LISBON Portugal's budget deficit narrowed to 5.6 percent of GDP in the first nine months of 2012 from 6.7 percent a year earlier, still above the year-end target set for the bailed out nation.
Economists say extraordinary one-off measures are likely to allow Lisbon to meet its 5 percent target but the underlying budget shortfall is likely to be greater - leaving it with more work to do next year.
In the official data on Friday, the National Statistics Institute said the country's worst recession since the 1970s drove revenues down 3.4 percent in the January-September period, offset by a 5.6 percent reduction in public spending.
As unemployment soared to record highs of around 16 percent, social security contributions slumped 6.8 percent, while income and property tax revenues fell 5.6 percent.
Portugal's EU, ECB and IMF lenders agreed in September to give the country more time to meet the deficit targets under their 78-billion euro bailout after the austerity affected tax revenues that had been supposed to rise.
Despite the shortfall, they have praised Portugal's austerity efforts, including huge tax hikes and painful spending cuts, so far. They eased this year's goal from 4.5 percent. The deficit goal for 2013 was eased to 4.5 percent from 3 percent.
Portugal reached last year's deficit goal of 5.9 percent thanks to a one-off transfer of banks' pension funds to the state, a move that is still helping public accounts this year after lenders waved through such solutions despite initial objections.
The government also hopes to use part of the proceeds from Thursday's successful sale of airport operator ANA to France's Vinci (SGEF.PA) to reduce this year's deficit. However, the move is yet to be approved by Eurostat.
"The consensus among economists is that with extraordinary measures the year-end deficit should be around 5 percent," said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultants in Porto.
"But the thing is, the real deficit is going to be 6 percent and not 5, and that is a much more difficult starting point to get to 4.5 percent in 2013," he added. "Deficit targets are failed ... showing that without growth and more activity it will be impossible to reach a sustainable path for our debt."
The government expects the economy to contract 1 percent next year, which will be Portugal's third straight year of recession coming after this year's estimated 3 percent slump. It expects a mild growth to return in 2014.
(Reporting by Andrei Khalip and Filipa Cunha-Lima; editing by Patrick Graham)