Portugal slashed its budget deficit sharply last year to 2.1 percent of gross domestic product, the lowest level in the country’s 42 year democratic history and beating the 2.5 percent target agreed with Brussels.

The National Statistics Institute also put this year’s deficit at 1.6 percent, in line with the target set in this year’s budget. In 2015, the deficit was 4.4 percent.

The deficit reduction came despite a slight deceleration of economic growth last year to 1.4 percent from 1.6 percent.

Still, the country’s gross public debt rose last year to 130.4 percent of GDP from 129 percent in 2015, but the INE (Istituto Nacional de Estatistica)  expected it to fall to 128.5 percent this year.

The minority Socialist government, which came to power in late 2015 and is backed in parliament by the hard left, has managed to combine budget consolidation with a reversal of the austerity measures imposed by previous administration under the country’s 2011-14 international bailout.

António Costa, Portugal’s Socialist prime minister after finishing second to the centre-right Social Democrats in an inconclusive general election, he cobbled together a coalition with the far left, promising to “turn the page on austerity”.

Mr Costa has kept his word : in 2016, according to figures released on March 24th, his government cut the budget deficit by more than half to just under 2.1% of GDP (as writing on next chart), the lowest since Portugal’s transition to democracy in 1974.

His administration restored state pensions, wages and working hours to pre-bail-out levels, and also brought the deficit well under the 2.5% target set for it by the European Union. It is the first time that Portugal has complied with the euro zone’s fiscal rules.

Mário Centeno, the finance minister, wants the EU to free Portugal from its excessive-deficit procedure, a disciplinary mechanism used to enforce the euro area’s fiscal rules.

Yet  Mr Centeno thinks their failure of the rating agency to recognise the strength of the recovery amounts to unfair treatment and burdens the government with high borrowing costs. Interest rates, he complains, absorb more of Portugal’s budget than of any other EU country’s.

The European Commission warned this week that Portugal’s banks remain fragile but the government plans to inject €2.5bn ($2.7bn) to recapitalise state-owned Caixa Geral de Depósitos, the country’s largest bank, which could increase this year’s budget deficit.

The sale of Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo in 2014, is expected to be concluded shortly, but may also entail additional state liabilities.

Mr Costa blames the EU and the IMF (International Monetray Fund) for failing to provide enough aid to the financial sector during the bail-out, leaving his government, which has spent €4.4bn on bank rescues, to clear up the mess.

The Portuguese tout the shrinking deficit as proof that their Keynesian approach to growth works. But until Mr Costa shows that he can repeat last year’s budget.

Sources :  timeofindia.indiatimes.com  –  economist.com