UPDATE 2-Portugal ’10 budget draft sees gap cut to 8.3 pct/GDP

* Fiscal gap seen dn by 1 pctg point from high 9.3 pct/GDP

* Economy to grow 0.7 pct 2010 vs 2009 drop of 2.6 pct

* Public spending little changed
(Adds details, quotes)

By Sergio Goncalves

LISBON, Jan 26 (BestGrowthStock) – Portugal plans to cut its fiscal
deficit by 1 percentage point to 8.3 percent of gross domestic
product this year to address investor concerns over soaring
debt and deficit, the government said in the draft 2010 budget
on Tuesday.

The reduction will start from a wider-than-expected deficit
of 9.3 percent for last year, it said. The government’s
previous estimate for 2009 fiscal gap was around 8 percent.

“We will reduce the deficit by one percentage point without
increasing taxes as we will concentrate our efforts on
containing and reducing spending,” Finance Minister Fernando
Teixeira dos Santos told reporters.

Still, the draft document projects an increase in the
debt-to-GDP ratio to 85.4 percent from last year’s 76.6

The minister added that the high deficit of 2009 reflected
the worsening of the economic crisis, which caused a 14 percent
drop in revenues from 2008, or around 5 billion euros.

Teixeira dos Santos said that the economy will continue to
need stimulus measures introduced in late 2008 at the peak of
the global financial crisis, but the government will start
phasing them out this year as uncertainty over economic
recovery dissipates.

The bill, presented to parliament in January after a delay
caused by last September’s elections, is almost certain to
clear the house.

The two main opposition parties have agreed to abstain from
the vote, allowing the ruling Socialists to approve it with
their simple majority.

“Clearly the government is choosing a compromise with
centre-right policies, with deficit reductions and spending
cuts aimed to send a positive signal to investors and ratings
agencies. Such a signal is clearly needed in the current
situation,” said political scientist Antonio Costa Pinto.

“The compromise also heralds political stability, which is
another positive sign, while the rate of social conflict is low
in Portugal and this budget alone is unlikely to change that,”
he added, brushing off concerns over a wage freeze in the
public sector announced in the draft budget.

The budget plan envisages economic growth of 0.7 percent
this year after last year’s estimated contraction of 2.6
percent, which marked the worst recession in the Iberian
country since the aftermath of the 1974 revolution.

The government has said the projected deficit cut puts
Portugal on track to bringing its fiscal gap back below 3
percent in 2013, as demanded by the European Commission.

Credit rating agencies have threatened to downgrade
Portugal’s debt if the country does not come up with credible
measures to shore up its finances, while economists also
express concern about Portugal’s weak competitiveness, which
prevents it from growing at the rate of its European partners.

The government said total revenues should rise 2.7 percent
from last year while primary public spending will drop just
about 0.3 percent to 75.88 billion euros ($106.9 billion).

Public investment is expected to edge up to 4.482 billion
euros from 4.349 billion euros, the government said.

By comparison, Greece, which is considered the weakest link
in the euro zone, plans to cut its deficit by 4 percentage
points this year, to 8.7 percent of GDP and get to 2012 with a
2.8 percent deficit.

For budget FACTBOX, click [ID:nLDE60Q00D], for analysis on
Portugal’s debt, click [ID:nLDE60E1ZK]

Stock Market Research

(Additional reporting by Shrikesh Laxmidas and Andrei Khalip,
writing by Andrei Khalip; editing by Leslie Adler)

UPDATE 2-Portugal ’10 budget draft sees gap cut to 8.3 pct/GDP