Portugal government, opposition seal austerity budget agreement

Portugal’s minority Socialist government and its centre-right opposition PSD yesterday sealed a deal that will ensure parliament approves a crucial austerity budget for 2011.

The agreement, reached late on Friday after weeks of haggling and a break in the negotiations for a time, will see the PSD abstain in the first reading vote on the budget on Wednesday.

The government needs at least a PSD abstention as all other opposition parties have said they would vote against the budget, deemed vital to cut Portugal’s massive deficit and restore market confidence.

“We have met the conditions for adopting a budget that will entail sacrifices from the Portuguese in order to insure the financing of the country,” Finance Minister Fernando Teixeira dos Santos said.

“This agreement reaffirms the target of a public deficit of 4.6 per cent of GDP by the end of 2011, against 7.3 per cent expected this year,” he added after finalising the accord with the PSD’s Eduardo Catroga in the national assembly.

But he warned that extra measures would be needed to recoup €500 million in tax receipts that would be lost in conceding certain PSD demands.

The opposition has pressed for a budget that makes a reduction in state spending the priority rather than tax hikes.

Under the compromise deal the Socialists have kept a two-point rise in value-added tax (sales tax) to 23 per cent but will have to suspend major infrastructure projects.

A lower VAT on food will also stay as it is, while tax relief on health, education and housing expenditure will be curbed only for the highest earners.

Catroga said that “the budget is still a bad one” but agreed that the deal was “very important for the country’s image in the financial markets on which we depend.”

Portugal’s economy has been one of those worst hit in Europe by the downturn in recent years.

Under pressure from Europe and financial markets to curb its big public deficit and debt, the government of Prime Minister Jose Socrates presented an unprecedented austerity budget in October.

It aimed to reduce public sector salaries and welfare payments while raising taxes, but was strongly resisted by the PSD despite calls from businessmen and politicians for consensus.

The two sides broke off talks last Wednesday, sparking an immediate response from the markets, but resumed on Friday amid warnings from President Anibal Cavaco Silva.

“The current financial situation of the country is very serious and cannot cope with attitudes that will lead to the start of a political crisis,” he said. Socrates said on several occasions that he would resign if the budget failed to get parliamentary approval.

This would provoke an unprecedented political crisis as, under the terms of the constitution, the government cannot call elections until spring next year.

The prime minister has been working without a parliamentary majority since September’s legislative election, which meant the PSD needed to be convinced to abstain in the vote.

Eurozone states and the European Central Bank have urged Portugal to launch ambitious structural reforms to boost economic growth, and the country has been facing renewed pressure from investors on the bonds market.

But unions have responded to the austerity drive by calling a general strike for November 24.