Portugal fears government crisis over austerity budget (News Feature)

By Emilio Rappold and Sinikka Tarvainen Oct 14, 2010, 15:12 GMT

Lisbon - Concern over a possible government crisis was mounting Thursday in Portugal as Prime Minister Jose Socrates' government was preparing to present an austerity budget criticized by most opposition parties.

The government was due to approve the budget on Thursday. It will then be presented Friday to parliament, which was expected to vote on it by October 29 at the latest.

Socrates has pledged to resign if his minority Socialist government fails to win parliamentary approval for the budget seeking to dispel international concern over Portugal's economic stability.

That would plunge the country into a months-long period of uncertainty, which would rattle the confidence of financial markets even more, and edge the country closer to a Greek-style financial abyss, analysts said.

Portugal's economy is deemed to be one of the weakest in the 16-member eurozone. The country's lethargic growth and high debts have sparked worries that it might need an international bailout similar to the one that rescued the Greek economy earlier this year.

The budget was expected to include austerity measures announced earlier, such as slashing public sector salaries by 5 per cent, freezing pension payments, and cuts in social spending and public investments.

The government also wants to increase value added tax from 21 to 23 per cent, and reduce tax deductions which had mainly benefited the middle class, according to a draft of the budget quoted by the daily Publico.

The tax hikes are opposed by the main opposition conservative Social Democratic Party (PSD), which had earlier backed the government's attempts to cut the budget deficit of 9.3 per cent to below the European Union limit of 3 per cent by 2013.

PSD leader Pedro Passos Coelho said his party would decide its stance on the budget later on, but voices urging him to reject it were growing louder within the party.

The budget 'kills the future of Portugal,' PSD youth leader Pedro Rodrigues said.

The PSD fears the austerity measures will paralyse the economy which the government expects to grow at least 0.5 per cent over the next two years, after it shrank 2.7 per cent in 2009.

International analysts, however, have been more pessimistic, with the ratings agency Standard & Poor's predicting a contraction of 1.8 per cent in 2011.

Portugal's public debt exceeds 80 per cent of gross domestic product (GDP), and unemployment has reached a record 10 per cent.

Left-wing parties also slammed the government's austerity plans, with Jose Manuel Pureza from the Left Bloc (BE) saying they would have a 'brutal impact' and would 'sink the economy.'

The government was creating 'recession and more unemployment,' said Heloisa Apolonia from the Green Party.

The government is also facing a general strike over the austerity plans on November 24. The strike will be the first called jointly by the two top trade union confederations CGTP and UGT in 22 years.

A government crisis would have 'extremely serious' consequences, President Anibal Cavaco Silva warned, urging the political parties to be 'responsible' at a 'very serious' time.

Not approving the budget would be a 'tragedy for the country,' Socialist representative Vitor Ramalho warned.

It was 'essential for Portugal to have a budget that lends credibility to the Portuguese economy,' European Commission President Jose Manuel Barroso - a former Portuguese prime minister - stressed.

Portugal's growth was sluggish already before the global crisis.

The structural weaknesses of the economy have become evident as Asian competition has increased in sectors such as textiles and shoes, and eastern European countries have joined the EU, vying with Portugal industrially and for EU subsidies, analysts said.

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