LISBON, Portugal – The foreign lenders who granted Portugal a €78 billion ($100 billion) 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 Tuesday.
Gaspar announced that Portugal's budget government deficit goal this year has been raised from its original target of 4.5 percent to 5 percent of the country's €171 billion economy.
Even so, Gaspar said the government is readying new austerity measures for next year, including more tax hikes that risk deepening public and political hostility to the coalition government.
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 €78 billion lifeline in May last year when it was engulfed by the eurozone's financial crisis. Greece and Ireland also needed help.
Portugal applied for a bailout after it built up huge debts following a decade of meager economic growth. In 2010 in budget deficit was 10.1 percent.
The country has been finding it difficult to reach its economic targets because the country's economic slowdown, expected to bring a 3 percent 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 percent 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 troika said in a statement that Portugal's efforts to restore economic health "remain broadly on track." Inspectors, who spent the last two weeks assessing Portugal's progress, recommended the disbursement of the latest batch of bailout funds, valued at €4.3 billion.
Representatives from the troika are also currently in Greece, where they are investigating whether the country has gone far enough in its austerity program 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 €11.5 billion ($14.7 billion) for 2013-14 it promised its creditors which are needed if the country is to continue getting rescue loan payments.
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 1 percent. That would make it the fourth year of recession in five years. Portugal still intends to return to international debt markets in September 2013, as planned, Gaspar said.
Gaspar also said Tuesday that the country's 2013 state budget will include more cuts, insisting the government's policies are "appropriate" despite a broad public outcry over austerity.
Portugal needs to save €4.9 billion in 2013 compared with this year, Gaspar said.
The government will accelerate cuts in public sector staffing levels as well as public sector pay and pensions, Gaspar said. There will be more 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 €1 million.
He said details of those steps will be announced in the next year's state budget, scheduled for publication Oct. 15.
The government is facing a storm of discontent over the continuing austerity. Last week, Prime Minister Pedro Passos Coelho announced an increase in workers' social security contributions from 11 percent of their monthly salary to 18 percent. Business leaders complained the step will cut household spending and further depress consumption.
Passos Coelho also said his government will cut companies' welfare contributions to 18 percent from 23.75 percent to encourage hiring
In a post on his Facebook page at the weekend, the prime minister wrote that the austerity announcement was one of the hardest speeches he had ever made. He addressed the message to the Portuguese people calling them "amigos" and signed it "Pedro." By Tuesday, the post had more than 45,000 comments but only about 8,000 "liked" it. Most of the comments were sharply critical. Some were insulting.
Leading members of the Social Democratic Party, the senior partner in the governing coalition, have expressed dismay at the cutbacks. The main opposition Socialist Party, which gave its blessing to last year's bailout agreement, said it won't endorse the new round of cuts, and the country's two trade union confederations, represent more than 1 million workers, said they will fight the measures.
As part of its austerity program, the government also intends to privatize its national airline, TAP Air Portugal, and airport management company ANA Aeroportos by the end of the year. It will also sell off mail company CTT, waste management company Aguas de Portugal and rail cargo company CP Carga next year.
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