Portugal Plans Spending Cuts After Ruling on Salaries

Portugal will carry out more spending cuts this year and ruled out further tax increases after the Constitutional Court blocked a plan to suspend a monthly salary payment to state workers and pensioners.

“I will give instructions to the ministries to proceed with the necessary reductions in operating expenses to compensate for what was blocked by the Constitutional Court’s ruling,” Prime Minister Pedro Passos Coelho said in Lisbon yesterday. “The government does not accept more tax increases, which seems to be the solution that the Constitutional Court favors in its interpretation.”

The court blocked measures that represent 1.3 billion euros ($1.7 billion) in savings, an official at the Finance Ministry said today. That’s equivalent to about 0.8 percent of Portugal’s gross domestic product of 164 billion euros. The government doesn’t plan to use treasury bills to pay state workers a monthly salary, the official said.

Passos Coelho is battling rising joblessness and lower demand from European trading partners as he cuts spending and raises taxes to meet the terms of the country’s 78 billion-euro aid plan from the European Union and the International Monetary Fund. The government on March 15 announced wider deficit targets as it forecast the economy will shrink twice as much as previously estimated this year.

‘Fragile’ Position

The Constitutional Court’s ruling delays completion of the seventh review of the aid plan, and the corresponding disbursement of 2 billion euros won’t be paid until that review is concluded, Passos Coelho said. The prime minister said he’ll have to provide explanations to the troika of officials representing the European Commission, European Central Bank and IMF.

The troika will visit Portugal following the court’s ruling, the Finance Ministry official said. No date has been set yet for that visit.

The court’s decision also puts Portugal in a “more fragile” position in talks with its international partners about extending the maturities of its aid loans, Passos Coelho said. “The government is committed to all the goals of the aid program,” he said. “We will have to do everything to avoid a second rescue.”

Loan Extension

The Brussels-based commission said “determined implementation” of the austerity program “is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal,” according to a statement late yesterday. “Any departure from the program’s objectives, or their re-negotiation, would in fact neutralize the efforts already made and achieved by the Portuguese citizens.”

“I can reaffirm that we support the extension of the maturities of the loans given to Portugal, but it’s a decision that goes beyond us,” European Commission President Jose Barroso said in Brussels today. “The determination of Portugal in implementing the program is crucial to obtain that extension of the maturities.”

Passos Coelho’s coalition government is backed by the Social Democrats and the conservative CDS party, which together have a majority of seats in parliament. The Socialist Party is the biggest opposition group. A Socialist minority government requested the EU-led bailout in April 2011 before losing elections held in June of that year.

‘Fiscal Blow’

“While social pressure and opposition by the Socialists are likely to intensify, we do not see at the moment any strong alternatives to the current conservative government coalition,” Antonio Garcia Pascual, chief economist for southern Europe at Barclays Plc, said in a research note today. “Therefore, we consider early elections unlikely. However, the recent fiscal blow is likely to delay Portugal regaining full market access in 2013.”

Portugal’s benchmark PSI-20 stock index fell 1.4 percent to the lowest in four months. Portugal’s 10-year bond yield rose 6 basis points to 6.42 percent. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds has narrowed to 5.18 percentage points from a euro-era record of 16 percentage points in January 2012.

“Portugal has made great progress in the past years, Portugal is on its way to regain access to financial markets, but Portugal must, and the government has said so, take new measures after the court ruling,” German Finance Minister Wolfgang Schaeuble said on Bayerischer Rundfunk radio. These measures “will then be examined by the Commission and the council of finance ministers.”

‘Wage Advantage’

Constitutional Court President Joaquim Sousa Ribeiro on April 5 said the government’s plan to withhold a monthly salary payment of state workers violated “the principle of equality.”

State workers’ salaries remain higher than private sector wages, the European Commission said in an October 2012 report about Portugal’s adjustment program. “While program implementation has acted to change the balance between public and private sector workers, a significant wage advantage in the public sector persists,” the commission said.

“The ruling that elements of the country’s fiscal consolidation plans are unconstitutional shows the institutional limits on the Portuguese government’s room for manoeuvre as it seeks to keep its EU and IMF program on track,” Fitch Ratings said in a statement.

The court last year also stopped the government from withholding the equivalent of two monthly salary payments to state workers this year and in 2014. In response, the government wanted to withhold only one of the two monthly payments it had proposed to cut in 2013. The same court allowed the government to suspend the two monthly payments in 2012, with projected savings of 2 billion euros.

Tax Increases

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. The deficit last year widened to 6.4 percent from 4.4 percent in 2011. The government forecasts debt will peak at 123.7 percent of GDP in 2014.

After last year’s court ruling, Finance Minister Vitor Gaspar in October announced an “enormous” increase in taxes on wages and other income to meet deficit targets in 2013. 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.

The government has also said it plans to cut spending by about 4 billion euros in the three years through 2015. The prime minister said yesterday that reductions will come from spending on social security, health, education and state-owned companies this year.

Portugal will “accelerate” the restructuring of the state, Passos Coelho said.

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