Portugal Makes Last-Minute Cuts to Avoid Budget Fight

By cutting its deficit faster, Portugal avoids becoming the first country that has its budget rejected by Brussels.

Prime Minister António Costa of Portugal meets with Chancellor Angela Merkel of Germany in Berlin, February 5
Prime Minister António Costa of Portugal meets with Chancellor Angela Merkel of Germany in Berlin, February 5 (Bundesregierung)

Portugal’s new left-wing government avoided a standoff with the rest of the European Union on Friday when it submitted a revised budget proposal for 2016 that respects the bloc’s deficit-cutting rules.

The Southern European country came up with an extra €135 million in spending cuts, meaning it will cut its structural deficit by just over .1 percent of economic output this year. That means the EU sees Portugal as “at risk” of breaking the rules but not in violation.


António Costa, Portugal’s prime minister, claimed victory. “It shows it is possible to turn the page [on austerity] and remain in the euro,” he said during a news conference in Berlin.

But European officials were cautious. Valdis Dombrovskis, the commissioner for the eurozone, said, “We need to remain very attentive.”

“We cannot be certain the Portuguese budget plan offers enough reassurance to correct the excessive deficit in 2016 and government debt is still very high,” Dombrovskis pointed out.

Portugal was supposed to be get its deficit under the EU’s 3-percent ceiling last year. It came in at 4.2 percent of gross domestic product.

Overly optimistic

Costa, who governs with the support of far-left parties in parliament, came to power promising to roll back austerity measures enacted by his right-wing predecessor.

His initial spending plan, which includes increases in pensions and public sector salaries, was found wanting. The European Commission said it risked “particularly serious noncompliance” with the country’s obligations.

The commission also contested the Portuguese numbers, saying they were based on overly optimistic growth forecasts.

The budget assumes 2.1 percent growth in 2016 when the European Commission’s own projections put the likely figure at 1.6 percent.

Costa came back with €1 billion in additional tax increases, including on bank transactions and tobacco, and then added €135 million in spending cuts late on Thursday.

By narrowly meeting Portugal’s requirements, the new prime minister avoids becoming the first leader in Europe who has his budget rejected by Brussels.

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