Special comment: Portuguese Finance Minister announces new austerity measures for 2012-2013

In the run-up to the 2013 Budget and given the fiscal slippage in the first half of the year, Portuguese Finance Minister Vítor Gaspar has announced on Wednesday afternoon further austerity measures for 2012 and 2013.

According to the Government, without further adjustment measures, the Portuguese deficit would reach 6.2% of GDP this year, 1.2 percentage points higher than the upwardly revised target of 5%. In order to reach this new objective, the Government counts on the concession of ANA aeroportos (airport operator), which should yield receipts of 0.7% of GDP and on savings of EU funds’ reprogramming, which will amount to 0.2% of GDP. These measures are temporary in nature and need to be replaced in 2013. As for the remaining 0.3% of GDP, they should result from the anticipation of tax rises on capital income and real estate worth over €1mn and the suspension of any investment plans until the end of the year.

For 2013, the required adjustment to cut the deficit from 5% of GDP in 2012 to 4.5% of GDP in 2013 will be 3 p.p. First, the temporary receipts stemming from ANA’s concession and EU funds reprogramming, worth close to 1% of GDP, will need to be replaced. Second, the Government will need to compensate for the impact of the GDP contraction on public accounts, estimated at a further1.3 % of GDP. Finally, the Government expects interest payments to rise 0,2% of GDP in 2013.

According to Vítor Gaspar, the measures already planned for in the Portuguese Adjustment Programme amount to 1.9% of GDP. Therefore, the Government will need to find extra-savings worth 1.1% of GDP as well as to replace the cuts in subsidies for civil servants and pensioners that the constitutional court has vetted for 2013.

The measures announced on Wednesday are mostly on the income side, namely:

  • A reduction in the number of tax brackets from 8 to 5 and an increase in the average personal income tax from 9.8% this year to 11.3% next year. Adding to this the Government will impose a 4% extraordinary tax in 2013 and, for the top earners, a solidarity tax of 2.5%.
  • A rise in taxes for companies with profits above €7mn, an increase in the IMI, which is a tax on real estate, and hikes in luxury goods and tobacco excise taxes

On the spending side, Gaspar announced further cuts will be published in the Budget on 15 October. The Government is also studying ways to replace the so-called fiscal devaluation, i.e., the reduction in labour costs via cuts in employers social subsidies, as the plans announced in September were strongly contested by both workers and employers.

Today’s announcement comes against the background of a successful operation by the Public Debt Management Institute (IGPC), that managed to exchange €3.7bn of debt maturing in September 2013 for debt maturing in October 2015, thereby reducing the Government’s financing needs in 2013, when Portugal officially goes back to the financial markets. Together with the downward trend in bond yields in the secondary market, today´s news appear to support the idea that markets are confident of Portugal’s ability to overcome this crisis.