LISBON, Portugal - THE foreign lenders who granted Portugal a (euro) 78-billion ($9- trillion) bailout last year have agreed to ease the country's budget targets as it struggles to cut its debt load amid a recession, Finance Minister Vitor Gaspar said yesterday.
Gaspar announced that Portugal's budget government deficit goal this year has been raised from its original target of 4.5 per cent to five per cent of the country's (euro) 171 billion economy.
Gaspar said the new target was agreed with the International Monetary Fund, the European Commission and the European Central Bank. They made up the so-called "troika" which lent Portugal the (euro) 78 billion lifeline in May last year when it was engulfed by the eurozone's financial crisis. Greece and Ireland also needed help.
Representatives from the troika are also currently in Greece, where they are investigating whether the country has gone far enough in its austerity programme and economic reforms to be allowed the next payment in its bailout loans. The debt-crippled country is struggling to come up with cuts worth (euro) 11.5 billion for 2013-14 it promised its creditors which are needed if the country is to continue getting rescue loan payments.
Portugal applied for a bailout after it built up huge debts following a decade of meager economic growth. It has been finding it difficult to reach its economic targets because the country's economic slowdown, expected to bring a three per cent contraction of gross domestic product this year, has meant a bigger drop in tax revenues than expected. Also, a record jobless rate of 15.7 per cent has drained Treasury resources, making it difficult for the government to cut the national debt load despite a raft of cutbacks.
Though Portugal is one of the smaller countries using the shared currency, its continuing woes have underlined the difficulties Europe faces in drawing a line under the crisis through unpopular austerity measures and economic reforms that could take years to bear fruit.
"This is a grave moment" for Portugal and the wider eurozone, Gaspar told a news conference. Portugal "is in deep crisis", he said.
The new deficit target gave Portugal some breathing space, but Gaspar said the recession is now expected to continue into next year, shrinking the economy by one per cent. That would make it the fourth year of recession in five years.
Gaspar's announcement came at the end of a two-week assessment by inspectors working for the troika. Portugal has to comply with the terms of the financial rescue agreement to qualify for the next batch of bailout funds.
The inspectors noted that Portugal has made "significant progress" in its efforts to restore fiscal health, Gaspar said. Portugal's budget deficit in 2010 was 10.1 per cent.
The inspectors made no public comment.
Gaspar also said that the country's 2013 state budget will include more cuts yesterday, insisting the government's policies are "appropriate" despite a broad public outcry over austerity.
Portugal needs to save (euro) 4.9 billion in 2013 compared with this year, Gaspar said.
The government will accelerate a reduction in public sector staffing levels next year and introduce further cuts in public sector pay and pensions, Gaspar said. There will be further cutbacks in the public education and health systems, he said.
A change in income tax brackets will mean most people will end up surrendering more of their income. High earners will pay a "solidarity tax" next year and will be subject to new taxes on capital gains, dividends, luxury goods and property valued over (euro) 1 million.
He said details of those steps will be announced in the next year's state budget, scheduled for publication October 15.