Centeno promises the biggest structural cut on the deficit since he’s been in office. How?

  • ECO News
  • 16 October 2017

IRS decrease will be paid for with the increase in other taxes and with dividends from the Bank of Portugal. Increase in expenses with benefits and salaries are compensated with other cuts in expense.

In the 2018 State Budget, the Finance minister Mário Centeno promised the largest budgetary consolidation since taking office: 0.5 percentage points of GDP. But he also promised to lower taxes, increase pensions, remove civil servants career promotions’ freeze and reactivate investment. How will the Government fit all these measures in the State Budget, while still respecting Brussels’ rulings?

ECO searched the State Budget report to find the answer. It was possible to conclude that Centeno commits to consolidating the deficit mainly on expense: out of a 482 million euros’ effort, 89% are savings, while just a little over 10% correspond to increases in income. This means that, concerning income, there is mainly a taxation rearrangement: the tax burden drifts away from IRS (Personal Income Tax) to indirect taxes and the loss in taxation left to compensate will be paid by the central bank’s dividends.

Consolidation will come mostly from expenses, Centeno assures. There are 492 million additional euros that are exclusively justified by the Government’s discretionary measures, such as the removal of civil servants career promotions’ freeze or the increase in pensions. These were the measures the minister found to compensate for them:

  • a 307 million euros saving with interests;
  • the nominal freeze of intermediate consumption, of around 300 million euros;
  • a revision in expense, with a 287 million euros’ saving;
  • the contention of another current expenditure, with an associated saving of 180 million euros;
  • a discrete 23 million euros’ saving from the control of public service labor strength, through a softer new rule of three dismissals per two recruitments.

All in all, the Government says they will save almost 1,100 million euros in 2018. In the State Budget report, the Government says the cut in the deficit is structural, although it is not clear in which scenario will this be materialized.