Portugal minister says bringing deficit down fully will take years

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November 6, 2012 10:56 PM EST

Portugal will take many years to fully reduce its budget deficit, its finance minister acknowledged on Tuesday, adding that the IMF and World Bank were close to concluding an evaluation of further spending cuts.

Additional spending cuts of 4 billion euros would come into effect in 2013-14, and would be on top of next year's budget, which will heap more austerity on the Portuguese as it will include the largest tax hikes in the country's modern history.

The spending cuts were not included in the country's original 78-billion-euro bailout from the European Union and IMF but the government has presented them as a way to guarantee the long-term sustainability of public finances.

Finance Minister Vitor Gaspar said it would take several decades to cut Portugal's debt to GDP ratio below 60 percent and said there were still great risks to the economic outlook in Portugal and Europe. Debt is currently expected to peak at 124 percent of GDP in 2013.

"We live in a situation where there are great risks and uncertainties," he told a parliamentary commission committee.

The euro zone member faces a third year of recession next year after entering its worst downturn since the 1970s this year and has seen a sharp rise in protests against austerity in recent weeks after acceptance of the need for cutbacks in the first year of its bailout.

Gaspar warned that economic forecasts were difficult to make at this time.

"In a crisis situation macroeconomic forecasts tend to be less precise in qualitative and quantitative terms," he said.

The government has already downgraded its output forecasts for this year and next, and now expects a 3 percent decline in GDP this year and 1 percent in 2013 - an outlook many economists think is too optimistic.

Lisbon asked the IMF and World Bank to help identify spending cuts because they routinely offer technical assistance on reform of public finances.

Gaspar said the spending cuts would be identified in the sixth review of the economy under the bailout programme, which should start at the end of November.

The fact that advisors from the International Monetary Fund and World Bank are already close to identifying spending cuts suggests the government is well advanced in the process, which could meet with more political and social opposition as it could include more cuts to welfare benefits such as health.

(Reporting By Axel Bugge and Daniel Alvarenga; Editing by Susan Fenton)

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