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Cablegate: Portugal's 2009 Budget to Maintain Discipline

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R 221302Z OCT 08
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 7097
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 LISBON 002659

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV PO
SUBJECT: PORTUGAL'S 2009 BUDGET TO MAINTAIN DISCIPLINE

1. (SBU) Summary. The Portuguese Government's 2009 budget
request maintains the record low budget deficit that was
achieved last year (2.2% of GDP). There are no major policy
or spending shifts in the budget request and, for that
reason, there was little significant criticism from
opposition parties or the media. The largest salary increase
for public workers in the last decade is the only nod to
populism in the face of upcoming elections. As the
government has a majority in parliament, the budget should
pass without major revision. End summary.

2. (U) The Government of Portugal (GOP) presented its 2009
budget to the parliament October 15, claiming the budget to
be an example of "realism, prudence, and rigor." Portugal's
fiscal year matches the calendar year. Although budget
drafting is a continuous process dating back to the
presentation of the previous iteration, the GOP said helping
Portuguese families respond to the current financial crisis
was the chief orienting principle. That said, there were no
grand surprises as resource shifts were relatively small.

3. (U) Even though GOP budgets traditionally allocate around
60% to social functions (health, education, and social
security), the GOP nonetheless stressed that the 60.3%
allocated in the 2009 budget demonstrated a commitment to
"Portuguese families." In addition to the largest salary
increase for public workers in the last decade (2.9%), the
GOP provided tax breaks on the sale of residences and the
reinvestment of gains into subsequent residences. Such
actions were offset in part by increased taxes on personal
vehicles, petroleum products, and vehicle circulation fees
(although tax incentives are available for electric vehicles)
and a public sector that did not replace 12,000 departed
employees.

4. (U) While cynics call it an "everybody wins" budget
focused on garnering support in advance of the fall 2009
elections, the 2009 budget maintains the budget discipline
achieved in the previous year. The 2008 budget deficit
equaled 2.2% of GDP, the lowest deficit in the last 30 years.
The 2009 budget proposal increases expenditure by 2.3
billion euros, but this is matched by increased revenue to
maintain a deficit of 2.2% of GDP.

5. (U) The big winners in this year's budget are the
ministries of Education and Public Works, while the losers
are the ministries of Culture and Agriculture. Portugal's
largest line item is for the Ministry of Health, but its 2.4%
increase falls slightly short of the 2.5% inflation rate
predicted for 2009. One could also consider the Ministry of
Justice a big winner with a 60% budget increase, but
virtually all of that is for the purchase and rehabilitation
of new office space in Lisbon and elsewhere. The Ministry of
Justice's real operating expenses increased only 4.5%,
despite several new large-scale initiatives to counter money
laundering, narcotics, and corruption.

Foreign Relations
-----------------
6. (U) Budget of 354 million euros; down 1.2% from 2008.
Although the Ministry of Foreign Affairs (MFA) officially
suffered a budget cut, this is only because the 2008 budget
included leftover expenditures related to Portugal's 2007
presidency of the European Union. Although less demanding
than an EU presidency, in 2009 Portugal continues to chair of
the Community of Democracies (CD) and will assume the
presidency of the Ibero-American Conference. For each of
these roles, Portugal will host one summit and one
ministerial during 2009.

7. (U) In operating terms, the MFA's 2009 budget represents
major increases for information technology investments
related to consular services and for outreach to Portuguese
communities abroad. The latter funds are also expected to be
used for increased economic diplomacy, in which the MFA and
its embassies will take greater steps to promote Portuguese
exports.

Defense
-------
8. (U) Budget of 2.24 billion euros; up 3.9% from 2008. The
Ministry of Defense (MOD) budget represents 1.3% of GDP, far
below the 2% NATO target, even though the MOD looks to make
key investments in equipment and infrastructure.
Nonetheless, personnel costs top 1.2 billion euros, 54% of
the ministry's budget.

9. (U) The budget specifies that Portugal will continue
commitments overseas, citing activities in the lusophone
world and with the European Maritime Policy, but does not
specifically cite NATO commitments in Afghanistan. The army,
air force, and navy all received increases of between five

LISBON 00002659 002 OF 002


and six percent in their operating budgets.

10. (U) "Modernization" is the key word in all discussions of
defense investments and the Military Programming line item
receives a 54% increase to 314 million euros. None of these
funds are earmarked for specific projects, but each of the
services has new purchases and major upgrade projects coming
on line in 2009.

Interior
--------
11. (U) Budget of 1.84 billion euros; up 4.2% from 2008. The
Ministry of Interior (MAI) also includes the Republican
National Guard (GNR), a paramilitary police force responsible
for law enforcement in rural areas in addition to a range of
other tasks. Like Defense, the MAI budget is dominated by
personnel expenses that total 1.4 billion; 70% of the overall
budget. Policy priorities of the MAI are public security and
immigration control.

12. (U) In keeping with MAI's personnel costs and priorities,
the budget authorizes an additional 1,000 soldiers for the
GNR and an additional 1,000 agents for the police (PSP). The
GNR has several new response corps for civil protection and
fire fighting, amongst others, and the PSP has several new
task forces against carjacking and other crimes.

Comment
-------
13. (SBU) There are no great changes in this year's budget
request and for this reason there was little significant
criticism from opposition parties. The governing Socialist
Party (PS) has maintained throughout its tenure the desire to
be fiscally responsible and to cast itself as a better
administrator of the state than the Social Democratic Party
(PSD) government that preceded it. Given that the current
PSD leader is the former Minister of Finance, this appears to
be a good strategy. Whatever the GOP's motive, continued low
budget deficits are welcome.
STEPHENSON

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