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Sunday, 17 March, 2002, 22:01 GMT
Economic test as Portugal votes
Graphic for Portuguese elections
Portugal badly needs an economic boost

The economy was expected to have been uppermost in voters' minds as the Portuguese went to the polls on Sunday to elect a new parliament in early elections.

After the resignation of Socialist Prime Minister Antonio Guterres late last year, the ruling party looks set to lose its control of the government.

Whoever wins the elections will inherit a difficult task of taming a ballooning state deficit and boosting its economic growth rate.

Portugal, still the poorest country in the EU, has made enormous progress in the past decades after its dictatorship collapsed in 1974. The country's economy grew steadily, new roads and plants were built, tourist infrastructure was modernised and living standards grew.

But now the boom is over.

The economy is predicted to have grown only 1.7% in 2001, down from 3.4% in both of the previous two years.

Devaluation of the currency in order to boost exports is no longer an option, as Portugal is a part of the eurozone.

Spending too much

And the government is running out of money, leaving the state budget with a deficit of 2.2%, twice as high as predicted.

This prompted European Commission in February to threaten Lisbon with an unprecedented formal warning about the danger of coming close to the EU budget-deficit limit of 3%.

Some critics say that the real deficit is even higher.

Shopping centre Amoreiras
Signs of economic achievements are omnipresent in the country
Slowing economic growth and evaporating foreign investments will make the task of balancing the budget even more difficult in the future.

The Socialist government committed itself to balance state finances within three years.

Centre-right Social Democrats, the main opposition party, are also promising to "review the state finances".

Already the government has cancelled a naval exercise and forced the army to borrow from commercial banks to pay for supplies, but many economists argue that cuts should be more severe.

Privatisation slows

A huge state sector, which emerged as a result of a massive nationalisation in mid-1970s, has kept unemployment four times lower than in the neighbouring Spain.

But the losses of the state enterprises are putting the budget under sever pressure, while the government has delayed further privatisations until market conditions improve.

Some critics blame the state for being too attached to its strategic companies and reluctant to sell to overseas buyers.

Eastern threat

Now the steady flow of foreign investments in Portugal is drying up.

Foreign investment totalled 1.1bn euros (684m, $965m) in 2001 compared to 3.9bn in 2000.

In the past, Portugal's relatively cheap workforce attracted foreigners, and the country's market was regarded as one of the most stable and promising in Europe.

Manuel Durao Barroso
Social Democrats are leading the exit polls
But the country has lost the battle for investment to Ireland, where taxes are lower, bureaucracy is more effective and English is spoken.

Now it could lose out to Eastern Europe.

"Portugal will soon have to compete with future members of the EU where tax rates are more attractive and the workforce is highly trained and of low cost", Jose Luis Cardoso of Lisbon University said.

Another threat is an loss of EU subsidies, which will be redirected towards even poorer new member-states in Eastern and Central Europe in a few years' time.

Tough task ahead

Both of the main political parties fighting for power have put economic issues high on their agendas.

The exit poll-leading Social Democrats, headed by Manuel Durao Barrosa, are proposing corporate tax reduction from the current 28% to 20%, as well as a cut in the top rate of income tax by 5% to 35%.

Portugal flag
Will they still be celebrating after the election?
The incumbent Socialist party, led by Eduardo Ferro Rodrigues is ready to grant a 25% corporate tax but only to the companies who can prove their effectiveness.

But Portugal's business is divided on the tax initiatives of the both parties, stressing that liberalising of the labour market and upgrading the country's educational system might be more effective for nation's productivity.

Portugal's productivity is the lowest in the EU and both parties are promising to tackle the problem.

Socialists propose to provide free training for the youth, while their rivals insist on introduction of an "emergency" education program to improve study of Portugal language as well as math and science.

"The education system has to be reformed so that it responds to the needs of the workforce", said Pedro Matos Branco, an economist in Banco Espirito Santo.

Whoever wins the election, the new government will face tough tasks and have less room for manoeuvre than its predecessors.

With EU going eastwards, trade barriers vanishing, currency devaluation impossible and the world economy slowing, Lisbon has to work hard to keep its 10 million people in work and prosperous..

See also:

08 Mar 02 | Country profiles
30 Jan 02 | Business
12 Feb 02 | Business
28 Dec 01 | Europe
17 Dec 01 | Europe
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