07 April 2013

FT: Portugal faces fresh cuts to spending

Pedro Passos Coelho, Portugal’s prime minister says the government will have to cut spending on health, education and social security to keep the country’s €78 billion bailout programme on track.

The premier said the court’s rejection of planned austerity measures posed a serious risk to Lisbon’s ability to comply with the adjustment programme and its effort to regain access to international bond markets by a September deadline.

Mr Passos Coelho said he had no alternative after the court decision but to make extra spending cuts that would have a significant impact on the welfare state. The budgets of state-owned companies would also be cut, he said but the premier ruled out more tax rises on top of record increases introduced in January. “I have ordered ministries to cut expenditure to compensate for the effects of the court decision”, he said.

Mr Passos Coelho also faces a difficult task to convince international lenders that new spending cuts will keep deficit-reduction plans on target.

The decision by Mr Passos to cut spending on the welfare state is likely to intensify opposition pressure on the government to resign, potentially opening the way to an early general election. “We have to do everything possible to avoid a second bailout”, the prime minister said. The European Commission stressed that it was vital for Portugal to stick with the austerity measures agreed in the bailout terms to help the country emerge from its deep economic crisis.

Economists calculate that four measures ruled unconstitutional – including planned cuts in public sector pay and state pensions – mean Lisbon will lose about €1.3 billion in expected revenue and savings, more than 20 per cent of the total planned from austerity measures this year. The loss would increase this year’s budget deficit to about 6.4 per cent of national output, compared with the agreed target of 5.5 per cent – an objective that has already between twice relaxed by the troika of international lenders: the European Commission, the International Monetary Fund and the European Central Bank.

A decision is also imminent on whether to grant Portugal’s request for more time to repay its loans – a move the government says is vital to the success of the bailout programme.

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