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Portugal faces fresh cuts to spending

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Story highlights

  • Portugal's PM says government will cut spending to keep country's bailout on track
  • Cuts were ordered after constitutional court rejected planned austerity measures
  • Health, education and social security will all be targeted under cuts

Portugal's prime minister says the government will have to cut spending on health, education and social security to keep the country's €78bn bailout programme on track.

Pedro Passos Coelho made a televised address on Sunday after the constitutional court rejected austerity measures considered essential to meeting mandatory deficit targets. 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.

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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.

    "Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment," the Commission said in a statement on Sunday night.

    A government official said another response to the court's decision could be a "large government stimulus package", possibly to be announced in the next few days, aimed at raising growth in an economy facing its third consecutive year of recession.

    Economists said international lenders -- which have already given Lisbon two extra years to consolidate its public finances -- would be reluctant to make any significant concessions in view of the tougher line on fiscal issues taken by Germany and the Netherlands over the Cyprus bailout.

    "Any negotiations on making Portugal's adjustment programme more flexible will be extremely tough," said Ricardo Santos, an analyst with BNP Paribas. "The mood in Europe has changed and it will not be easy to gain more concessions."

    The extent of the austerity measures rejected by the court has surprised economists and appears to have been much greater than expected by the government, which said the ruling had created "serious difficulties" for the bailout programme.

    Economists calculate that four measures ruled unconstitutional -- including planned cuts in public sector pay and state pensions -- mean Lisbon will lose about €1.3bn 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.

    However, economists said it would also be difficult to table new fiscal measures, such as more tax increases, to make up the shortfall after the government introduced what it described as "enormous" tax rises in January. "It's hard to see how they could find measures worth 0.8 per cent of GDP without distorting growth even further," said Antonio Garcia Pascual, chief eurozone economist with Barclays.

    The court ruling has intensified opposition calls for Mr Passos Coelho to resign and allow a new government to renegotiate a new bailout agreement. António José Seguro, leader of the opposition Socialists, said an early general election would be the best solution.

    "This government no longer has any authority or credibility. It has reached the end," said Mr Seguro, whose party has an eight-point lead in opinion polls.

    Portugal's President Aníbal Cavaco Silva said the government maintained the necessary support to "fulfill its democratic mandate".

    However, a senior EU diplomat said he expected Mr Passos Coelho, to resign. "Many thought he would step down today [on Sunday] but he hasn't ... I'm not sure he can hang on much longer," the diplomat said.

    The diplomat said Brussels could be flexible over budget goals. "It's early to speculate on whether funds will be blocked ... Solutions can always be found."

    A southern European diplomat said Lisbon risked losing financial support from the EU, however. "If they can't meet the bailout terms and they veer away from the austerity measures they promised to undertake, it will become difficult for EU finance ministers to give them more money."

    EU finance ministers will be meeting in Dublin on Friday and Saturday, when they are expected to discuss the deteriorating economic state of Portugal.

    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.

    Portugal's plight has attracted particularly close scrutiny in neighbouring Spain, which is itself mired in recession and struggling to bring the wayward government deficit back under control.

    Leading members of Spain's ruling Popular party were at pains on Sunday to draw a sharp contrast between the two countries, stressing that Spain was in a much stronger economic position than Portugal.

    "If Portugal is weaker than Spain it is because they have not taken the necessary measures that we have taken in our country," said Esteban González Pons, a senior PP official.

    The opposition Socialists, however, warned Madrid to take note of the Portuguese court ruling, pointing out that some of the Spanish government's own austerity measures would probably be tested in the Spanish courts in the near future.

    "We trust that the constitutional court in Spain -- just like the one in Portugal -- will defend the rights of the citizens," said Purificación Causapié, a Socialist leader.

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