Portuguese State reduces deficit by €359 million

By CHRIS GRAEME

chris.graeme@theresidentgroup.com

The Portuguese State has got off to a good start in reducing its budget deficit, slashing it by €359 million since January.

The State deficit went down 31% overall while the deficit for the Central Administration fell 58% for the period.

The Government heralded the results as “fairly promising” in a long road ahead but admitted that budgetary consolidation had been further helped by increased receipts rather than reduced expenditure.

In fact, according to statistics released on Monday, the State’s actual expenditure increased 0.9% while primary expenditure (which discounts the effects, for example, of interest payments) increased 0.4%.

“Expenditure is under control but we were expecting some reduction, not just in relation to 2010 but also 2009,” said economist Paulo Trigo Pereira.

Even compared to 2009, the year in which there was a general election and the Government increased public sector salaries by 2.9%, actual expenditure has been rising by 14.6% across the board.

To compensate, Government receipts have increased substantially helping to offset the effect of expenditure on public accounts.

As the Government has already announced, tax receipts have increased 15.1% thanks to an increase in VAT from 21 to 23% and Income Tax (IRS) and Corporation Tax (IRC) rates up to 26%.

“The increase in tax rates is huge and from this it’s easy to see why the Government is managing to keep the budget on an even keel,” said Paulo Trigo Pereira.

The result of increased revenues from taxation was a corresponding reduction in the deficit, which was €787 million in January, an improvement of €360 million on the same period in 2010.

As to the Central Administration deficit, figures for which the Government released for the first time for this budget, there was a reduction of 58.6%, to €282 million that contributed to an improvement in independent services funds by €38.7 million to €503.5 million.

Meanwhile the country’s Social Security bill, which stood at €310.5 million at the start of the year, dropped by €52.3 million.

Expenditure on unemployment benefit and back-to-work schemes fell 6.6% in January with Social Security spending €11.7 million less than a year ago.

With the austerity measures implemented from the State Budget 2011, receipts from an increase in VAT to 23% brought an extra €59.7 million to State coffers.

Opposition parties reacted cautiously to the improved budgetary figures with the PSD’s economist, Miguel Frasquilho, detecting “creative accounting” in the Government’s figures.

The president of the conservative CDS-PP, Paulo Portas, reacted with irony by stating: “I would hope that the deficit wouldn’t go up after those tax increases.”

The leader of the opposition PSD party, Pedro Passos Coelho, remarked that the Government had only succeeded because the “Portuguese were paying more taxes”.

The Prime Minister José Sócrates said he couldn’t understand the “ill faith and grudges from those who weren’t happy because the figures were good.”