Portugal: Government presents 2014 budget, aims to regain access to financial markets
October 15, 2013
On 15 October, the government presented its draft budget for 2014, which aims at exiting the EUR 78 billion bailout program - scheduled to end in June 2014 - as early as the first half of next year. According to Finance Minister Maria Luis Albuquerque, the fiscal deficit is expected to reach 4.0% of GDP next year. For this year, the government expects a shortfall of 5.9% of GDP, which exceeds the 5.5% of GDP target agreed with international lenders under the current bailout program. FocusEconomics Consensus Forecasts panelists are less optimistic and expect a budget deficit of 4.4% of GDP for 2014, which is down from the projected 5.7% of GDP shortfall envisaged for 2013. Public debt is projected to reach 126.7% of GDP and an unemployment rate of 17.7% is expected in 2014. FocusEconomics panelists are slightly less optimistic and see public debt at 129% in 2014 and an unemployment rate of 17.6% in the same period.
The budget includes austerity measures - mainly on the expenditure side - amounting to EUR 3.2 billion to meet the deficit targets. The government seeks to slash public-sector workers' salaries by between 2.5% and 12.0% on earnings above EUR 600. In addition, the government plans to cut public-sector pensions that are over EUR 600 per month and the minimum retirement age will be increased from 65 to 66 next year. The budget also includes measures to boost revenues, including higher taxes on diesel, tobacco, alcohol and energy producers, among others. On the other hand, corporate taxes would be cut from 25.0% to 23.0% in order to promote economic activity.
The budget also shows that Portugal plans to issue EUR 10.5 billion in government bonds next year, while financing from international lenders will amount to EUR 7.9 billion. The yield on Portugal's benchmark 10-year bond has fallen from the highs registered during July's political paralysis. But at 6.15% on 24 October, it remains considerably higher than the 3.54% in Ireland, which is due to exit its bailout program by the end of this year. It is no surprise that on 21 October, the government confirmed its intention to seek a precautionary credit line from the troika in order to provide reassurance to investors when the bailout ends.
The Bank of Portugal expects the economy to expand 0.3% in 2014, after a 1.6% contraction estimated for this year. The government is more upbeat than the Central Bank regarding 2014 and expects the economy to grow 0.8%, after contracting 1.8% in 2013. FocusEconomics Consensus Forecast panelists anticipate that GDP will contract 1.9% in 2013, which is up 0.1 percentage points from last month's projection. For 2014, the panel expects GDP to expand 0.4%, which is unchanged over the previous month's estimate.