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Bank of Portugal sees steady growth, uncertain on new budget

The Bank of Portugal expects the economy to grow 1.7 percent in 2016 after a 1.6 percent expansion this year, it said on Thursday, but warned the outlook was clouded by uncertainty about the new government's budget plans. The central bank's winter bulletin included its first projections for the economy after nearly two months of political uncertainty which resulted in a Socialist government coming to power in November. It has yet to present a 2016 budget.

"Uncertainty is higher than normal," the bulletin said. "Information about the budget plans that will be implemented in coming years is still unknown." The bank projected that growth would rise to 1.8 percent in 2017. The Socialist government, which will rule with the support of the far left Communists and Left Bloc in parliament, has said it will only complete a draft budget for 2016 in early January.

Many economists fear the new government could water down attempts to cut the budget deficit as it moves to end the harsh austerity of recent years, possibly undermining an economic recovery that started last year.

The government has promised to stick to European budget goals but has said it will reverse some austerity measures, including raising some civil servants' salaries and pensions, hiking the minimum wage and cutting some taxes. The central bank warned that a "sustained decline in public and private debt levels is fundamental". At just under 130 percent of national output, Portugal has one of the highest debt levels in the euro zone.

"In this context, guiding public accounts towards balance in the medium term, in line with European budget rules, is a desirable objective for the Portuguese economy," the central bank said.

Copyright Reuters, 2015