Portugal Plans to Reduce Number of State Workers, Review Wages

Portugal proposed spending cuts that include reducing the number of state workers as it tries to meet deficit targets without relying on tax increases.

“The exact moment has arrived to advance to a second stage of reforming the state and social security system,” Prime Minister Pedro Passos Coelho said in Lisbon today. Coelho listed possible measures that may generate savings of about 4.8 billion euros ($6.3 billion) through 2015 and said he wants to discuss alternatives with opposition parties.

Coelho plans to reduce the number of public sector workers by seeking agreements to end employment contracts. Together with a plan to “requalify” state workers through training, the government estimates about 30,000 employees may be affected. Ministries will have to reduce spending on purchases of goods and services by at least 10 percent next year and the government will consider applying a “sustainability contribution” on pensions, he said.

The government also plans to review salaries and other compensation paid to state workers, and their working week will increase to 40 hours starting this year, in line with the private sector.

Portugal is proposing 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. The measures blocked by the court represented 1.3 billion euros of savings in 2013, or about 0.8 percent of the country’s gross domestic product.

Loan Extension

The alternative measures together with proposals for other “permanent” savings 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.

The government on March 15 announced less ambitious targets for narrowing its budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. The government targets a deficit equivalent to 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.

About 80 percent of the 5.3 billion-euro deficit-trimming effort in the 2013 budget comes from revenue gains, including 3.7 billion euros of tax increases.

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