While of late investors have been concerned largely with Spain and Greece, Portugal is struggling too. This week the government presented “an uncompromisingly tough” budget for 2013, said Peter Wise in the FT. It foresees a 35% jump in the average income-tax rate, thanks to a special levy, along with some further spending cuts. That’s all in a bid to reduce its budget deficit to 4.5% of GDP next year – a target dictated by the terms of Lisbon’s €78bn bail-out package.
The budget, described as a “fiscal atomic bomb” by an opposition leader, is set to pass through parliament, but will do little to improve Portugal’s prospects. Portugal is in the deepest recession since the 1970s, with the economy expected to shrink by 3% this year. Unemployment is at record highs around 16%.
With GDP already shrinking, a further fiscal squeeze threatens to intensify a “recessive spiral like Greece”, says Sergio Goncalves on Reuters.com. “Shrinking tax revenues will outweigh gains from cuts. Lisbon is chasing its tail,” says Ambrose Evans-Pritchard on Telegraph.co.uk. Citigroup says the economy will shrink by 5.7% next year. Government economists are banking on a GDP decline of 1%.
So the budget deficit target is set to be missed again: creditors recently relaxed the targets for this year and next, owing to disappointing tax revenues. The debt pile will continue to mount and Portugal will probably need another bail-out to avoid a disorderly default. The prospect of endless austerity for no perceptible reward will fuel protests. That raises the spectre of a default if Lisbon gives up on the austerity programme. Don’t expect Portugal to be overshadowed by Greece and Spain in the news for much longer.