Debt-heavy Portugal steps up austerity program

Associated Press
Workers gather at the gate of Viana do Castelo shipyards prior to a parade to the city center to protest against the lay off of some 380 people in coming months, more than half the 720 total employees of the yards, in Viana do Castelo, Portugal, Wednesday June 29, 2011. Portugal's National Statistics Institute said Wednesday the deficit fell 0.7 percentage points from the previous quarter thanks to austerity measures designed to cut debt but remains high and far off target despite austerity program. (AP Photo/Paulo Duarte)
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LISBON, Portugal (AP) — Portugal's prime minister announced a new batch of austerity measures Thursday, including an additional tax on private income this year, as the country struggles to break free of its ruinous debt burden.

Portugal's high debt load and frail economy have alarmed investors who have demanded unsustainably high returns for loans, forcing the country to take a euro78 billion ($113 billion) international bailout this year.

The budget deficit stood at 7.7 percent of gross domestic product in the first quarter — way off the target of 5.9 percent for 2011 — despite a year of belt-tightening that included unpopular tax hikes and welfare cuts.

"The state of public finances obliges me to ask for more sacrifices," Passos Coelho said in a speech to Parliament.

Acknowledging that Portugal is in the grip of "uncertainty and anxiety," Passo Coelho said debt-reduction measures "will take precedence" over other concerns.

"We are going through very hard times ... (and) further difficulties lie ahead," he said.

Portugal is locked into a program of austerity and broad economic reforms agreed with its European partners and the International Monetary Fund in return for the financial rescue package which is to run through 2013. The reforms are intended to improve economic competitiveness after a decade of scrawny growth when the country racked up huge debt. The deficit stood at 10.1 percent of GDP in 2009 and 9.1 percent in 2010.

The country will face a major test in the autumn, when debt inspectors will travel to Lisbon to make sure the government is on track with its austerity program.

Portugal accounts for less than 2 percent of the 17-nation eurozone's gross domestic product. But with the bloc's leaders and investors fretting over Greece's fate, any indication Lisbon is coming up short in its debt fight could stoke the continent's financial crisis that has already lasted more than a year.

Portugal's economy is forecast to contract 4 percent this year and next, forcing companies out of business, while unemployment stands at a record 12.4 percent and is predicted to rise further. Those developments are denying the government tax revenue to settle its debts.

"Never in the democratic history of our country have we faced a challenge like this," Passos Coelho said.

Unions have vowed to oppose plans to impose further sacrifices on workers and say they are considering strikes and street protests. Portugal has not so far seen anything like the violence witnessed in Athens.

Passos Coelho said details of the supplemental tax on income, which will be implemented only this year and will exclude those earning the national minimum wage, will be announced within two weeks. He said he expected the levy, which would help "spare the country from disaster," to raise around euro800 million.

He also said his center-right government would begin privatizing state companies in the third quarter. They include the sale of the state's 20 percent stake in energy company EdP and its 49 percent stake in electricity distributor REN.

The education system, blamed for a lack of skilled workers, and the notoriously slow justice system will also undergo deep changes, Passos Coelho said. He provided few details but said special teams of judges would be placed in charge of resolving cases that have dragged on for years.

The government's plans are virtually guaranteed of approval in Parliament where the coalition government has an overall majority. The Social Democratic Party and the smaller, conservative Popular Party joined forces after an election earlier this month.

The main opposition Socialist Party has also endorsed the austerity program.

Parliament is likely to keep working through the summer, instead of going into recess, to make legislative changes required for the measures to be enacted swiftly.

Passos Coelho set the tone for his four-year term last week, a few days after taking office, when he flew economy class to a European Union summit in Brussels.

The government debt agency announced Thursday it aims to raise up to euro6.5 billion in short-term Treasury bill auctions over the next three months.

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