January 22, 2016 / 2:55 PM / 4 years ago

Exclusive: Portugal PM says confident Brussels will approve budget

LISBON (Reuters) - Portuguese Prime Minister Antonio Costa is confident that Brussels will approve his 2016 draft budget, which will both cut the deficit and “turn the page on austerity” to boost economic growth with higher disposable incomes.

Portugal's Prime Minister Antonio Costa reacts during an interview with Reuters in Lisbon, Portugal January 22, 2016. REUTERS/Rafael Marchante

The draft budget, which was presented on Thursday, will cut the deficit to 2.6 percent of gross domestic product and sees economic growth rising to 2.1 percent.

Costa’s new Socialist government, which came to power after he teamed up with the far-left Communists and Left Bloc to oust the previous center-right government, has prompted concern among some investors who fear a rolling back of reforms and austerity.

But Costa told Reuters in an interview that the budget is set to boost consumption and investment, expecting it to be approved both by Brussels and his far-left allies in parliament.

“I am expecting the (European) commission to approve this,” he said. “We have talked with the commission in recent weeks to find a budget that is comfortable for our European partners and that meets our election promises and our commitments to our parliamentary partners.”

“This is a realistic budget,” Costa said. “We have kept our partners informed.”

Many analysts saw the budget as the first big potential point of conflict with the Communists and Left Bloc, but Costa dismissed the concerns. The alliance struck between the moderate Socialists and far-left parties was the first of its kind in Portugal and overcame longstanding ideological differences.

“I don’t see any instability given that the measures we agreed on are in the budget,” said Costa, whose party depends on the far-left to pass bills in parliament.

Asked whether the growth outlook of 2.1 percent was overly optimistic, he said it took into consideration slower global growth. Still, a positive boost to exports will come from two important Portuguese export markets, Germany and Spain, which should continue to grow, he said.

The Bank of Portugal has forecast growth this year to reach 1.7 percent, nearly the same as 2015’s estimated 1.6 percent.

The budget includes measures to raise public sector salaries and pensions, raise the minimum wage, reinstate four public holidays and cut an extraordinary income tax introduced during the debt crisis to boost revenues. The government has calculated those changes will cost 1.2 billion euros this year.

Costa said the financing for cutting the deficit to 2.6 percent from 3 percent in 2015 will partially come from higher tax on petrol and a stamp duty on loans for personal consumption. He said both those measures are positive for the economy as they reduce imports and cut household’s indebtedness.

“This is a responsible budget which is focused on creating the conditions for growth and employment, to strengthen social protection and to manage public finances with rigor with a reduction in the deficit and debt,” he said.

OUT OF EXCESSIVE DEFICITS?

Costa said the draft budget, which had been delayed because of the election in October, will now be sent to Brussels for formal consideration.

The prime minister said he expected Brussels to take Portugal out of the European Union’s excessive deficit procedure for 2015 as the rescue of bank Banif at the end of last year was a one-off measure. If the cost of the rescue is included, the 2015 deficit would reach 4.25 percent.

“I am expecting the commission and council to give serious consideration to the absolutely exceptional nature of this measure and value what is important, which is that without the Banif resolution we would have had a deficit below 3 percent,” he said.

He added that the government had proposed to Brussels to integrate Banif into state-owned bank Caixa Geral de Depositos, which would have implied no cost, but it was rejected.

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Costa rejected accusations that some measures, such as rolling back reforms and stopping privatizations, was damaging Portugal’s image with investors.

He said the move to ‘bail-in’ senior bond holders of Novo Banco had nothing to do with the government.

“The question that has had the biggest international repercussion was not decided by the government, it was not inspired by the government and did not result from any agreement in parliament,” he said. “It was a decision taken exclusively by the central bank.”

Editing by Andrei Khalip and Angus MacSwan

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