The Portuguese Prime Minister Pedro Passos Coelho, in his television address yesterday, has announced to reduce spending on health, education and social security to keep the country’s €78bn bailout programme on track.
Ruling out any further hike in tax, the premier said that the budgets of government companies would be reduced.
Passos Coelho remarks came after the constitutional court rejected austerity measures considered essential to meeting mandatory deficit targets.
The premier said the court’s rejection of planned austerity measures posed a serious risk to the country’s ability to comply with the adjustment programme and its effort to regain access to international bond markets by a September deadline.
“I have ordered ministries to cut expenditure to compensate for the effects of the court decision,” Passos Coelho said.
The premier’s decision to cut spending on the welfare state is likely to intensify opposition pressure on the government to resign, potentially opening the way to an early general election, reported the Financial Times.
The European Commission, in a statement, said: “Any departure from the programme’s objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment.”
Ricardo Santos, an analyst with BNP Paribas, told FT: “Any negotiations on making Portugal’s adjustment programme more flexible will be extremely tough. The mood in Europe has changed and it will not be easy to gain more concessions.”
With these cuts, as economists estimate, the country will lose about €1.3bn in expected revenue and savings, more than 20 per cent of the total planned from austerity measures in 2013. The loss would increase this year’s budget deficit to about 6.4 per cent of national output, compared with the agreed target of 5.5 per cent.
“It’s hard to see how they could find measures worth 0.8 per cent of GDP without distorting growth even further,” Antonio Garcia Pascual, chief eurozone economist with Barclays, told FT.
Aníbal Cavaco Silva, president of Portugal, said the government maintained the necessary support to “fulfill its democratic mandate”.
The EU finance ministers will meet in Dublin on 12 and 13 April to discuss the deteriorating economic state of Portugal.