The new PSD government led by Pedro Passos Coelho is planning additional austerity measures because spending figures for the first quarter of 2011 are above 7%.
Under the terms of a €78 billion bailout fund agreed by the International Monetary Fund/European Commission/European Central Bank, the government has to bring the government deficit on public administration spending down to 5.9% this year.
It means that if the new government is to keep its spending plans on track, it will almost certainly have to introduce additional cuts.
The new government is in a worse than expected budgetary situation and has less than three months to correct the situation in order to receive the funding from Brussels.
Prime Minister Pedro Passos Coelho explained on leaving the European Council on Friday that he would present “essential budgetary measures”, especially those pertaining to the structural reforms that the executive would have to take “within days”.
He warned the Portuguese that they faced “two terrible years ahead” but stressed that the goals laid down by the international ‘troika’ would be “followed to the letter”.
Pedro Passos Coelho also said that Brussels clearly understood that Portugal was not in the same boat as Ireland or Greece.
The government has inherited a difficult budgetary situation from the previous socialist government even though a raft of measures aimed at cutting down on expenditure and increasing receipts had already been introduced as part of the State Budget for 2011.
These included raising income tax for top earners and VAT to 23% as well as cutting public sector salaries.
Data from the Directorate-General of the Budget (Direcção-Geral do Orçamento) had shown encouraging signs that the budget was being brought under control.
However, it now emerges that the DGO figures suffered from two problems: they only registered the money coming in and going out of the Government’s treasury, which means that any Government delays in payments made the figures look better than they actually were.
Secondly, there are many public institutions and companies that are included in the overall national accounts deficit but do not appear in the government and public spending deficit.