By CHRIS GRAEME chris.graeme@theresidentgroup.com
The International Monetary Fund’s board of directors has approved the payment of the third slice of a €78 billion bailout package for Portugal.
The decision to release €2.7 billion comes after the European Central Bank/IMF/European Commission ‘Troika’ praised Portugal’s performance, since the fund was agreed in the spring, in keeping to its strict cost-cutting schedule.
The approval, made on Monday, also followed praise for Portugal’s efforts in making structural reforms and reducing its budget deficit by the German Chancellor, Angela Merkel, last week.
Last Wednesday, Merkel applauded Portugal’s bailout austerity efforts telling lawmakers in Berlin that Lisbon was making “very encouraging progress in cutting its deficit”.
The German chancellor said that the Portuguese implementing tough austerity measures deserved “all respect”.
The decision to approve the third tranche of the Economic and Financial Assistance Programme was based on the recommendations of the ‘Troika’ team’s report following its ‘technical mission’ in November.
Among the measures which the Portuguese government has so far succeeded in complying with were those announced on November 16 by the Minister of Finance Vítor Gaspar.
For 2012 and 2013, these include: freezing social welfare payments and pensions over €1,500, slashing health service costs and rationalising the education system, cutting funds to local government, reducing capital expenditure, cutting public sector company costs, reducing unemployment compensation in terms of time and money, cutting holiday subsidies, reducing the number of public holidays, increasing social security contributions, reducing and revising tax deductions, reorganising the effectiveness of VAT taxation, raising VAT on certain consumption items like tobacco and beefing up measures to fight tax evasion.
The Government’s aim is to reduce expenditure by 2.4% of GDP – 1.6% in 2012 and 0.8% in 2013.
Even so, the Government has predicted that it will have difficulties in meeting the country’s deficit in 2012.
In an extraordinary meeting held over the weekend in Oeiras, which lasted 11 hours, the Government prepared a raft of structural reforms for justice, employment, education, health and local government.
Miguel Relvas, the government’s spokesman, warned that 2012 “would be an extraordinary difficult year” since because of agreed commitments made with the ‘Troika’, the Government could “not have resource to extraordinary receipts”.
He also said that in order to fulfil all of the country’s financial commitments laid down in the Memorandum of Understanding between the Government and the ‘Troika’, the Government would face its “biggest scourge yet – increased unemployment”.
The Government has to try and reduce the country’s deficit to 4.5% in 2012. This year it succeeded in keeping to deficit reductions by taking the extraordinary measure of transferring bank pension funds to the State-run Social Security system.
So far, a total of €8 billion has been authorised by the IMF and the European Union mechanism, the European Financial Stability Fund (EFSF), for payment for Portugal.
Last week, the Legislative Assembly for Madeira approved a significant increase in the autonomous region’s taxes for 2012.
It means that the islands governed by Alberto João Jardim can expect tax hikes of 25% on 2011.
Under the Memorandum of Understanding between Portugal and the ‘Troika’, IRS and IRC taxes in Madeira will be the same as on mainland Portugal, the islands losing their offshore tax haven status.
Madeira has been forced into contracting a €75 million loan in order to pay its public sector salaries for December. The region has an estimated €5 billion black hole in its finances which had been covered up by creative accounting but was discovered by the ‘Troika’ in October.
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