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November 26, 2015


Portugal's imminent fiscal squeeze

The new Portuguese government starts with a fiscal disadvantage not only because elections postponed the presentation of a 2016 budget but also because the previous government used up most of the 2015 budget. It is now inevitable that the government will have to operate under the 2015 expenditure ceilings until a new budget can be drawn up. Costa will try to speed up the process, but chances are that the process from planning to implementation will drag on until March, writes Jornal de Negocios.

According to latest data, the budget deficit worsened in October by €1.2bn, the latest data revealed, implying that 95% of the deficit target for the whole year have been used up already. The next two months would only allow spending of €275m if it wants to keep the budget targets of below 3%. Diario Economico looked at the last two years, and showed that with October deficits either 84% and 90% of the target for the whole year respectively, the government had to resort to extraordinary measures. Even if one accounts for the fact that some items are relevant on the cash basis and not for the national accounts, the government might have a slightly bigger room of manoeuvre, but not much. The article cites €640m, which makes the government still prone to exceed the 3% deficit target and make the abolition of the extra-charges as postulated in the agreement with the left parties less likely.

When it comes to its pledges of anti-austerity measures, there are in fact some austerity measures to be taken. Some measures such as the income tax (IRS) surcharge, salary cuts of Public Service and Solidarity Extraordinary Contribution (CES) expire on 31 December. The PS does not want that to happen because of the impact it would have on public budgets. It is planning instead a progressive trajectory of these relief measures, though faster than the centre-right coalition intended to do. Costa plans to return the salaries of state workers at a rate of 25% per year to previous levels and eliminate half the surcharge in 2016 and half in 2017. However, for the measures to be adopted in time to enter into force on January 1, the parties are acting against the clock.

The proposal will be discussed in parliament today, according to this article. Communists did not indicate whether they agreed on this, but said they would be open for negotiations. Time is running out as only 20 days remain for the law to become approved and published by January 1.

Other items on the agenda is the revision of Passos Coelho’s redundancy scheme and the return to the 35-hour week from currently 40 hours, Diario Economico reports. On the list in Jornal de Negocios are also banking matters. The new government will have to negotiate with Brussels and extension of the deadline for the sale of Novo Banco. As the central bank is the resolution authority, the new finance minister Mário Centeno will have to find common understanding with the central bank governor. Also the finance minister needs to find a resolve for the state aid investigation from Brussels into Banif. 

The inauguration of the new government will be today, and the government programme is to be signed off by the cabinet and send to parliament for discussion Tuesday and Wednesday next week, according to Lusa (aka Jornal de Negocios). Manuel Caldeira Cabral, a professor at the University of Minho in northern Portugal, will be economy minister. 

Our other stories

We also have stories on Schengen and the euro, and what they have not in common; on the ECB's financial stability review; on the leverage ratio; on the Bundesbank’s criticism of deposit insurance; on Spain’s biggest corporate bankruptcy; and on the Greek pension reform timetable.

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