Portugal court rejects austerity measures

Portugal’s prime minister has promised further cuts in government spending after the country’s constitutional court rejected austerity measures considered essential to meeting mandatory deficit targets.

"We will have to introduce important cuts in expenditure on social security, health and education," Pedro Passos Coelho said in a televised address last night. "We need to do everything possible to avoid a second bailout. We will not increase taxes. I have ordered ministries to cut expenditure to compensate for the effects of the court decision."

The court ruling threatens Lisbon’s ability to comply with the adjustment programme and regain access to international bond markets by a September deadline. It could also trigger a political crisis leading to the fall of the prime minister’s centre-right coalition.

A government official said one response to the court’s decision could be a “large government stimulus package”, possibly to be announced in the next few days, aimed at lifting growth in an economy mired in its third consecutive year of recession.

Economists said international lenders – which have already given Lisbon two extra years to consolidate its public finances – would be reluctant to make any significant concessions in view of the tougher line on fiscal issues taken by Germany and the Netherlands over the Cyprus bailout.

The extent of the austerity measures rejected by the court surprised economists and appears to have been much greater than expected by the government, which said the ruling had created “serious difficulties” for the bailout programme.

Economists calculate that the four measures ruled unconstitutional – including planned cuts in public sector pay and state pensions – mean Lisbon will lose about €1.3 billion in expected revenue and savings, more than 20 per cent of the total planned from austerity measures this year.

The loss would increase this year’s budget deficit to about 6.4 per cent of national output, 0.8 percentage points higher than the agreed target of 5.5 per cent – an objective that has already between twice relaxed by the troika.

However, economists said it would also be difficult to table new fiscal measures, such as further tax increases, to make up the shortfall after the government introduced what it described as “enormous” tax rises in January.

The court ruling has intensified opposition calls for Mr Passos Coelho to resign.

António José Seguro, leader of the opposition Socialists, called for an early general election. “This government no longer has any authority or credibility. It has reached the end,” said Mr Seguro, whose party has an eight-point lead in the polls.

A southern European diplomat said that Lisbon risked losing financial support from the EU. “If they can’t meet the bailout terms and they veer away from the austerity measures they promised to undertake, it will become difficult for EU finance ministers to give them more money.” – (c) 2013 The Financial Times Limited