Portugal has announced plans to cut its budget deficit by reducing investment and capping public sector wage growth. (Portuguese Prime Minister Jose Socrates pictured)
By News Wires
REUTERS - Portugal plans to cut its budget deficit to below the EU's 3-percent limit by 2013 by reducing investment and capping public sector wage growth, although it will also rely on the economy recovering from this year.
The plan, which Portugal has to submit to Brussels, projects a fall in the deficit at 2.8 percent of gross domestic product in 2013 from 8.3 percent this year and also raises taxes on high incomes and stock market gains, according to a draft document.
The austerity plan is seen as the key to convincing markets that Portugal will tackle rising deficits and debt as investors examine the country for signs whether it may be next in line to run into Greece-style fiscal problems.
According to the draft guidelines of the stability and growth pact update for 2010-2013, the budget gap will fall to 6.6 percent next year and then to 4.7 percent in 2012 before it meets the EU target of below 3 percent the following year.
The government will discuss the plan with opposition parties, unions and business leaders on Monday. It has to present the programme to Brussels by the end of this month.
Spending cuts will account for 49 to 50 percent of the planned deficit reduction, while revenue measures will make up 15 to 16 percent of the narrowing, the draft said. The government expects economic growth to provide the rest of the adjustment.
The plan envisages that the economy, which contracted 2.7 percent last year and is expected to grow 0.7 percent this year, will expand 0.9 percent in 2011, 1.3 percent in 2012 and 1.7 percent in 2013.
Public debt is expected to peak in 2012 at 90.1 percent of GDP, up from 85.4 percent forecast or this year, before retreating to 89.3 percent in 2013.
Wages, sales
The government expects to raise 6 billion euros over the period via the sell-off of state-owned stakes in companies and privatisations, including 1.2 billion euros in 2010.
It will not raise public sector wages by more than inflation until 2013 and will extend the existing rule of hiring just one civil servant for every two leaving the service, as it aims to cut personnel spending gradually to 10 pct of GDP by 2013 from last year's 11.5 percent.
The share of public investment will fall to 2.9 percent of GDP in 2013 from 4.9 percent last year and investment in the defence sector will be slashed by 40 percent. It said it would postpone construction of high-speed train links between Lisbon, Porto and Spain's Vigo.
Social spending will be cut by 0.4 percentage points of GDP over the period thanks to a ceiling on transfers to Social Security. It will also seek savings worth 0.3 to 0.4 percentage points of GDP on healthcare.
Except for emergency situations and limited special cases, regional and local administrations will not be allowed to issue debt and are ordered to have zero net debt until 2013, and state-owned companies will also have limits on debt.
The austerity plan only encompasses tax hikes for annual incomes above 150,000 euros, where the tax rate will be increased to 45 percent. The maximum rate now is 42 percent.
A maximum limit on tax deductions will be imposed for taxpayers with higher incomes, and higher pensions will also enjoy fewer tax breaks.
Next year, Portugal will start withdrawing extraordinary measures imposed in 2008 to support the economy and ride out the global downturn. The measures included employment subsidies for young people.
France24
