Portugal’s budget deficit narrowed to 5.6 per cent of GDP in the first nine months of 2012 from 6.7 per cent a year earlier, still above the year-end target set for the bailed-out nation.
Economists say extraordinary one-off measures are likely to allow Lisbon to meet its five per cent target but the underlying budget shortfall is likely to be greater – leaving it with more work to do next year.
In the official data on Friday, the National Statistics Institute said the country’s worst recession since the 1970s drove revenues down 3.4 per cent in the January-September period, offset by a 5.6 per cent reduction in public spending.
As unemployment soared to record highs of around 16 per cent, social security contributions slumped 6.8 per cent, while income and property tax revenues fell 5.6 per cent.
Portugal’s EU, ECB and IMF lenders agreed in September to give the country more time to meet the deficit targets under their €78 billion bailout after the austerity affected tax revenues that had been supposed to rise.
Despite the shortfall, they have praised Portugal‘s austerity efforts, including huge tax hikes and painful spending cuts, so far. They eased this year’s goal from 4.5 per cent.
The deficit goal for 2013 was eased to 4.5 per cent from three per cent. Portugal reached last year’s deficit goal of 5.9 per cent thanks to a one-off transfer of banks’ pension funds to the state, a move that is still helping public accounts this year after lenders waved through such solutions despite initial objections.
The Government also hopes to use part of the proceeds from Thursday’s successful sale of airport operator ANA to France’s Vinci to reduce this year’s deficit. However, the move is yet to be approved by Eurostat.
“The consensus among economists is that with extraordinary measures the year-end deficit should be around five per cent,” said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultants in Porto.
“But the thing is, the real deficit is going to be six per cent and not five, and that is a much more difficult starting point to get to 4.5 per cent in 2013,” he added. “Deficit targets are failed... showing that without growth and more activity it will be impossible to reach a sustainable path for our debt.”
The Government expects the economy to contract one per cent next year, which will be Portugal’s third straight year of recession coming after this year’s estimated three per cent slump. It expects a mild growth to return in 2014.