Portuguese deficit limits are raised for 2012-2013

At today’s press conference on the conclusion of the Portuguese adjustment programme’s 5th review, Finance Minister Vítor Gaspar announced that the Government deficit targets were revised upward from 4.5% to 5% of GDP in 2012 and from 3% to 4.5% of GDP in 2013. The 2014 deficit target, at 2.5% of GDP, remains below the threshold of the Stability and Growth Pact of 3. The payments schedule from the IMF and the European Financial Stability Fund (EFSF) has remained unchanged which means that Portuguese Government is still expected to resume refinancing debt in financial markets in September 2013.

Additional measures
The revision to the target became necessary as the significant slippage in the first half of the year would have required too sharp a fiscal tightening to be fully corrected. In any case, considering that the Government estimates that without additional measures the deficit would be close to 5.8% of GDP, the Government will still need to find additional savings this year.

For the remainder of 2012, the Government plans to:
• Raise taxes on real estate transactions worth over one million euro;
• Raise taxes by 1.5 percentage points to 26.5% on capital gains and capital income (dividends, interest and royalties).

For 2013, Vítor Gaspar has announced:
• A reduction in the number of personal income tax brackets, resulting in higher average tax rates,
• Cuts between 3.5% and 10% in pension payments over €1500/month;
• Higher taxes for luxury vehicles, private jets and private boats;
• New measures to increase companies’ tax base and reduce fiscal evasion;
• Reducing the gap between the social security regimes of the public and the private sector.

These measures add to the changes in the social security contributions announced last week by the Prime-Minister of a 7 percentage points’ rise in the employees’ social security contributions and a 5.75 percentage points reduction in employers´ contributions, adding up to a net rise in contributions from 34.75% to 36% of gross wages. These measures should beef-up the social security balance, which has suffered from a higher-than-expected rise in unemployment, Moreover, the Government hopes that this measure will support employment and increase competitiveness for firms, thanks to lower costs for employers. Vítor Gaspar announced that econometric studies by the IMF, the European Commission and the Central Bank suggest they could raise employment by 1% , investment by 0.5% and exports by 1-2% after two years.

Structural reform
On the structural front, Vítor Gaspar has announced changes to the privatization calendar (TAP and ANA by the end of 2012, CTT and Águas de Portugal by Q1 2013 and CP Carga by Q2 2013), cutting red tape (notably licencing procedures) for firms and the liquidation of arrears in the Health sector.

Macrometria’s comment
Today´s conference shows the Government’s determination to continue the adjustment programme, albeit at a high cost in terms of short-term economic prospects. The leeway given by the IMF, EC and ECB is welcome news, given the sharp impact the adjustment programme has had on the economy, namely on employment, but is not a sign of weakening determination to continue the adjustment programme, as shown by the additional austerity measures announced for next quarter.

The Government has tried to tame the deterioration in the labour market, via a cut in labour costs. However, given dismal growth prospects, these measures are unlikely to have an impact in the short term, as companies are unlikely to resume hiring in the current economic conditions. The Government expects the economy to start recovering in the second half of 2013, but this may be too optimistic against a background of weakening global growth.