According to the Organisation for Economic Corporation and Development, the Portuguese economy will contract much more than expected next year, and there is the risk that the country may spiral into more debt.
The OECD feels that Portugal will need to implement further budget cuts in order to meet the deficit targets required for its €78 billion bailout from the European Union and International Monitory Fund.
The OECD is predicting that the Portuguese economy will contract by 1.8% next year, double its forecast in July and more than the 1% contraction forecast by the Portuguese government. It has made this prediction as it is concerned that the effects of the current cuts could be larger than expected, and could initially create worsening economic conditions.
However the OECD does expect Portugal to return to growth late in 2013, as it is predicting that export growth will offset weak domestic demand.
Last year the Portuguese economy contracted by 1.7%, and is expected to contract by 3.1% this year. This means it will be Portugal’s worst recession since the country returned to democracy in 1974. Since Lisbon received the bailout funds last year it has raised taxes and implemented harsh spending cuts, but economists think the country could need more financial help.
This is because the tax hikes that will take effect next year could affect growth and private consumption which is being forecast to fall by as much as 3.5% in 2013, considerably more than the government for costs of 2.2%. Unemployment levels are already at record highs, and are expected to peak at 16.9% in 2013.
The Portuguese government recently approved substantial tax hikes in order to keep to its austerity program, but it faced opposition from all parties who voted against the deficit reduction measures. These measures mean most workers will lose the equivalent of around one month income in 2013.
The opposition feels current austerity measures won’t do enough to revive the economy and the concern is that Portugal could end up going the same way as Greece. However the European Central Bank and the International Monetary Fund have praised the government’s strategy and feel it will do much to help Portugal return to financial health.
For its part, the government feels it’s hands are tied and there is simply no choice but to implement these tax increases. The bailout deal which is worth a total of €78 billion requires Portugal to cut its deficit, and the country has currently received €61 billion in bailout funds.
Although the finance minister of Portugal has been quoted as saying the tax hikes are “enormous” he is hopeful they will help restore investor confidence in the country, and that Portugal will still be able to obtain international credit from September next year as planned.
The current spending cuts are worth €2.7 billion, and the aim is to reduce the budget deficit to 4.5% in 2013 compared to 5% in 2012. The government hopes the new taxes will increase revenue by 30% in 2013. However the Organization for Economic Corporation and Development is predicting the economy will contract by 1.8% next year, and the government forecasts showed the unemployment rate will increase from 15.7% to reach a record 16.4% in 2013.
Portugal looks likely to backtrack on its plans to finance a reduction in company costs through raising workers contributions, and is searching for alternative austerity measures. The previous plans had provoked a backlash from the country’s workers, as it would have been the equivalent to losing a month’s wages.
Now the Portuguese Prime Minister needs to convince employers and trade unions that further increases in taxes, coupled with spending cuts are necessary in order for the country to meet its €7 billion bailout programme.
In early September the county had received praise from the International Monetary Fund and the European Union for sticking to a tough austerity regime, but this latest move proved to be too much for voters to cope with.
It looks as if the unions will not be prepared to compromise in any way, and will not accept any proposals involving a reduction in wages. If this happens then it could result in political instability and a rise in social tensions that could ultimately derail the austerity programme.
It is necessary for Portugal to find ways of making even deeper cuts as tax revenues have fallen, and the global economic outlook is deteriorating. In September the troika, which consists of the European Central Bank, the European Commission, and the International Monetary Fund, agreed that Portugal should be given another twelve months to meet fiscal targets previously agreed. The revised budget deficit is now 5% of economic output for this year, up from 4.5%, and for 4.5% in 2013, up from 3%.
Recent plans by the Portuguese coalition government to raise social security contributions has led to the opposition, unions and employers uniting and demanding a rethink on this policy. Up until now Portugal has largely been united in trying to stick to the terms for its €78 billion bailout, but recent protests saw around half a million people demonstrate their displeasure at these latest proposals.
Austerity measures have already resulted in unemployment reaching record highs, and the country is in its deepest recession since the 1970s.
Earlier on in the month the government announced it would raise workers social security contributions to 18%, costing them the equivalent of one month’s wages, while cutting the same tax for companies to 18%, a reduction of 5.75%. It also announced its intention to raise capital gains and property taxes.
Shortly afterwards the troika announced the approval of Portugal’s bailout, resulting in the relaxation of the country’s fiscal goals for the rest of this year and 2013. Many Portuguese are having difficulty understanding why there is any need to increase the austerity measures, especially as the government recently announced the recession will extend into next year.
Now it looks as if the government may rethink these tax plans, as it recently announced they are still a work in progress and may change before the draft budget is presented in the middle of next month. The finance minister said it was the government’s intention to make every possible effort to cut administrative spending to help soften the fiscal measures planned.
Part of the coalition government has also asked the taxes not be raised any further in the draft budget, and that the government should only do what is absolutely essential.
The Portuguese prime minister, Pedro Passos Coelho recently announced a fresh round of austerity measures, as he feels they are necessary to ensure the country is able to meet its targets in return for receiving a €78 billion bailout from the IMF and European Union.
Next year’s budget will include an increase in social security contributions from 11% to 18% for all workers, and this equates to roughly one month salary. Even though the Prime Minister feels the country has made a good start in attacking the problems, he has been at pains to point out they haven’t yet been conquered.
This move is hardly likely to be popular amongst the Portuguese who have already seen across-the-board tax increases combined with spending cuts since the country was forced to seek a bailout last year.
In addition the Prime Minister is cutting the Social Security contribution of companies from 23.75% to 18% in the hope this will boost employment. Portugal will miss its budget deficit goals for this year, and economists think this is due to the government underestimating the depth of the recession that has led to lower tax revenues.
In July a court ruling prohibited a cut in salary benefits for public sector workers, making next year’s budget goals more difficult to meet. The increase in social security contributions is partly to make up for the shortfall due to that decision.
The opposition has urged the government not to adopt any further austerity measures, especially as the economy is expected to contract by more than 3% in 2012. However Portuguese banks’ borrowing from the European Central bank fell by 3.5% in August, and now stands at €54.9 billion.
Portugal has been struggling since it requested a bailout from the EU. The government recently announced that this year’s budget deficit would reach 5.3% of GDP, exceeding the 4.5% target agreed under the bailout deal.
However it is thought inspectors for the International Monetary Fund and EU will take a lenient view, and the IMF has already said it will keep an open mind on Portuguese targets. Further austerity measures for the country could prove to be counter-productive as it has already stuck rigidly to an austerity programme.
This has brought the country praise, and optimism over its recovery is increasing. The economy is predicted to contract by 3% this year before growing by 0.8% next year.
Although much of Europe saw a property boom from the mid-90s until the beginning of the financial crisis, this largely missed out Portugal. The only years to see significant price growth were from 2003 to 2004 when prices rose by an average of 6.2%. Between 2005 and 2007, prices rose by just 1.25%, and prices have yet to fully recover from the financial crisis.
This means there are some real bargains around for those looking for an overseas property and Portugal will always be a popular year-round holiday destination. Even in the Algarve property prices are still below values seen before the financial crisis.
Experts also think there is a great deal of pent-up demand for rental homes in Portugal due to stringent tenancy laws that have discouraged landlords. Laws intended to invigorate the rental market were passed six years ago, but the system is still overcomplicated and weighted in favour of tenants.