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Categorized | Economy

Portugal unveils plan to extend austerity

Posted on April 30, 2013

Lisbon is to squeeze government spending by €6bn – the equivalent of 3.6 per cent of national output – over the next four years, extending tough austerity measures long after Portugal’s planned exit from a €78bn bailout programme.

The plan, announced on Tuesday, implies severe cuts in government spending on health, education and social security and is expected to meet resistance from opposition parties and trade unions.

    Portugal’s next €2bn instalment of bailout funds is contingent on international lenders approving the strategy.

    Vítor Gaspar, finance minister, excluded further tax increases, saying fiscal tightening to the end of 2016 would focus almost exclusively on spending cuts.

    His fiscal consolidation plan includes an additional €1.3bn in spending cuts this year to replace planned austerity measures that a Portuguese court ruled unconstitutional. The minister said €2.8bn in cuts would be introduced next year, followed by €700m in 2015 and €1.2bn in 2016.

    Lisbon is due to exit its three-year bailout programme in mid-2014, although economists have questioned whether Portugal will be able to avert the need for a second bailout by regaining full access to debt markets by next year.

    Pedro Passos Coelho, the prime minister, said on Tuesday that Portugal would have “little room for error” after the scheduled conclusion of the adjustment programme. The post-bailout period would require “discipline, rationality and long-term vision”, he told a Lisbon conference. Barriers to economic growth would have to be “definitively removed”.

    Announcing the government’s medium-term budget strategy, Mr Gaspar forecast the economy would begin to recover in 2014 from three consecutive years of recession, with national output increasing by 0.6 per cent next year after an expected contraction of 2.3 per cent this year.

    Unemployment was expected to climb to a record 18.2 per cent this year and 18.5 per cent in 2014, he added. Mr Gaspar is to announce in the coming days details of where spending would be cut.

    However, he ruled out further tax increases after introducing what the government itself described as “enormous” rises in January. “The state cannot be any bigger than citizens are prepared to pay for,” he said.

    Under the bailout programme, Lisbon is committed to making “permanent” cuts in state spending totalling €4bn by the end of 2015. The €6bn fiscal tightening package announced on Tuesday extends to the end of 2016 and allows for additional cuts required because of the constitutional court ruling.

    Mr Gaspar said the plan was aimed at cutting the structural budget deficit, which excludes interest payments, to 0.5 per cent of gross domestic product by 2017.