Portugal Court Strikes Down Cuts for State Workers, Pensioners

Portugal’s Constitutional Court blocked some of the government’s planned cuts in payments to state workers and pensioners for a second time.

The ruling by Portugal’s highest court that the measures are unconstitutional means the government may need to find alternative savings to comply with the country’s 78 billion-euro ($101 billion) aid plan from the European Union and the International Monetary Fund.

The court last year stopped the government from withholding the equivalent of two monthly salary payments to state workers this year and in 2014. In response, the government withheld only one of the two payments it had planned to cut this year, and in October it announced additional measures including 3.7 billion euros of tax increases to meet the 2013 deficit target.

The plan to withhold the payments “included a violation of the principle of equality and the principle of fair distribution of the public burden,” Constitutional Court President Joaquim Sousa Ribeiro told reporters last night in Lisbon.

The court also deemed unconstitutional cuts to unemployment and illness subsidies. It upheld a tax of 3.5 percent to 10 percent on pension income exceeding 1,350 euros a month, as well as other tax increases. In all, the judges approved five of the nine measures they were asked to review by the country’s president, Anibal Cavaco Silva, and various political parties.

Possible ‘Trouble’

The head of the IMF’s mission to Portugal, Abebe Aemro Selassie, said in a Jan. 18 conference call he didn’t think the court’s review for this year’s budget could bring the whole program “off course.” The court was asked to review a “relatively small part” of the budget’s measures, he said.

Even so, larger adjustments to the budget could “cause trouble” with the so-called troika of the IMF, the EU and the European Central Bank, Christian Schulz, an economist at Berenberg Bank, said in a note to clients before the decision was announced. That might “undermine the hard-earned trust of financial markets in the government,” he wrote.

Portuguese Prime Minister Pedro Passos Coelho called a special Cabinet meeting for 3 p.m. today, an official at his office said before the court’s announcement.

The yield on Portugal’s 10-year bond slipped 4 basis points to 6.359 percent yesterday in London. Portugal’s two-year note yield rose 2 basis points to 2.968 percent.

Rising Unemployment

Passos Coelho is battling rising joblessness and lower demand from European trading partners as he raises taxes to meet the terms of the bailout. The troika gave its blessing March 15 to less ambitious targets for the country’s budget deficit as the economy slumped.

Portugal’s government now forecasts the economy will shrink 2.3 percent this year, twice as much as previously estimated, before growing 0.6 percent next year. It says the jobless rate will climb to 18.2 percent in 2013 and 18.5 percent in 2014 from 16.9 percent in last year’s fourth quarter.

The government targets a deficit equivalent to 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the European Union’s 3 percent limit in 2015, when it aims for a 2.5 percent gap, Finance Minister Vitor Gaspar said March 15.

Last year the court allowed salary cuts with projected savings of 2 billion euros, more than 1 percent of the country’s GDP. Sousa Ribeiro said last night the 2012 decision was taken later in the year, and that the “identical reasons were not felt with the intensity of those that last year led to the decision that was taken.”

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