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Portugal's parliament passes austerity budget

03 November 2010, 20:44 CET
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(LISBON) - Portugal's parliament Wednesday approved a tough budget as the main opposition abstained under a pact with the government aimed at averting a political crisis and renewed strains in the eurozone.

The 2011 budget will cut the public deficit to 4.6 percent of gross domestic product from 7.3 percent this year through a mixture of spending cuts and higher taxes. The European Union deficit ceiling is 3.0 percent.

Socialist Prime Minister Jose Socrates had to compromise over his measures, which are hugely unpopular, in order to obtain abstention on the vote from the main opposition rightwing PSD party.

Parties on the further left and right voted against the budget.

"The goal is to arrive by the end of 2011 with one of Europe's smallest deficits so that Portugal emerges, once and for all, from the group of countries hardest hit by the financial crisis," Socrates told journalists after the vote.

The budget aims to save five billion euros (seven billion dollars) through a mix of painful measures including a two-percent sales tax hike, a freeze on retirement pensions, a drop in public sector salaries and ceilings on social spending and deductions.

The measures are also expected to slow growth to 0.2 percent next year and hike unemployment to 10.8 percent according to government projections judged optimistic by the opposition and a number of economists.

"Nobody takes such decisions with a light heart," Socrates said recently.

But he has insisted the measures were the only way to protect Portugal from the markets' turbulence.

The vote coincided with news Portugal must pay investors much higher rates of return to raise fresh funds.

The country's debt agency announced it had sold 500 million euros in three-month bills but had to pay buyers a rate of return of 1.818 percent -- up sharply from the 1.595 percent paid at a similar sale in early October.

Looming in the background are the economic troubles of fellow EU member Greece.

In May, the EU and International Monetary Fund cobbled a 110-billion-euro (140-billion-dollar) rescue package for debt-strapped Athens after the markets turned against it, demanding exorbitant returns for buying its government debt.

Faced with paying more in interest than it could ever hope to repay, Greece turned to the EU and IMF for help and the two later agreed on a larger back-stop rescue mechanism for other eurozone members.

In the Greek fallout, Portugal and other weaker eurozone countries such as Spain and Ireland came under intense pressure from the markets, forcing them to adopt stringent spending cuts to avoid eventual default.

"There isn't yet total confidence in Portugal's capacity to realize its budget consolidation effort," said European Commission President Jose Manuel Barroso, a former Portuguese prime minister.

"This budget is an important step but it isn't everything," he said on the sidelines of a ceremony in Lisbon.

Leftist lawmakers have denounced the austerity measures and civil servants are planning to demonstrate in the capital on Saturday.

Portugal's two top unions have also announced a general strike on November 24 to protest the cuts.


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