Portugal Announces Planned Cuts After Court Clouds Rescue Effort

Portugal announced plans for more than 1 billion euros ($1.3 billion) in savings to keep emergency loans flowing after the country’s highest court struck down proposed salary cuts for public workers.

Spending in all programs will be reduced, Luis Morais Sarmento, the secretary of state for the budget, told reporters in Lisbon today. The government will also “redesign” a measure that affects payments from recipients of unemployment subsidies, he said. The cuts represent about 0.5 percent of gross domestic product and more detail on the measures will be provided in a budget amendment next month.

Portugal has to find alternative measures to meet budget deficit targets set in its 78 billion-euro aid program from the European Union and International Monetary Fund after the country’s Constitutional Court on April 5 blocked a plan to suspend the equivalent of a monthly salary payment to state workers and pensioners this year.

“As the government has opted not to address the financial problem created by the Constitutional Court’s decision with tax increases, there will necessarily have to be a reduction in spending,” Parliamentary Affairs Minister Luis Marques Guedes said.

The measures will allow Portugal to complete the seventh review of its bailout plan and secure an extension of rescue loans that was agreed upon in principle on April 12 by EU finance ministers meeting in Dublin. The extension of the maturities of Portugal’s aid loans will help the country issue 10-year bonds and regain access to bond markets, Finance Minister Vitor Gaspar said on April 12.

Troika Talks

The so-called troika of officials from the EU Commission, European Central Bank and IMF visited Lisbon from April 15 to today and discussed with the government “compensating policy measures” to meet deficit targets, the EU said in a statement today. “Discussions will continue with the aim of securing a timely completion of the seventh review,” it said.

The measures blocked by the court represent 1.3 billion euros of savings in 2013, or about 0.8 percent of the country’s gross domestic product of 164 billion euros. Portugal has set a target for the budget deficit of 5.5 percent of GDP in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. It forecasts debt will peak at 123.7 percent of GDP in 2014.

Highway Contracts

The government also plans to bring forward to this year “structural” measures that had been planned for 2014 and 2015 and aims to obtain savings of 300 million euros by negotiating existing public-private partnership highway contracts, Sarmento said.

“The government prefers a negotiated solution,” he said. It may consider resorting to taxes on those contracts if the savings target is not met through negotiation, according to Sarmento.

Before the court ruling, the government had planned to cut spending by about 4 billion euros in the three years through 2015. About 80 percent of the 5.3 billion-euro deficit-trimming effort in the 2013 budget comes from revenue gains, most of which being 3.7 billion euros of tax increases.

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