The Portuguese government today announced further spending cuts so as to reduce its 2011 budget deficit target to 4.6% of GDP from a previous estimate of 5.1%.
Portugal, like Spain and worse still Greece is struggling to stabilise its public finances as massive debt and budget deficits have eroded market confidence and driven up borrowing costs, sparking fears of a default.
Prime Minister Jose Socrates last week pledged to reduce Portugal's public or budget deficit this year to 7.3% of GDP, rather than 8.3% as initially planned. The shortfall last year came to a record 9.4%.
Today, he said VAT would rise by a percentage point to 21% to increase revenue while costs would be reduced, with public servants' salaries cut. Additional taxes would also be levied on profits above €2m at large companies. A new income tax surcharge of between 1% and 1.5% will also be levied on higher earners.
As a member of the euro zone, Portugal is in principle bound to hold its annual public deficit to under 3% of output. Portugal's public debt, which came to 76.6% of GDP last year, is projected to widen to 86% in 2010, well beyond the 60% level prescribed by the euro zone.
Analysts have said that while Portugal is saddled with tepid growth, its solvency is not in question.
