March 5, 2021

Portugal Praised for Progress on Financial Overhaul

But as international lenders were delivering an upbeat review of Portugal’s progress, the country’s finance minister announced a steep increase in the tax on electricity and natural gas consumption to ensure that Portugal cuts its budget deficit this year by more than a third.

Vitor Gaspar, the Portuguese finance minister, warned that the government was still short of its deficit-to-gross domestic product goal for the full year, by about 1.1 percentage points.

To be on track, he said Friday, the government needed to increase its tax proceeds by an additional 100 million euros ($142 million) in the fourth quarter by raising the value-added tax on electricity and natural gas to 23 percent from 6 percent.

Still, officials from the International Monetary Fund, the European Commission and the European Central Bank said during a televised news conference in Lisbon that they were confident Portugal would meet its goal of reducing its budget deficit to 5.9 percent of G.D.P., from 9.1 percent in 2010.

“We have observed some public expenditure overruns, but we don’t expect these to continue in the fourth quarter,” said Jürgen Kröger, the chief negotiator for the European Commission.

Analysts at Barclays Capital wrote in a note to investors that the review was “marginally positive news” and added that new spending controls would be needed eventually. Offsetting spending increases with one-time tax increases is “certainly not helpful at a time when economic activity is in the process of declining to an already large planned fiscal contraction,” they wrote in the note.

The officials representing international lenders were in Lisbon this week to complete their first quarterly review of Portugal’s progress since they agreed on the terms of the bailout in May. Their favorable assessment paves the way for the government to receive another installment of financial assistance in September, of 11.5 billion euros ($16.4 billion).

Portugal has already received about 20 billion euros ($28.4 billion) of the bailout financing, which the previous Socialist government requested in April to meet debt refinancing obligations and avoid a default.

The international lenders also insisted that Portugal’s three-year overhaul program was not under immediate threat because of the deepening concerns about the euro debt crisis and the financial difficulties of larger European economies like Italy and Spain.

“I am very confident that there will be no need for new money” for Portugal, said Poul Thomsen, who has been leading the bailout negotiations on behalf of the I.M.F.

Mr. Thomsen also argued that “even if the headwinds are stronger,” Portugal’s position had been strengthened by the agreement in July among Europe’s leaders to ease financing terms for Greece and other rescued euro economies.

“The decision of European leaders means that the ball is in Portugal’s court,” Mr. Thomsen said. “Europe will do whatever it takes as long as Portugal pursues the reforms.”

The jump in the natural gas and electricity tax comes as Portuguese households already face a recession that the government and other institutions expect to last until the end of 2012. The decision could also raise concerns that the center-right government was relying heavily on punishing tax increases rather than on spending cuts to improve its budgetary situation.

To stick to the deficit target, Pedro Passos Coelho, who was elected prime minister in June, also recently announced a one-time tax on the traditional Christmas bonus paid to Portuguese employees, to raise 800 million euros ($1.1 billion).

Still, officials representing the lenders said they expected the government to put much more emphasis on spending cuts next year as more structural changes are made. Over all, they noted, Portugal is committed to delivering about two-thirds of its budgetary improvement through spending cuts.

“Without comprehensive structural reforms, there is a clear risk that the program becomes all about cutting and not growth, which is what it should be about,” Mr. Thomsen warned.

The international lenders also praised Portugal’s efforts to strengthen its banking sector despite unhappiness among domestic bankers about having to meet by year-end core capital requirements that are above those set under international banking rules.

“The authorities are off to a good start,” said Rasmus Rüffer, an official from the European Central Bank. “It is important to continue to strengthen the capital buffers of the banks and bring about an orderly deleveraging.”

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