February 5, 2016 / 4:50 PM / 4 years ago

UPDATE 3-EU executive accepts Portugal's 2016 draft budget after tax tweaks

* European Commission taking softer line to revive economy

* Leniency gives hope to other nations

* Far left blame Commission’s “blackmail” for higher taxes (Adds government’s leftist ally)

By Jan Strupczewski and Daniel Alvarenga

BRUSSELS/LISBON, Feb 5 (Reuters) - The European Commission approved Portugal’s 2016 draft budget on Friday after the new Socialist government promised to hike indirect taxes to meet EU budget rules while also easing austerity to keep its leftist allies happy.

The Commission’s decision will be a relief for Portugal’s government, which was able to maintain most of its initial budget promises, such as hiking civil servants’ wages and raising the minimum wage, but had to lower its economic growth outlook.

The decision shows the EU executive is taking a softer line in applying its fiscal rules, as the euro zone economy struggles to revive. In the past year the commission has granted France, Italy and Spain budget leeway to spur growth.

“The commission is looking at Portugal through the prism of political developments elsewhere in the euro zone — particularly in Spain,” said Nicholas Spiro, partner at Lauressa Advisory consultancy in London.

“It doesn’t want to trigger a government crisis but neither does it want to let countries off the hook. In this instance it seems to have preferred to go easy on Portugal.”

Portugal’s Socialist government came to power in November after teaming up with the far left Communists and Left Bloc to oust the previous centre-right administration and turn the page on years of austerity under a bailout programme.

The Socialists need to retain support from their leftist allies to ensure a majority in parliament, so they have to keep promises to ease austerity.

Senior Left Bloc lawmaker Mariana Mortagua criticised the changes, blaming them on “blackmail from the European Commission and the right”, but said the budget is still true to its main purpose of ending impoverishment and boosting household incomes. She said the Bloc will try to introduce measures to help the poorest households during parliament debates.

Portugal presented its draft budget to the commission on Jan. 22, but it breached EU budget rules. Lisbon then put together measures worth around 900 million euros ($1 billion), including more tax on oil products, cigarettes, cars and property.

“Intense political and technical contacts have taken place in recent weeks to ensure that the Portuguese budget plan for the year ahead is complying with these (EU budget) rules and, as a result, the Commission did not have to request a revised draft budgetary plan from the Portuguese authorities,” Commission Vice President Valdis Dombrovskis told a news conference.

The new budget will now cut the deficit to 2.2 percent of gross domestic product (GDP) after the originally proposed 2.6 percent. Growth was also revised down, to 1.8 percent from 2.1 percent previously.

“In negotiations that end up in an agreement there are no winners, but we do take good notice of the commission’s reservations,” Portuguese Finance Minister Mario Centeno told reporters. “Let’s focus on the implementation of the budget, which is very rigorous.”

Portugal is still not in the clear, Dombrovskis said. “The Commission today concluded that the existing draft budgetary plan is at risk of non-compliance with the rules of the Stability and Growth Pact,” Dombrovskis said.

The leniency towards Portugal offers hope to other countries seeking flexibility.

Last November, the EU executive warned France, Italy, Spain and other euro zone countries their 2016 budgets may breach EU rules unless they trimmed public spending. (Additional reporting by Francesco Guarascio, Sergio Goncalves, Andrei Khalip, Axel Bugge, Gabriela Baczynska; Editing by Ruth Pitchford and Catherine Evans)

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