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Portugal Aims to Narrow Budget Deficit to 1% as Economy Grows

Portugal Aims to Narrow Budget Deficit to 1% as Economy Grows

(Bloomberg) -- The Portuguese government aims to narrow its budget deficit to 1 percent of gross domestic product in 2018 as the economy is set to grow for a fifth year.

The deficit will be 1.4 percent in 2017, the Finance Ministry said late on Friday in a statement about the 2018 budget proposal. The debt ratio is forecast to drop for a second year to 123.5 percent of GDP in 2018 from 126.2 percent in 2017.

The budget includes an increase in the number of income tax brackets to seven from five as the government tries to reduce the tax burden on some earners. It plans to raise taxes on certain packaged foods that contain high levels of salt, including biscuits and potato chips. Finance Minister Mario Centeno said he estimates the government will get 500 million euros ($591 million) of dividends from the country’s central bank next year.

Tourism and exports have been boosting the country’s economy and helping the minority Socialist government manage the budget deficit, which last year was the narrowest as a percentage of GDP in four decades of Portuguese democracy. Prime Minister Antonio Costa has reversed state salary cuts faster than the previous administration proposed, while raising indirect taxes.

Economic growth is now projected to slow to 2.2 percent in 2018 from 2.6 percent this year as exports decelerate, while the unemployment rate is forecast to drop to 8.6 percent next year from 9.2 percent in 2017, Centeno said.

Portugal Aims to Narrow Budget Deficit to 1% as Economy Grows

“This growth in jobs and an increase in average wages is compatible with gains in competitiveness,” Centeno told reporters in Lisbon.

An initial vote on the budget is scheduled for Nov. 3. Costa’s minority government took office at the end of 2015 and has been supported in parliament by the Left Bloc, Communists and Greens, which hadn’t followed the moderate Socialists in backing European budget rules in the past.

Portugal’s 10-year bond yield was at 2.3 percent on Friday, down from 3.9 percent six months ago. It peaked at 18 percent in 2012 at the height of the euro region’s debt crisis.

To contact the reporters on this story: Anabela Reis in Lisbon at areis1@bloomberg.net, Henrique Almeida in Lisbon at halmeida5@bloomberg.net.

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net, Joao Lima