PORTUGAL: DEFICIT REDUCTION AHEAD OF SCHEDULE,

UNCLAS LISBON 001839

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PO
SUBJECT: PORTUGAL: DEFICIT REDUCTION AHEAD OF SCHEDULE,
MORE MONEY NEEDED FOR EU PRESIDENCY


Summary
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1. Portugal's efforts to reduce its budget deficit were
ahead of schedule, Ministry of Finance Chief of Staff Goncalo
Castilho dos Santos told post. It was even possible that the
government would reach its target to reduce the deficit below
3% in 2007, a year ahead of schedule, if GDP grew by 2.0%.
Portugal planned to present its 2008 budget proposal which
focused on "consolidating the consolidation" by the end of
July instead of in October to allow the government to focus
its attention on Portugal's EU presidency. He also noted
that the government would allocate an additional 10 million
euros to the Presidency budget to pay for the EU-Africa
Summit and other expenses not originally incorporated into
the 51 million euros originally approved.

Deficit Reduction Ahead of Schedule
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2. Ministry of Finance Chief of Staff Goncalo Castilho dos
Santos told post that Portugal's efforts to reduce the
country's budget deficit were ahead of schedule. Originally
scheduled to reduce its budget deficit to 3.7% in 2007, the
government had already revised this year's target to 3.3% due
to better than expected results in 2006. It was even
possible that Portugal could reach its goal of reducing the
budget below 3% in 2007, a year ahead of schedule, if GDP
grew by 2.0% or more as predicted. The government was also
on target to reduce its bloated public administration by
75,000 positions by 2008, with Castilho dos Santos noting
that a total of 40,000 civil servant positions were expected
to be eliminated by the end of 2007 through attrition,
reassignment and consolidation.

Consolidating the Consolidation
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3. Having focused on increasing revenue in 2006 and reducing
expenses in 2007, the government planned to "consolidate the
consolidation" in 2008. The Ministry had worked hard since
2005 to bring the many off-line expenses and separate budgets
into a unified budget, consolidating disparate pension and
social security systems, standardizing civil service
benefits, and strengthening fiscal supervision. The
government planned to present its 2008 budget proposal by the
end of July instead of in October to allow for early debate,
thereby enabling the Ministries to focus their full attention
on Portugal's EU presidency following the August break. The
2008 budget proposal includes plans to charge tolls on more
highways, with part of the revenue going to the Highway
Administration and part going into central government
coffers. The government may begin reducing taxes in late
2008 if GDP growth permits.

Additional 10 Million Euros for EU Presidency
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4. The government will increase the EU presidency budget to
61 million euros from the original 51 million euors(45
million euros for the MFA and 6 million for other ministries)
initially allocated. The additional 10 million euros is
needed to cover the cost of the EU-Africa Summit and other
expenses not incorporated into the 2007 budget approved in
December 2006.

PM to Focus on Internal Coordination
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5. Having expended considerable effort to consolidate the
budget and public administration, Prime Minister Jose
Socrates is focused on ensuring internal budget coordination
continues throughout and after Portugal's EU presidency.
Castilho dos Santos noted that following Portugal's last EU
presidency in 2000, the lack of internal coordination among
the ministries precipitated the economy's downturn and
negative growth from which the country is just now beginning
to recover.

No Special Treatment for Portugal
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6. Although Finance Minister Fernando Teixeira dos Santos
agreed last week with UK and German officials to accommodate
France's request for greater flexibility in reducing its
budget deficit, Portugal has no desire to change its Growth
and Stability Agreement. With the government's goal to
reduce the deficit below 3% (from an all time high of 6% in
2005) within its grasp, Portugal sees no need to change its
successful path to economic recovery.
O'Neal