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Portugal government targets budget surplus in 2020, irks allies

LISBON (Reuters) - The Portuguese government on Friday narrowed this year’s budget deficit target despite criticism by its hard left allies and said the once bailed-out country should post its first budget surplus in 2020, significantly alleviating its huge debt burden.

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In a stability program for 2018-2022 presented by Finance Minister Mario Centeno, the government expects a surplus of 0.7 percent of GDP in 2020 and 1.3 percent at the end of the program. Next year the deficit should narrow to just 0.2 percent from this year’s projected 0.7 percent.

“We don’t have a short memory. We know what it cost the Portuguese to leave the nightmare behind and we will not follow this path,” Centeno said referring to the 2010-13 debt crisis after years of spending beyond Portugal’s means.

“The path of budget sustainability is the safe road of our future,” he said.

The previous target for 2018 was 1.1 percent and the revision has already caused objections from the minority Socialist government’s hard left allies in parliament, prompting Prime Minister Antonio Costa to defend his strategy.

The Eurosceptic Left Bloc and the Communists have argued that the administration should spend more on healthcare and public servant wages rather than cutting the deficit overzealously below the target they agreed to a year ago.

However, Costa told reporters that the new plan does not compromise their deal, which was to keep reducing the deficit in line with EU guidelines, whereas sticking to the original target for 2018 would have lifted it from 2017 levels.

He said the new reduction was possible after Portugal hit a more than four decade low in its 2017 budget gap of 0.9 percent, excluding a one-off bank recapitalization, as the economy grew at its strongest pace since 2000.

“The agreement we have (with allies) was not about the deficit figure, but about policies and measures,” Costa said.

“No measures or policies will be revised to meet the deficit goal. We will meet all our commitments to the Portuguese” and our political allies, he added, explaining that the reduction effort this year will be smaller than envisaged a year ago.

Since coming to power in late 2015, Costa’s government has managed to combine fiscal discipline with measures to support growth, while reversing most of the austerity policies imposed by a center-right administration during the 2010-13 debt crisis.

According to the program, the debt to GDP ratio should gradually fall to 102 percent in 2022 from this year’s estimated 122.2 percent. Last year, Portugal’s public debt fell around 4 percentage points to 126 percent, but it still remains one of the highest in Europe, after Greece and Italy.

The government also slightly raised its economic growth outlook for this year to 2.3 percent from 2.2 percent and forecast the same pace of expansion next year and in 2020. By 2022, the pace of growth is expected to slow gradually to 2.1 percent.

Parliament will only debate the program on April 24, and no vote is required.

Although the new targets could sour the relationship with the parties backing the Socialists in parliament, few analysts expect this to destabilize the government or undermine its budget plan for 2019, to be rolled out in the autumn.

Reporting by Andrei Khalip; Editing by Richard Balmforth