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Bailed-out Portugal makes new cuts in 2014 budget

Bailed-out Portugal’s government said Tuesday it plans to cut spending by 3.9 billion euros next year, a move demanded by its creditors that risks deepening discontent over austerity measures.

The cuts announced in the government’s 2014 draft budget will mainly hit pensioners and civil servants, who face salary reductions of up to 12 percent.

“These efforts are necessary to successfully conclude our rescue programme, which ends in June 2014,” said Finance Minister Maria Luis Albuquerque as she presented the budget to the press.

“The sacrifices requested are necessary to assure our future,” she added.

Portugal, which is trying to regain full access to debt markets with the end of its three-year, 78-billion-euro ($106-billion) rescue plan from the European Union and International Monetary Fund, had already vowed to bring its deficit down to 4.0 percent of output next year, from 5.5 percent in 2013.

That meant the ruling centre-right coalition government, which took a heavy beating in local elections last month, had to trim spending by about 4.0 billion euros next year.

The country tried in vain to get its creditors to raise its deficit target to 4.5 percent in 2014. It wanted more leeway to ease austerity measures and thus provide more support to boost economic growth.

The new cuts — which amount to 2.3 percent of the country’s total economic output — will reduce civil servants’ salaries by 2.5 percent to 12 percent for income over 600 euros per month.

That is substantially deeper than the cuts made to date, under which only civil servants earning more than 1,500 euros a month had their salaries cut, by 3.5 percent to 10 percent.

The new budget also raises the retirement age to 66 from 65 and makes pension benefits for widowers dependent on their resources.

It came under fire from unions and leftwing opposition parties even before it was unveiled.

Portugal’s largest union, the CGTP, called the budget “a stab in the back”, while the Communist Party blasted it as “theft”.

Constitutional Court wildcard

The government is walking a tightrope as it seeks to meet the demand of the country’s EU-IMF creditors while avoiding an eruption of social discontent.

Protests against austerity measures — including tax increases and civil service pay cuts — introduced in exchange for Portugal’s May 2011 bailout have brought tens of thousands of people into the streets.

The government also faces divisions within its own coalition. In July it narrowly survived a political crisis when key ministers resigned over widespread public resistance to further austerity policies.

Portugal’s 10-year bond yield has dropped since the political crisis and is now around 6.4 percent.

But this level is still too high to allow Lisbon to resume regular bond issuance next year after the bailout programme ends.

“There is no alternative to reducing spending. If we are not able to meet our goals, the price to be paid will be much higher,” Prime Minister Pedro Passos Coelho said on the eve of the budget presentation.

Portugal exited a two-year recession in the second quarter with 1.1-percent growth, but its debt is still ranked below investment grade by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.

The wildcard in the government’s efforts to meet its deficit targets is the Constitutional Court, which has blocked public-sector pay and pension cuts and other austerity measures.

In April, the court also ruled against several austerity measures in the government’s 2013 budget worth 1.3 billion euros, including a controversial slashing of bonuses for civil servants and pensioners.

“The big risk for Portugal right now is the Constitutional Court. If it does not play the game, it will be difficult to respect the 4.0-percent (deficit) limit,” said a source close to the Portuguese government’s negotiations with its creditors.