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Portugal approves 2018 budget, seeks to trim deficit further

LISBON (Reuters) - Portugal’s parliament on Monday approved in the final reading the minority Socialist government’s 2018 budget bill that aims to trim the deficit to a new low in the country’s democratic history thanks to continuing, if slower, economic growth.

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The budget was approved by the Socialists and their far-left allies in parliament - the Communists and Left Bloc - who together hold 122 seats in the 230-seat house. The remaining lawmakers voted against the document that set the deficit at 1.1 percent of gross domestic product.

The allies have already reversed many of the austerity policies of the previous center-right administration introduced under an international bailout program in 2011-14, and next year’s plan carries more measures like tax cuts for low to medium incomes and higher pensions.

“The Socialist administration has debunked the myth that to have balanced accounts it is necessary to sacrifice the economy, jobs and well-being of Portuguese,” Pedro Nuno Santos, secretary of state for parliament affairs, told lawmakers.

The budget envisages that Portugal’s strongest economic performance in at least a decade will extend into next year, with investment, tourism and exports remaining robust. But growth will slow to 2.2 percent from 2017’s 2.6 percent.

Despite the approval, some analysts say that during the budget discussions pressure has been building on Prime Minister Antonio Costa, who came to power exactly two years ago, from the left and the unions for more state spending. That could make it more difficult to maintain the budget cuts down the road.

“As the 2019 electoral period approaches, there will be more serious pressure on the government, and the trend is no longer that of accelerating growth,” said political scientist Antonio Costa Pinto of the University of Lisbon.

“They’ve had good growth and deficit numbers in the first two years but those will be difficult to replicate,” he said, adding though that potential tensions between the government and its allies were unlikely to result in any political crisis.

The projected deficit is higher than the initial 1 percent plan due to hundreds of millions of euros added to expenditure on aid and reconstruction after devastating fires in June and October this year, which killed over 100 people and were an embarrassment to the government.

Still, the gap is poised to narrow from this year’s projected 1.4 percent - the lowest since Portugal returned to democracy in 1974 - as the economy is expected to grow for the fifth consecutive year.

Nevertheless, Brussels has warned Portugal, along with several other countries, that their budgeted structural deficit cuts in 2018 fell short of EU requirements while some government spending also caused concerns.

The European Commission has also put Portugal’s overall 2018 budget gap at 1.4 percent, the same as this year.

Costa argues that his government will allay Brussels’ concerns “with each month that passes”, citing his record of beating deficit-busting targets in 2016 and 2017.

Reporting by Andrei Khalip; Editing by Alison Williams