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Portugal's Tax Revenues Fall Sharply

By Ulrika Lomas,, Brussels

26 July 2012

Portugal's tax revenues have fallen sharply in the first half of 2012, with a decrease of 3.1% compared with one year ago while expenditure has fallen at the slower rate of 2.2%, putting the government's budget plans under further strain.

The government's budget deficit for the first half of 2012 was EUR3.22bn (USD3.9bn), down sharply from EUR6.05bn a year earlier. However, this improvement was masked to a large extent by the one-off transfer of pension fund assets from the banks to the government, worth almost EUR2.7bn.

The government is therefore expected to struggle to meet its budget deficit target for 2012 of 4.5% of gross domestic product (GDP) with Portugal's economy is predicted to shrink by 3%, albeit a slight improvement on the 3.3% fall in GDP expected by the IMF.

However, the fall in tax receipts has to be interpreted with caution as the recent tax rises as part of Portugal's commitments in exchange for the EU/IMF EUR78bn bailout package were not effective during the first quarter, thereby leaving room for more encouraging figures during the second half of the year.

Portugal's severe austerity measures under its bailout programme combined with the very tight credit market for the Portuguese private sector have fuelled the economic contraction, with an ever-rising unemployment rate, now at 15.5%, which is challenging the debt reduction programme.

Nevertheless, market conditions for Portuguese government debt have improved a little since the beginning of the year, enabling the government to consider returning to the market to sell short-term debt and then attempt to lengthen the maturities of new debt issues. This is due to continued supportive comments from EU and IMF officials who have repeatedly declared they would stand by Portugal if market conditions deteriorate, alluding to the credibility of the country's efforts.

The European Commission and the IMF have both said risks to Portugal's 2012 deficit target have recently increased, but neither institution has offered to review the target.

“Fiscal consolidation is on track," said the IMF. "The end-2012 fiscal target remains within reach, although risks to its attainment have increased on account of weaker revenue performance, requiring close monitoring of developments and continued efforts to strengthen tax compliance."

TAGS: tax | economics | European Commission | Portugal | fiscal policy | budget | International Monetary Fund (IMF) | unemployment | Europe

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