Portugal's new socialist administration is facing some tough decisions on taxation with the news that the government's budget deficit could be over 7% of gross domestic product this year, more than twice the level permitted by the eurozone stability pact.
According to reports, value added tax and fuel taxes are likely to be the first to rise as the government of President Jorge Sampaio, which pledged not to hike taxes during the election campaign, attempts to raise additional revenues without resorting to unpopular increases in income tax.
The central bank governor Vitor Contsâncio has been appointed by the government to head a commission which will prepare a report on the current state of Portugal’s public finances after doubts were raised over data from the last three years.
Contsâncio, who has repeatedly warned over the dire state of the nation's finances, has for many months been calling for fiscal belt tightening. In November last year, while the former conservative government was attempting to cut taxes, Contsâncio argued that consolidation was then “more necessary than ever.”
Portugal become the first EU nation to breach the stability pact in 2001. Whilst tax hikes and spending cuts have ensured that budget deficits remained below 3% in the intervening years, analysts now forecast that the deficit has ballooned to 7%, well over Prime Minister José Socrates forecast of a deficit in the region of 5% to 6%.
In 2003, Portugal recorded negative growth of 1.1%. It rebounded last year, posting GDP growth of 1.1%, and is expected to maintain its fragile recovery in 2005.
Speaking on the sidelines of a meeting of the Council of Europe in Warsaw recently, Socrates indicated that the government was awaiting the Central Bank report, and would then act depending on the "severity of the situation."
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