraordinary income tax introduced during the debt crisis to boost revenues.

The Commerzbank salvo was the latest in a series of attacks made by the financial markets and the “troika” (ECB, European Commission and International Monetary Fund) since the PS came to power last month with the support of the BE and PCP. They are piling pressure on the PS and its pseudo-left allies to deepen austerity. Portugal’s debt stands at about 130% of GDP, one of the highest in the eurozone, well above pre-2008 levels of 84%.

The budget deficit in 2014 ended up at 7.2% of GDP, compared to the forecast 2.3%. The latest data shows it reached 4.2% in 2015 instead of the 2.7% agreed with the troika. Troika officials are in Lisbon next week to push for the shortfall to be rectified this year, and are reportedly demanding 18 measures to achieve a 2.8% target in 2016.