Portugal scraps more austerity but vows budget deficit cut

AP News
Posted: Oct 20, 2016 11:25 AM

LISBON, Portugal (AP) — Portugal's center-left government is rolling back some more austerity measures, even while it pledges to keep cutting its budget deficit as part of an ongoing effort to reduce its huge national debt.

The government said Thursday it will re-open some public services in rural areas that were shut to save money after Portugal came close to bankruptcy in 2011 and needed a 78 billion-euro ($85.5 billion) international bailout. It plans to reopen 20 court houses and expand the network of rural educational institutions, as well as build 34 new health centers.

Though it is one of the European Union's smaller economies, Portugal has earned the attention of international investors because it uses the shared euro currency. Markets fear its continuing economic difficulties could harm the bloc's efforts to generate more wealth. The EU's executive Commission has taken a tough line with Portugal, demanding a lower deficit each year.

Portugal has had no problems raising money on financial markets, though the Toronto-based DBRS ratings agency is the only main agency that did not cut Portuguese bonds from investment grade to junk status following the bailout. DBRS is due to announce a review of Portugal's rating on Friday, though Finance Minister Mario Centeno said after meeting with the agency earlier this month that he didn't expect a rating change. Lisbon needs at least one investment rating to be able to participate in a key stimulus program by the European Central Bank.

The Socialist Party is in power thanks to the support in Parliament of the Communist Party and radical Left Bloc, which after weeks of negotiation have given their blessing to the 2017 state budget.

That spending plan foresees a 1.8 percent deficit in 2017. The government is aiming for a 2.2 percent deficit this year, though the International Monetary Fund expects 3 percent. The IMF has warned that Portugal remains one of the eurozone's financially vulnerable countries.

The Portuguese economy has been treading water since the turn of the century, a period in which average annual growth has been below 1 percent. The government is hoping for growth of 1.2 percent this year. The budget says the 2017 growth target is 1.5 percent.

The government aims to cut the deficit by raising indirect taxes. There will be increases next year for taxes on alcohol and tobacco, high-value real estate, vehicles and vacation rentals. The budget also creates a "sugar tax" on sodas.