The government has had to scramble to find new areas to cut after the court concluded that it was unfair to single out civil servants for reductions in benefits under measures imposed to meet the terms of an international bailout programme.
The decision deepens the divide between a protected class of civil servants and other workers, whose lives have become far more precarious during the worst recession since the 1970s.
Although public sector pay has fallen faster than in the private sector during Portugal’s economic crisis, state workers still earn on average double the wages of the private sector.
Meanwhile, all Portuguese have been hit since January by the largest tax hikes in living memory, and many economists believe more austerity measures will prolong and deepen the slump.
“This decision left me very worried. Civil servants benefit, but not the private sector. It’s in the public sector where the government has to cut,” said Sonia Castro, 39, an unemployed secretary.
Jose Manuel, 56-year-old taxi driver in Lisbon, said the only outcome he sees is that “our lives will only get worse”.
The European Commission, and particularly Germany, have urged Lisbon to waste no time in coming up with new savings to keep its bailout programme on track.
Prime minister Pedro Passos Coelho reaffirmed Lisbon’s commitments to its fiscal tightening goals under an EU/IMF bailout, promising to compensate for the court decision with other spending cuts.
Coelho has managed to avert the court decision bringing down his government. He survived a no-confidence vote last week and won President Anibal Cavaco Silva’s support to stay in office.
Portuguese benchmark bond yields jumped almost 20 basis points in early trading yesterday following last Friday’s constitutional court ruling — a sign of investor concern — but then rolled back to Friday’s settlement level of 6.42%.
“The key thing here now is that there is no political crisis, that the government stays on and that it is not planning to renegotiate bailout targets. It could have turned out much worse,” said Filipe Garcia, head of Informacao de Mercados Financeiros, an economic consultancy in Porto.
Coelho’s pledge to meet targets with more spending cuts means Lisbon will now have to find another 0.8% of gross domestic product to satisfy the troika of lenders — the EU, ECB and International Monetary Fund — which demand austerity in return for bailout loans.