Portugal has reported its lowest budget deficit in more than 40 years, a landmark that Lisbon hopes will see the EU lift the threat of financial sanctions against the former bailout country for breaking the bloc’s fiscal rules.

The deficit fell to 2.1 per cent of gross domestic product in 2016, down from 4.4 per cent the previous year and the lowest level since democracy was restored in Portugal in 1974, according to figures published on Friday by the National Statistics Institute (INE).

After beating the 2.5 per cent of GDP target set by Brussels and bringing its deficit comfortably below the 3 per cent maximum allowed under EU rules, Portugal will seek authorisation to exit the bloc’s mechanism for enforcing fiscal discipline, known as the excessive deficit procedure, later this year.

Prime Minister António Costa, whose “anti-austerity” Socialist government has shown a commitment to meeting fiscal targets that has surprised many analysts, will also use the record deficit figure to press credit rating agencies to lift Portugal above junk status.

Fitch, Moody’s and S&P Ratings, three leading rating agencies, have all had Portugal at below investment grade since 2011, the year Lisbon negotiated a €78bn bailout with the EU and the International Monetary Fund.

The INE forecast this year’s budget deficit at 1.6 per cent of GDP, in line with the government’s budget forecast. The 2015 deficit figure of 4.4 per cent of GDP was inflated by the injection of state funds, equivalent to about 1.3 per cent of GDP, into struggling banks.

Despite the strong fiscal performance by the minority Socialist government, which is backed in parliament by Communists and the anti-establishment left, international bodies and rating agencies remain concerned about Portugal’s fragile banking sector and its high public debt.

INE said on Friday that the public debt had increased from 129 per cent of GDP in 2015 to 130.4 per cent last year. It said the debt was expected to fall to 128.5 of GDP this year.

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