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Portugal’s government has said it has to look at further ways to cut spending to meet targets imposed by the EU and the IMF as part of its bailout package.
The prime minister Pedro Passos Coelho insisted that taxes will not go up.
He has been placed in a massively difficult position by Portugal’s Constitutional Court rejecting key austerity measures in this year’s budget.
The court said the government could not reduce holiday bonuses and other perks for public sector workers as it was “unfair” to single them out.
The decision deepens the divide between a protected class of civil servants and other workers, whose lives have become far more precarious during the worst recession since the 1970s.
Although public sector pay has fallen faster than in the private sector during Portugal’s economic crisis, state workers still earn on average double the wages of the private sector.
The prime minister said: “No one can deny that the decision from the Constitutional Court has serious consequences for the country. The decision was made public less than a week before Portugal was due to complete – with our international partners – decisive negotiations for an agreement, with our creditors, to reduce the payment of our debt and to improve the conditions for us to respect our obligations.”
Austerity has pushed Portugal further into recession. The central bank predicts the economy will contract 2.3 percent this year,
The budget deficit is supposed to be cut to 5.5 percent of GDP from 6.4 percent in 2012.
Now, with time running out for Lisbon to satisfy its lenders and get the latest installment of bailout money, the only way to do that is to cut spending in areas like health care, education and pensions which have already suffered huge reductions.
Strong public reaction can be predicted with more street protests inevitable.
Since January the Portuguese people have been hit by the largest tax hikes in living memory, and many economists believe additional austerity measures will prolong and deepen the slump, by preventing economic growth.
More austerity could “bring improvements in headline numbers at a great unnecessary cost,” said Nicholas Spiro, Managing Director at Spiro Sovereign Strategy in London.
“What undermines it the most is that there is no growth and no real prospects of growth soon,” Spiro added.
Political scientist Viriato Soromenho Marques said the spending cuts were unlikely to cause new constitutional problems for now. “But most importantly, they will cause problems with people’s living standards, which are already very low.”