IMF advises Portugal to contain public spending

The International Monetary Fund (IMF) has ruled out the risk of Portugal clocking up a deficit in its public spending accounts this year and next, but has warned that the country runs the risk of high deficits in 2028, 2029 and beyond if measures are not taken to avoid getting in the red.

It says that Portugal will not be able to maintain balanced public accounts without curbing public spending given policy obligations on defence, pensions, and salaries.

Changes to retirement and pension rules and increases are among the measures suggested by the IMF which is based in Washington.

“Maintaining a largely balanced budget position in the medium term, as planned, and keeping to future targets will require additional measures”, warns the institution led by Kristalina Georgieva, which predicts more costs from an aging population, increases on defence to 3.5% of GDP in 2035, and the permanent impacts from adopted and planned tax cuts.

The latest forecasts are mentioned in the IMF Article 4 report which resulted from consultations made by the IMF team in Portugal between the end of April and the beginning of May.

Based on its calculations and assumptions, the IMF sees Portugal going from a budget deficit in public accounts of 0.2% of GDP in 2028 and 1.25% in 2031.

At the rate Portugal’s spending is evolving from the spending commitments it has taken on, there will be no primary surpluses to reduce debt which will start rising from 2035 unless preventative measures are taken, particularly on pensions, more specifically the recommendations made in the Green Book for the Sustainability of the Social Security System.

Portugal’s Green Book on the Sustainability of the Social Security System (Livro Verde para a Sustentabilidade do Sistema Previdencial) is a major government report drafted by the Commission for the Sustainability of Social Security (CEPS) to identify future financial and demographic challenges facing the country’s pension and social welfare system.

One of its main tenets is  Complementary Savings. The group of academics and policy advisors who compiled the report advocates for a more diversified approach to pensions by encouraging tax benefits and encouraging the Portuguese to have private, complementary retirement savings to fill the inevitable and widening  gap left by state pensions.

Source: Negócios/IMF