An article by credit ratings agency Fitch Ratings concludes that Portugal is on track to hit its fiscal targets this year, following the constitutional court's approval of expenditure-related proposals, but warns about potential tax increases in future.
On 14th August 2014, the court said that temporary pay cuts for some public sector workers proposed for this year and next year are constitutionally acceptable, but that they should not be extended beyond 2015. It said a levy on some public sector pensions would be unacceptable.
Temporary pay cuts have already been used in Portugal to cut expenditure. Fitch Ratings said the court's ruling reinforces its view that Portugal will hit its 2014 fiscal target of cutting the general government deficit to 4% of gross domestic product (GDP), down from 4.5% last year.
The ratings agency forecasts a further reduction to 2.7% in 2015, when the government plans another sharp reduction in expenditure. This is marginally above the government's 2.5% target due to more conservative growth assumptions.
Political risks to fiscal consolidation remain significant following Portugal's 'clean exit' from its EU-International Monetary Fund program in May, the agency said however. Elections are due to be held by October 2015, and the next Government may have to resort to politically challenging tax increases to keep finances in line, Fitch concluded.
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