Portugal launches another round of spending cuts

AP News
Posted: Apr 18, 2013 7:26 AM
Portugal launches another round of spending cuts

LISBON, Portugal (AP) — Portugal's government is pushing ahead with deeply unpopular austerity policies, announcing plans Thursday to save 800 million euros ($1 billion) this year — about 0.5 percent of annual GDP — by slashing spending on public sector staff, goods and services.

The center-right government said the new money-saving measures are needed to meet deficit targets stipulated by creditors who gave the country a 78-billion-euro bailout two years ago.

With the recent rescue of Cyprus indicating the eurozone's financial crisis is far from over, the bailout lenders — the International Monetary Fund, European Central Bank and European Commission — are insisting that Portugal abide by its three-year bailout agreement. That involves painful cuts to public spending and tax increases to reduce debt.

If it doesn't comply, the creditors won't disburse the bailout loans, which are paid in installments. They said in a brief statement Thursday that discussions on Portugal's progress are continuing.

Portugal's deficit target for this year is 5.5 percent. Last year, it stood at 6.4 percent, above the 4.5 percent target. In 2010, it was 10.1 percent.

However, there are signs the austerity strategy is backfiring. Despite following its austerity program closely, Portugal has repeatedly missed its deficit goals.

That is partly because the measures have hurt the economy, which contracted 3.2 percent last year and is forecast to shrink 2.3 percent in 2013 for a third straight year of recession. As the economy shrinks, the government loses vital revenue it needs to lower debt.

And as joblessness increases, the government faces higher social welfare bills. The unemployment rate, currently at 17.5 percent, is forecast to climb to 18.5 percent in 2014.

The government is trying to plug a 1.3-billion-euro hole in its budget after the Constitutional Court recently ruled that some of this year's austerity measures were unlawful. After the 800 million euros, it still has to make up for the rest of that shortfall.

Officials said the latest cuts, which are to be presented in detail next month, will likely result in staff cuts and prompt some public services to be scrapped. Government official Luis Sarmento, who oversees the budget, said the steps "will place public services under great pressure."

The government drew up the measures — announced after a late-night Cabinet meeting — under the eyes of inspectors from the bailout lenders. The inspectors were in Lisbon to make sure Portugal doesn't backslide on the May 2011 agreement.

The government's job has become harder as street protests have mounted. Also, the broad political consensus that initially surrounded the bailout agreement has frayed, leaving the government isolated.

Prime Minister Pedro Passos Coelho invited the leader of the main opposition Socialist Party to a private meeting at his official residence Wednesday. Passos Coelho said in his written invitation to Antonio Jose Seguro that Portugal has to follow a "very narrow" path to economic recovery and that political consensus is "fundamental" to achieve the country's goals.

But after the 90-minute meeting Seguro said he couldn't sign up to the government's approach. Austerity "isn't working," Seguro said.

The center-left Socialists, who have built a clear lead in opinion polls, want to ease up on austerity, negotiate an extension to Portugal's loan repayments and other aspects of the bailout agreement, and switch the focus to fostering growth, investment and job creation. The government has balked at many of those options, saying it must get its finances back in order first.

European Commission spokesman Olivier Bailly said Thursday in Brussels that "political consensus for us is still ... an important requirement."


AP reporter Juergen Baetz in Brussels contributed.