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EU approves Portugal budget despite concerns

The European Commission on Friday approved Portugal’s draft budget for 2016, but warned that more efforts would be needed by the socialist-led government to avoid a breach of EU rules on spending.

The Lisbon government that took office in November risked an unprecedented rejection of its behind-schedule budget plans by the EU’s executive, but several days of tense negotiations in the end bore fruit.

“Following intense technical and political contacts, the Commission did not have to request a revised draft budgetary plan from the Portuguese authorities,” Commission Vice President Valdis Dombrovskis said at a news briefing.

“Nevertheless, the government’s plans are at risk of non-compliance with the rules of the Stability and Growth Pact,” he added, referring to the EU’s strict rules on government budgets.

In the wake of the eurozone debt crisis, the commission in 2011 gained new powers of oversight over EU budgets, with the added ability to outright veto spending plans by eurozone countries found in serious violation of the rules.

The EU caps deficit spending at 3.0 percent of GDP and public debt at 60 percent of output. Most of the eurozone’s 19 members break the limits, but negotiate a timeline to meet the rules with the commission.

– ‘Long and steep’ –

The Socialist Party-led government took office in November and submitted its budget in January to the EU months behind schedule following inconclusive elections in October.

The commission made clear that the initial proposal fell short and the government at the eleventh hour agreed to new tax hikes and to rescind on a tax cut to the poor to get over the hurdle.

“It’s a signal of international trust (in a plan) that still meets the government’s agenda as agreed with parliament”, the Portuguese authorities said after the EU greenlight.

Portugal received a massive international debt bailout in 2011 that saved it from defaulting, but in return the country had to introduce a string of austerity measures.

In four years, more than 78,000 public sector jobs were cut — more than 10 percent of the total — alongside other steps the creditors said were needed to return the public finances to balance and put the economy back on track.

The debt in Portugal, which was bailed out by the EU and IMF in 2011, is forecast to hit 130 percent of GDP.

“The road with our Portuguese friends is still long and steep,” warned Pierre Moscovici, the EU’s Economics Affairs Commissioner.

German Chancellor Angela Merkel, the EU’s influential hardliner on budgets, on Friday hosted Prime Minister Antonio Costa for talks in Berlin and asked that Portugal stay on a disciplined path.

“The predecessor of Prime Minister Antonio Costa led Portugal through difficult times,” she said.

“It is important to keep to this framework,” she said echoing a similar warning on Thursday from the International Monetary Fund.