Portugal's Socialist government has unveiled a draft 2017 budget which raises pensions and cuts income taxes while aiming to reduce the public deficit as required by the European Union.

"This is responsible budget which will consolidate accounts but is also accompanied by social measures," Finance Minister Mario Centeno told a news conference called to present the spending plan Friday.

The Socialist government, which is backed by two smaller far-left parties, forecasts the budget deficit will fall to 1.6 percent of economic output next year from 2.4 percent in 2016, well below an EU limit of 3.0 percent.

Portugal posted a budget deficit of 4.4 percent in 2015.

EU member states in August decided against fining Portugal for its repeated breach of budget deficit rules but Brussels has warned that it could still suspend its EU structural funds should Lisbon continue to miss its budget targets.

European Commission Vice President Valdis Dombrovskis warned Tuesday that the decision on the structural funds would "depend largely" on Lisbon's commitment to bringing its budget deficit within EU rules.

The budget is based on the forecast that the economy will expand by 1.5 percent next year after growing by 1.2 percent in 2016. 

The government had previously forecast 1.8 percent growth during both years.

The International Monetary Fund warned last month that Portugal’s fragile recovery is losing momentum, with growth held back by sluggish investment and weak exports as uncertainty and corporate debt weigh on the economy.

Concerns over Portugal's slowing growth have caused borrowing costs to rise.

Portugal's 10-year bond yield is at 3.4 percent, compared to 1.1 percent for Spain and 1.4 percent for Italy.

The draft budget, which will be put to a parliament vote next month, will next year phase out an income tax surcharge introduced by the previous centre-right administration back in 2011 during Portugal's debt crisis.

It also calls for an increase of ten euros, starting in August, for the lowest pensions of up to 628 euros a month.

To compensate for the extra spending, the government will introduce a tax on soft drinks and a new 0.3 percent tax on real estate holdings above 600,000 euros.

"This tax will have devastating effects on the sector and undermine the confidence of foreign investors," said Luis Lima, the president of the Portuguese Association of Real Estate Agents.

- 'Precarious political balance' -

The Socialists came to power last year after they teamed up with the Communists and the far-left Left Block to oust the centre-right administration.

They have vowed to boost the economy by raising the income of families after years of austerity imposed during the country's 78-billion-euros international bailout.

The small leftist parties did not formally join the new government, but Prime Minister Antonio Costa relies on them for a majority in parliament to pass legislation.

The extra social spending included in the draft budget were seen as concessions to the far-left parties to ensure they approve the budget.

"There is no reason why they should not be able to maintain this precarious political balance," said political scientist Jose Antonio Passos Palmeira of the University of Minho, referring to the Socialists' alliance with the two parties which was been dubbed "the contraption".

The Socialists have risen in popularity since they came to power.

The party had 36.3 percent support in a poll published Friday by weekly newspaper Expresso, 5.6 percentage points ahead of the opposition centre-right Social Democrats and its best result since it took office last year.

Source: AFP