Portugal must be ready to make more cutbacks if can't achieve its deficit-reduction target, the European Union's executive commission warned Wednesday as it struggles to curb soaring debt levels across the region.
Portugal's austerity efforts are closely watched by financial markets looking to see whether Greece's borrowing problems could spread to another member of Europe's currency union. Eurozone nations have pledged Greece some euro30 billion in loans if it can't borrow from markets.
A European Commission report said that Portugal's target to reduce its deficit to 8.3 percent this year could run into trouble if its economy does not recover strongly and it can't raise the money it expects from non-tax revenue and cutbacks to capital spending.
"The outlined revenue performance and expenditure containment may be difficult to attain on the basis of the announced measures already in 2010," it said.
EU Economy Commissioner Olli Rehn said "additional measures may be needed this year" if the economy performs worse than the government is forecasting.
"This relates especially to the fact that the 2009 deficit outcome is worse than anticipated," he told reporters.
Portugal's finance minister Fernando Teixeira dos Santos said the country was prepared to do more if necessary.
"But that need isn't there at the moment," he told reporters in Lisbon.
Portugal's deficit widened sharply from 2.8 percent in 2008 to 9.3 percent last year after the government spent heavily to stimulate the economy, while unemployment and welfare payments soared due to the economic downturn. It aims to bring the deficit below 3 percent by 2013.
The report says Portugal has been "in a situation of sluggish economic growth for almost a decade" and is suffering from low productivity and potential growth.
Portugal is now assuming that it can raise more taxes from higher domestic demand after it increases exports to major trading partners, the EU says.
Rehn said the government had "somewhat optimistic" forecasts for economic growth and defended the EU's harsh words for Portugal, saying regulators "had no other option than to make a correct and honest assessment."
"Otherwise we would not be credible and the situation would be even worse," he said.
"It is important that people write an accurate picture of the Portuguese economy and I'm sure this will help a serious and conclusive policy debate in Portugal in order to address the challenge of fiscal consolidation," he said.
Portugal's credit rating was downgraded from AA to AA- by Fitch Ratings last month. Ratings are closely watched by bond investors who are looking to see if Greece's troubles are spreading to other eurozone nations.
Greece's ballooning borrowings has forced it to offer high rates to attract investors who believe the country could be unable to make debt repayments.
The EU report also says Portugal is not attracting enough foreign investment and that it can no longer compete globally on wage levels in labor-intensive industries — such as making clothes and leather goods — where it used to be strong. Much of this type of work has shifted to Asia.
It calls for Portugal to step up "structural reforms" to upgrade education and training and open up competition for services, energy and telecoms companies.
Portugal has one of the highest rates of people leaving high school early, making many workers unable to apply for skilled jobs.
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