By Sergio Goncalves
LISBON (Reuters) - Portugal's budget deficit fell more than expected last year, data showed on Tuesday, putting the country that had to take a bailout during the euro zone crisis close to balancing its books.
The deficit fell to just 0.5 percent of gross domestic product by the end of 2018, the National Statistics Institute (INE) said, one of the smallest budget shortfalls in the euro zone and down from 3 percent of GDP at the end of 2017.
Portugal's improving public finances earned it a credit ratings upgrade by Standard & Poor's this month and result from years of harsh austerity since the country had to secure an EU/IMF bailout during the euro zone crisis.
At the height of the crisis in 2010, the budget deficit reached 11 percent of GDP, but the Portuguese economy has rebounded in the past few years, bolstering tax income and other government revenue, although Standard & Poor's warned this month that the country's banks still face challenges given weak credit demand.
"For the first time Portugal can face a possible slowdown in the European economy," Finance Minister Mário Centeno told reporters on Tuesday. "In the last three years Portugal has been able to gain a status of credibility never achieved before.
"We showed Europe that there is an alternative," he said.
In February Centeno had forecast the 2018 deficit would be around 0.6 percent of GDP.
INE said it expected the deficit to fall to 0.2 percent of GDP in 2019, the same as the government's target for this year.
Gross general government debt is still high but fell to 121.5 percent of GDP last year from 124.8 percent in 2017, INE said.
It said the budget deficit for 2018 totalled 913 million euros, compared to 5.77 billion euros in 2017, when the economy grew by 2.8 percent, its fastest pace since the turn of the century. Last year the economy expanded by 2.1 percent.
Portugal's EU/IMF bailout imposed severe austerity - increasing taxes, cutting social expenditures and wages. Since 2016, the current socialist Government has benefited from a resurgent economy and last year fiscal revenues grew 6.3 percent, while public spending increased 4.4 percent.
INE said that the 2017 public deficit was hit by the "extraordinary recapitalisation operation" of 3.94 billion euros for state-owned Caixa Geral de Depósitos bank.
The 2018 deficit included a capital increase of the resolution fund for capital injections into Novo Banco, amounting to 792 million euros, INE said. There was also a loan of 280 million euros from the treasury to the credit recovery fund of investors affected by the bankruptcy of Banco Espirito Santo and a 65 million euro guarantee to SATA Air Azores.
(Additional reporting by Goncalo Almeida; Writing by Catarina Demony; Editing by Axel Bugge/William Maclean/Susan Fenton)
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Updated Date: Mar 27, 2019 00:06:48 IST