The Portuguese government needs to act fast to shore up its public finances, maybe with tax increases, to ensure vital support from investors, the OECD stressed today.
'The immediate challenge is to foster investor confidence by rapidly consolidating the public finances,' the Organisation for Economic Cooperation and Development said in a report on Portugal.
Action should be taken 'swiftly', with the government being prepared 'to raise taxes, focusing on those that are the least distorting to growth, such as consumption and property taxes.'
The report also suggested extending a freeze on government salaries, adopted this year, up to 2013.
Portugal is struggling with a huge public debt, raising fears for its solvency elsewhere in Europe and driving up the government's cost of borrowing on the sovereign debt market.
Last week, the interest rate, or yield, on Portuguese government bonds soared to record high levels, widening the spread - or differential - with the German sovereign bond yield, the benchmark in the euro zone.
'Widening sovereign spreads, if persistent, may put the economic recovery at risk,' the OECD warned, in an indirect reference to a risk that a rise in the cost of borrowing to cover overspending, when passed on to taxpayers, could be a severe drag on activity.
Portugal's public debt is expected to expand this year to more than €142 billion, or 86% of gross domestic product, well beyond the 60% stipulated by EU and euro zone rules.
The government is also confronting an annual public deficit of 9.3% of output, a shortfall it has pledged to trim to 7.3% this year and 4.6% in 2011 through an austerity programme based on spending cuts and an overall tax rise in 2010.
As a member of the euro zone, Portugal is bound to hold the annual public deficit to under 3%, and should move towards a surplus in times of growth.
'I am confident Portugal will weather this crisis,' OECD Secretary-General Angel Gurrria said in Lisbon today. 'The ambitious fiscal consolidation strategy must be backed by a strong political consensus, which the country has in the past been able to achieve,' he added.
But the government, which is in a minority position in parliament, is having trouble overcoming opposition to its 2011 budget from the centre-right, which rejects another round of tax increases.
