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IMF Lauds Portuguese Fiscal Policy

by Ulrika Lomas,, Brussels

27 November 2012

The Portuguese government has undertaken "an impressive policy effort" to gradually reverse accumulated fiscal imbalances and forestall a crisis, according to the International Monetary Fund (IMF).

Discussing the circumstances that saw Portugal receive an EU-funded bail-out in its annual review of the country's economy, the IMF said that over several years public sector spending had crept higher to prop up economic growth, leading to a higher tax model and the accumulation of significant debts. The IMF said that up until the recent bail-out program, "the policy response was, at best, muted."

However, the Fund observed that a front-loaded fiscal adjustment program is aiming at restoring credibility in government bond markets, and, it said that in spite of setbacks, including lower than expected revenue receipts, "underlying fiscal adjustment has advanced markedly."

Over the next few years, Portuguese authorities are faced with the challenge of slashing the deficit while ensuring that the tax regime does not deter foreign direct investment. The IMF therefore suggested that there is scope to reduce tax distortions and simply the tax system. In particular, it said tax expenditures could be streamlined further, and existing tax incentives could be targeted more effectively.

The Fund suggested that headline income tax rates, particularly on corporations, could be reduced if the tax base was broadened.

TAGS: tax | business | Portugal | tax incentives | public sector | International Monetary Fund (IMF) | tax reform

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