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Portugal risks seeking breathing space as budget misses loom

Dwindling tax revenues brought on by record joblessness and deep recession will force Portugal to seek breathing space, much like Greece has, on commitments to EU-IMF creditors, analysts say.

In data published Thursday, the Portuguese budget office said 2012 first half tax receipts dropped 3.5 percent compared with the same period last year, hit by a fall in consumption as the economy shrank and unemployment reached 15 percent.

As things stand, the government, which had forecast an increase in revenue of 2.6 percent this year, is set to miss this year’s deficit target of 4.5 percent, several analysts agreed, if it cannot come up with an extra two-three billion euros ($2.5-3.8 billion).

Finance Minister Vitor Gaspar, unable to foresee the impact of austerity measures on the Portuguese economy, “has lost the fight”, wrote business daily Diario Economico in an editorial.

Paulo Mourao, economist at the University of Minho, said the new data served to “lay the ground” for “needed flexibility on Portugal’s rescue programme.”

As part of the programme agreed in May 2011, in return for 78 billion euros in rescue loans, to be paid out in tranches over several years, Portugal has carried out deep budget cuts and pursued structural reforms.

In the deal, which followed similar ones for Greece and Ireland, Portugal agreed to bring its public deficit to the EU ceiling of 3.0 percent of output by 2013 after 4.5 percent in 2012.

But a key plank of that effort, slashing 13th and 14th month salary bonuses for civil servants and pensioners for three years, was ruled unconstitutional and threw the centre-right government’s austerity budget into disarray.

With the controversial measure now impossible, the government must find an equivalent cut in spending, which analysts said was all but impossible within the timeframe set by lenders.

The troika of creditors from the European Union, International Monetary Fund and European Central Bank have made clear their preference for measures centered on spending cuts and structural reforms.

But the Portuguese government, which for now has maintained its targets, acknowledged in June that ” a great effort would be required” to do so.

On Thursday, a finance ministry official told the Lusa news agency that the shortfall would not be overcome by the end of the year, and that the government must either adopt more austerity measures or get creditors to relax budget requirements.

Bruno Proenca, editor-in-chief at Diario Economico, said: “This budget failure can have consequences on the country’s external credibility with international investors, complicating an already challenging return to the debt markets by 2013” as tabled in the rescue programme.

But, he added, new austerity measures “will resolve nothing and only sink the economy further.”

Auditors from the EU, IMF and ECB creditors arrive to Lisbon on Tuesday on their fifth evaluation mission and should provide more clarity on the way forward.

During the previous mission in July, the auditor team recognised that “budgetary risks” existed but that the targets for the year were within reach.

To Mourao, missing the target should considered a failure for the troika as well, since their remedy, “intended to be implemented as Portugal’s economy continued to grow”, will have proved wrong under the far more dire circumstances.