Portugal's minority government sent a draft 2011 budget to parliament late Friday that includes tax hikes and spending cuts, with Prime Minister Jose Socrates (pictured) warning that the country needed to prove it was serious about tackling debt.
REUTERS - Portugal's minority government sent its 2011 austerity budget to parliament late on Friday, warning of political paralysis if lawmakers rejected the most important finance bill in a quarter of a century.
Prime Minister Jose Socrates said the debt-laden country needed to show the financial markets it had the means to narrow a wide budget gap, though some economists fear the tough measures could tip Portugal back into recession.
Portugal has moved into the front line of the euro zone's battle with debt and banking weakness as investors have become increasingly concerned the centre-right opposition Social Democrats (PSD) may refuse to support the budget, meaning it would fail to clear parliament.
"What's really at stake are not just economic issues," Socrates told lawmakers on Friday, before the budget was officially dispatched to parliament.
"There are also issues of governability. And the economic difficulty we are going through is coupled with the threat of a political crisis."
Were the government to fall over the budget, the country's electoral rules would make it impossible to hold snap elections, plunging the country into political uncertainty until at least May of next year.
Finance Minister Fernando Teixeira dos Santos delivered the draft budget to parliament late Friday amid doubts that the minority Socialist government can convince the opposition to support the austerity measures.
"Every budget is important but this budget is without a doubt the most important in the last 25 years," he said, adding that it was "a budget that requires courage from all of us."
Teixeira dos Santos was due to hold a press conference at 0900 GMT on Saturday to publicly unveil details of the document.
Lisbon is under pressure from Brussels to ensure it meets a goal of slashing its fiscal deficit to 4.6 percent of GDP next year from 7.3 percent in 2010.
The government has already announced a series of measures that will be included in the budget, notably a hike in value-added tax to 23 percent from 21 percent and a 5 percent cut in civil servant wages.
Concerns over the fate of the budget pushed Portugal's risk premiums to euro lifetime highs at the end of September, although 10-year its government bond yields versus German Bunds tumbled on Friday as investors scrambled for higher returns.
Joao Lampreia, an analyst at Banco BIG, said the falling spread suggested the market was turning more positive that the budget would be approved.
"It (the spread) is a sharp decline, showing that the perception of risk that the budget will not pass is diminishing," said Lampreia.
Governments across Europe have been drawing up austerity measures to cut their budget deficits even as they seek to pull their economies out of the worst financial crisis in decades.
Economists say Portugal's plans for 2011 could tip the country back into recession next year after growth this year which is expected to be around 1 percent.
Decision next week
Portuguese opposition leader Pedro Passos Coelho has promised to announce his party's position on the budget after a meeting on Tuesday.
His PSD party has been angered by the government's warnings of a crisis as it feels blackmailed into voting for a budget including tax hikes, which it opposes. Its key demand is that the government concentrate instead on cutting public spending.
PSD bench leader Miguel Macedo said his party would not give the government a "blank cheque" on the budget.
An opinion poll published on Friday showed neither the PSD nor the Socialists have pulled ahead during the budget row, with both parties' support ratings at 35.3 percent.
The 2011 fiscal programme will also include cuts in tax benefits for housing loans, schooling and health expenses. The government has also said it will introduce an extra tax on the banking system.
A presentation by treasury secretary Carlos Pina, made on Friday at a conference in London, showed the government expects to raise 1.87 billion euros, or 1.09 percent of GDP, from privatisations next year.
Portugal's debt load is seen rising next year to 85.9 percent of GDP from 83.5 percent in 2010, but the government hopes it will decline from 2012.
Unemployment is at its highest in two decades at above 10 percent. Unions and workers are furious at the austerity the budget will bring after years of dwindling incomes under the Socialists, and unions plan a general strike on Nov. 24.
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