- Portugal plans to cut its budget deficit to below the euro zone’s limit by 2013 by reducing investment and capping wage growth in the public sector, but the government is also counting on an economy recovery starting this year. The plan, which Portugal must submit to the European Commission, projects that the deficit will fall to 2.8 percent of gross domestic product in 2013 from 8.3 percent this year. The euro zone’s limit is 3 percent of G.D.P.
- The government also plans to raise the top tax rate on annual incomes above €150,000 from 42 percent to 45 percent. In addition, tax deductions would be capped for higher-income taxpayers, and bigger pensions would enjoy fewer tax breaks.
- Spending cuts will account for half of the planned deficit reduction, while revenue-generating measures will contribute 15 percent to 16 percent, according to the draft. The government expects economic growth to provide the rest of the reduction in the deficit. The plan envisages that the economy, which contracted 2.7 percent last year in the country’s worst recession in decades, would grow 0.7 percent this year and 0.9 percent in 2011.
- Parliament is to vote Friday on this year’s budget, which includes a freeze on public sector wages. The Social Democrats, the main opposition party, have pledged to abstain, which should allow the ruling Socialists to pass it. (can you imagine this type of plan ever passing muster in the US?) Major unions have already said they plan strikes and protests if the government does not reverse declines in real wages.
- Portugal will extend the existing practice of hiring just one civil servant for every two leaving the service. (I believe the US plan is the opposite - hire 2 federal workers for each leaving the service!)
- Portugal’s debt is expected to peak in 2012 at 90.1 percent of G.D.P., up from 85.4 percent forecast for this year, before retreating to 89.3 percent in 2013. [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?]
- The minority Socialist government’s austerity plan is seen as key to convincing markets that Portugal will tackle rising deficits and debt, and avoid fiscal problems of the magnitude Greece is experiencing.
On a very related note, after the close Friday the CBO increased the long term deficit (over the next decade) by yet another $1.2 Trillion. (my assessment is it will get far worse than these estimates since more deficit spending will ensue during the next round of "emergencies") No problemo...put it on the grandkid's credit card.
- The new report predicts that debt held by investors, including China, would spike from $7.5 trillion at the end of last year to $20.3 trillion in 2020. That means interest payments would more than quadruple — from $209 billion this year, to $916 billion by the end of the decade. (that assumes we don't see any interest rate spikes as the vigilantes finally visit the US within a decade)