Portugal: Troika softens deficit targets amid global headwinds
September 24, 2012
The fifth review mission to Portugal conducted by the ECB-IMF-EC Troika on 11 September concluded that the program remains broadly on track. The approval of this review will allow the disbursement of EUR 4.3 billion under the EUR 78 billion bailout, which is expected to take place in October. The joint mission stated that GDP growth remains in line with projections despite headwinds from abroad, but acknowledged that higher unemployment and lower disposable income are weighing on tax revenues, thus threatening a slippage in fiscal deficit targets. Consequently, the fiscal deficit targets were adjusted upward to 5.0% of GDP in 2012 from the previous 4.5% of GDP and to 4.5% of GDP in 2013 (up from 3.0%). In 2014, Portugal is projected to reach a fiscal deficit of 2.5% of GDP, below the 3% threshold of the Stability and Growth Pact. The Troika report sees the public debt-to-GDP ratio peaking below 124% of GDP in 2014, before embarking on a downward trajectory. These new targets should allow the government to strike a balance between advancing the required fiscal adjustment and avoiding undue strains on the economy. Meeting the softer deficit targets will still be a challenge as a furious public backlash against further austerity measures forced the government to scrap plans to cut employers' social security contributions by 5.75 percentage points and to hike workers' contributions to 18% from 11%, a measure designed to decrease labour costs and thus improve competitiveness. The plans were included in the additional consolidation efforts stipulated in the Troika report. Now the government is purportedly looking to raise taxes on personal income, property and capital gains, as well as cutting public sector workers' wages to meet the country's deficit targets. The next program review is expected to take place in November.