By Nick Mann | 12 September 2012

Portugal has been given more time to reach the deficit reduction goals agreed as a condition of its bailout from the European Union and International Monetary Fund.

The ‘troika’ of the IMF, European Commission and European Central Bank announced yesterday that Portugal was ‘broadly on track’ with the economic and fiscal reforms required under the bailout programme.

But higher unemployment, lower disposable incomes and a shift in tax bases away from more highly-taxed activities meant revenues were ‘lagging significantly’ behind those expected this year, the troika said.

As a result, Portugal had now agreed to reduce its deficit to 5% of gross domestic product this year, 4.5% in 2013 and 2.5% in 2014. It had previously been expected to reach 4.5% this year and 3% in 2013.

Revising the goals would ‘allow the government to design and implement structurally sound fiscal measures, while easing the short-term economic and social cost of fiscal adjustment’, the troika added.

Portugal had also agreed to further permanent austerity measures, as well as efforts to strengthen public finance management and bolster compliance with tax laws.

‘Continued efforts to... reduce losses of state enterprises, bring down the costs of public-private partnerships, and streamline public administration will also contribute to the needed fiscal adjustment,’ the troika added.

Increased social security contributions by workers and tax increases on capital gains and property were announced by the Portuguese government last week.

The country’s economy is expected to contract by 3% this year, returning to growth in the second quarter of next year but shrinking by 1% as a whole in 2013.

‘Swift progress on structural reforms remains key to putting the economy on a sustainable growth path,’ the troika stressed. ‘Maintaining broad political and social support for the revised adjustment programme will also be important.’