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Portugal vows to tighten austerity measures

Finance Minister Fernando Teixeira dos Santos announced Friday that Portugal will tighten its austerity measures to ensure it meets its deficit reduction targets, hours ahead of a summit on the eurozone debt crisis.

“We are going to reinforce the measures to reduce planned expenditures in 2011 in order to open up a supplementary margin which will guarantee in an even stronger manner attaining the target of a public sector deficit of 4.6 percent” of gross domestic product, he said.

Portugal has come under increased speculation in recent days that it will be forced to follow Greece and Ireland in being forced to accept an international bailout.

Investors have driven Lisbon’s borrowing costs to levels widely considered unsustainable in the long-term, with yields on its 10-year bonds at 7.403 percent Wednesday.

Dos Santos said the additional measures were necessary due to the risks tied to the volatility of debt markets, where Portugal now has to pay record levels of interest to investors since it adopted the euro.

Eurozone leaders meeting Friday in Brussels aim to agree on at least the broad lines of the greater economic policy coordination needed to tame a deep-seated debt crisis threatening to claim yet more victims.

Dos Santos said the “precautionary measures” that will primarily hit the health, public-owned companies and social welfare, will provide savings of around 0.8 percent of GDP.

He reiterated that Portugal aims to reduce its public deficit back to the eurozone limit of three percent of GDP in 2012 and down to two percent in 2013. It aims to accomplish this by means of slashing spending by 2.4 percent of GDP and increasing revenue by 1.3 percent of GDP.

Dos Santos said the government plans to implement next year a special tax on pensions above 1,500 euros per month, similar to the five percent pay cut imposed this year public workers who earn over 1,500 euros per month.

He said a freeze on pension increases would also be kept in place as long as necessary, social welfare payments would be cut and addition fiscal measures put into place to increase tax revenues.

The minister said the government would also continue with structural reforms in order to boost economic growth, which will be key for the country to be able to keep up with payments on its debt which stood at 143 billion euros in 2010, or 83.3 percent of GDP — above the EU limit of 60 percent.

Portugal’s national statistics institute confirmed Friday the economy contracted 0.3 percent in the final quarter of last year, and grew by 1.4 percent in 2010.

The Portuguese government forecasts 0.2 percent growth this year due to an increase in exports, while the central bank forecasts a 1.3 percent contraction due to the austerity measures.

Portugal’s government has repeatedly denied that it will need to follow Greece and Ireland in seeking help from the European Union and International Monetary Fund, even though the cost of financing its debt has skyrocketed.