Portugal's fiscal 'shock' to counter debt crisis

13th May 2010, Comments 0 comments

After Spain cut public salaries, Portuguese ministers on Thursday took their turn to enforce a fiscal "shock" to stop the country becoming the next battleground in Europe's debt crisis.

While Australia's central bank warned that Europe's turmoil could hit Asian growth, international share prices rose as markets decided that the measures could just work.

Portugual's Socialist government has agreed tax hikes, wage cuts and to freeze major public works such as a new Lisbon airport as it battles to reduce Portugal's public deficit from a record 9.4 percent to target of a 5.1 percent of gross domestic product by next year, reports said.

The Jornal de Negocios business daily described the measures as a "fiscal shock," ahead of the cabinet meeting to put the final seal on the cuts. "All taxes are going up," reported Diario de Noticias.

Reports said the salaries of ministers, members of parliament, local elected officials and heads of public companies would be cut by five percent.

As a member of the eurozone Portugal is bound to hold its annual public deficit to under 3.0 percent of output.

Portugal's public debt, which came to 76.6 percent of GDP last year, is projected to widen to 86 percent in 2010, beyond the 60 percent eurozone rule.

Portugal and Spain, like Greece, are struggling to stabilise deficit-plagued public finances that have eroded market confidence and driven up borrowing costs.

The Italian government is now considering a freeze on public sector salaries and new hirings under measures that could save at least 2.0 billion euros (2.5 billion dollars), Il Sole 24 Ore reported.

The government this week renewed a pledge to reduce Italy's public deficit from 5.3 percent last year to 2.7 percent in 2012.

Britain's new centre-right coalition cabinet also started discussing the economy on Thursday. The government has promised an emergency budget in 50 days that will aim to start slashing public spending.

Spain's Socialist Prime Minister Jose Luis Rodriguez Zapatero on Wednesday ordered a five percent pay cut for public workers, a partial freeze on pensions and the scrapping of a 2,500-euro-payout for the birth of new children as he seeks to save an extra 15 billion euros over two years.

His cuts were in addition to a 50-billion-euro (63-billion-dollar) austerity package announced in January designed to slash the deficit to three percent of GDP by 2013 from 11.2 percent last year.

"Zapatero gets out the big scissors," said Spain's economic daily Cinco Dias.

Spain and Portugal's deficit attack followed creation of a 750-billion-euro (one-trillion-dollar) fund to help debt stricken nations in the eurozone. Europe's main stock markets in London, Frankfurt and Paris all rose in early trade Thursday amid new cheer over the continent's prospects.

Tokyo closed more than two percent higher and Hong Kong and Sydney were also up.

But Australia's central bank warned that Europe's renewed financial turmoil could pose a risk to Asian growth.

Assistant governor of the Reserve Bank of Australia (RBA) Phillip Lowe said emergency measures to stave off a European debt crisis had gone some way to restoring investor confidence, but doubts could resurface.

"Despite the recent announcements having stabilised confidence in Europe, concerns about public finances could build again," Lowe said in speech in Sydney.

"If they did, it would weigh on growth prospects for the countries directly concerned, and it could also weigh on prospects in Asia, particularly if it were associated with a marked increase in risk aversion globally."

Lowe said the RBA would be "watching carefully over the weeks and months ahead to assess how the balance of these risks is evolving", with the crisis in Europe, especially Greece, showing how circumstances could change quickly.

© 2010 AFP

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