Portugal PM vows to meet bailout goals after confidence vote win

Protesters in parliamentary gallery put on red clown noses to show disdain for vote

Portugal’s prime minister ruled out any backtracking on its bailout terms tonight as his revamped government easily won a confidence vote intended to show it has repaired an internal rift over austerity.

Speaking to parliament before the symbolic vote, Pedro Passos Coelho also said the economy was giving signs of nearing a turnaround after a long, deep recession, showing the country was taking the right path out of its debt crisis.

All members of parliament from the two parties of the centre-right ruling coalition, who have a solid majority in the house, voted in support of the motion of confidence.

The opposition Socialists and two other left-wing parties voted against, their leaders dismissing the premier’s optimism about the economy and saying austerity only leads to disaster.

A dozen protesters in parliament's gallery put on red clown noses to show their disdain for the vote, which Socialist leader Antonio Jose Seguro called a "make-believe act".

Some investors fear the re-jigged government may be less amenable to further budget tightening because the party that disagreed with some austerity measures has won more clout.

The premier said: “There are 10 months left of the assistance programme, full of challenges and tough choices. But it certainly isn’t now that we will falter ... We will manage to make structural spending cuts under the terms already announced.”

Portugal has promised to cut spending by €4.7 billion by the end of 2014, the year in which Lisbon hopes to return to normal market financing. Many investors believe it will still need some form of further support, not least due to its steep recession.

But Mr Passos Coelho said: “There are growing positive signals in the economy that we may be very close to the turnaround that all the Portuguese want.”

The economy is still in its worst recession since the 1970s and the government expects it to shrink 2.3 per cent this year before returning to slim growth in 2014. It estimates that the economy started recovering in the second quarter.

While the government has also promised to boost growth by cutting corporate taxes, the premier said any fiscal reform must be gradual. “We don’t have budgetary margin ... to accommodate a corporate tax reform in just one year,” he said.

The ruling centre-right coalition narrowly avoided a breakup this month by striking a deal that made the leader of the junior coalition partner, Paulo Portas, deputy prime minister, averting a renewed spiral in the euro zone's debt crisis.

Portas said “the country has a reduced room for manoeuvre” as it heads for the bailout exit and would have to restrain spending to enable any future tax cuts.

After spiking to over 8 per cent due to the political turmoil, Portugal’s benchmark 10-year bond yields have rolled back and were nearing the end of July at 6.4 per cent, around the level where they started.

Under its bailout goals, Lisbon must cut its budget deficit to 5.5 per cent of gross domestic product this year from last year’s 6.4 per cent, and then reduce it to 4 per cent in 2014.