Tough Budget in Portugal to Cut Debt

November 4, 2010 Taxation in Portugal

flag of portugalPortugal is aiming to have one of the smallest budget deficits in the European Union by the end of 2011, a goal the ruling political party hopes to achieve through the newly approved budget, which slashes government spending and increases taxes.

In the wake of the recent debt crisis Greece, many smaller and vulnerable European economies are struggling with market pressure to reduce their national debt figures. Portugal, which currently has a budget deficit of 7.3 percent of GDP, hopes that its austerity budget will reduce the deficit to 4.6 percent by the end of 2011.

Portugal’s upcoming budget, which received its initial approval on November 3rd, outlines approximately EUR 5 billion worth of budgetary changes. Among the most significant changes are a 2 percent increase to the Value Added Tax (VAT) rate, a freeze on retirement pensions, a cap on government spending, and reductions to public sector salaries.

Commenting on the new economic austerity Jose Socrates, Prime Minister of Portugal, indicated that the new budget measures will be tough on the country, saying, “…nobody takes such decisions with a light heart.” But he maintained that the outlined measures were the only means by which the country could return to economic stability. It is estimated that the upcoming budget will reduce GDP growth by 0.2 percent in 2011, and increase unemployment level to 10.8 percent.

The budget has already been heatedly debated in Portugal’s parliament, after its first version originally rejected, as the Social Democratic Party (SDP) contested that it relies too heavily on tax increase. The current revision features almost EUR 500 million in concessions. In exchange for the changes, the SDP, the largest opposition party, agreed to abstain from voting of the new budget.

The exact details and balances of the final austerity and financial measures will soon be debated again by a group of select committees. A final, and binding, vote will be held at the end of the month. The next few weeks could have far-reaching effects for the country, as the Prime Minister has already vowed that he will resign if the budget is rejected. Portugal will be left with a “caretaker government” until its earliest possible general elections, in May. The results of the debates will also influence whether there is adequate funding for several national infrastructure projects.

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