Instant View: Portugal’s long-term budget austerity plan

LISBON (BestGrowthStock) – Portugal will deepen budget deficit cuts by imposing extraordinary income taxes of up to 1.5 percent, hiking value-added tax by 1 percentage point and imposing a 2.5 percent tax on large companies and banks’ profits.

ANALYSTS’ COMMENTS

DIEGO ISCARO, ECONOMIST, IHS GLOBAL INSIGHT

“These measures should help to restore markets’ confidence in Portugal’s ability to deal with its deteriorating public finances. The risk I see is that these austerity measures will weigh on economic activity – which was seen as sluggish anyway – thus making fiscal consolidation more difficult.”

RUI CONSTANTINO, ECONOMIST, SANTANDER

“If these measures in fact bring the 2 billion euros expected, they will be enough and will certainly contribute to a more confidence in Portuguese debt and allow to maintain this correction which started with the announcement of the 750 billion euro mega-fund.”

“The effort to cut the budget deficit for 2011 is ambitious but won’t require additional measures to cut spending.”

GONCALO PASCOAL, CHIEF ECONOMIST, MILLENIUM BCP

“The big test will be the execution of the measures on the spending side. That’s the most desirable part and where most of the uncertainties lie.

On the revenue side, the measures all have an immediate, quick effect and this alleviates pressure on Portugal”

Earlier comments:

GIADA GIANI, ECONOMIST, CITI:

The overall fiscal effort is now quite large, although still well below that of Greece or Ireland.

The Portuguese economy has been performing relatively well in recent months, and this should help the government meet its deficit target for this year. The absence of a housing boom-burst cycle also contributed to make Portuguese domestic spending more resilient to the financial crisis so far than, for example, in Spain or Ireland.

However, Portugal’s cyclical position is likely to deteriorate in coming months as a result of tighter fiscal policy and higher interest rates spilling over from higher government bond yields.

Therefore, additional fiscal consolidation is likely to become necessary in the next few years and we reckon the country risk premium is likely to remain elevated.

TULLIA BUCCO, ECONOMIST, UNICREDIT “Portugal had already taken some measures to contain the wage bill in the past few years.”

“Portugal needed measures that could quickly lift revenues and so improve upon the 2009 budget deficit.”

“I think that the step is positive to restore market confidence but I need to have a closer look at the details to gauge whether they are so impressive. At a first look I would say they are.”

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(Additional reporting by Daniel Alvarenga, Filipa Lima and Patricia Rua)

Instant View: Portugal’s long-term budget austerity plan