Fragile Portugal faces another year of austerity as gov't risks its re-election prospects

LISBON, Portugal – Portugal’s government is extending into 2015 the main features of its unpopular austerity program, resisting the temptation to sweeten its policies for an election year as it battles to restore the weakened country’s financial health.

The spending plan for 2015 “acknowledges that the (financial) adjustment process is not yet finished,” Finance Minister Maria Luis Albuquerque said Wednesday as she unveiled the government’s annual state budget. “2015 will be another year of challenges.”

Portugal is still recovering from near-bankruptcy in 2011, when it needed a 78 billion euro ($98 billion) international rescue amid a debt crisis that gripped countries sharing the euro currency. Though one of the eurozone’s smallest economies, Portugal’s return to health is seen as important to maintain investor confidence in the 18-nation bloc.

The government intends to cut its budget deficit to 2.7 per cent next year. The deficit has fallen from 10.1 per cent in 2010 to an estimated 4 per cent this year. That drop was largely thanks to deep cuts in spending and entitlements and steep tax increases, which will mostly remain in place.

Economic growth remains frail at an expected 1.1 per cent this year and a forecast 1.5 per cent next year. Public debt — still worryingly high at around 133 per cent of gross domestic product, the third highest in the 28-nation European Union — is predicted to fall to 123.7 per cent.

The unemployment rate is seen falling only slightly next year, to 13.4 per cent from the current 14 per cent.

Portugal hasn’t been able to match Ireland, another eurozone country that needed a bailout, which drew a line under austerity when it announced an expansive 2015 budget Tuesday. Dublin expects growth of 3.9 per cent next year, allowing it to increase government spending.

Yet Portugal’s budget offered improvements for some: corporate tax will drop to 21 per cent from 23 per cent next year, while most old-age pensioners will be exempt from a special tax of 3.5 per cent which is being levied on all income.

The centre-left Socialist Party, the main opposition, wants more government spending on measures to propel the economy and create jobs.

The coalition government has enough votes in Parliament to ensure approval of its spending plan.