Portugal tightens finances to avoid Greek crisis

PORTUGAL announced new austerity measures yesterday, cutting welfare benefits and government hiring as well as selling assets and raising taxes.

The announcement, to avoid a debt crisis like that engulfing Greece, came two days ahead of a bond issue where Portugal will try to raise €750 million.

Greece was able to tap bond markets last week after also announcing more deep cutbacks.

The countries’ troubles have fuelled a Europe-wide debt crisis that has undermined the euro and led the European Union to consider setting up a new European monetary fund to help support the euro.

Portugal aims to raise €6 billion from privatisations, trim welfare benefits and slash state expenditure in an effort to reduce the country’s heavy debt load, Finance Minister Fernando Teixeira dos Santos said.

The measures are part of a four-year austerity plan devised to convince financial markets and other euro countries that Portugal has its finances in order.

The plan “rests, essentially, on a reduction in public spending,” Mr Teixeira dos Santos said.

Portugal’s budget deficit is projected to have hit a record 9.3% of gross domestic product last year, prompting fears it could face similar problems to Greece, where a budget crisis has brought violent demonstrations, rattled the EU and undermined the 16-country euro currency.

Portugal’s public debt is expected to climb to 85.4% of GDP this year, up from 76.6% in 2009, and Mr Teixeira dos Santos said he predicts it will peak at 90.1% of GDP in 2012 before falling back.

He expected the privatisations over the four years to bring revenue equivalent to 3.6% of GDP.

The centre-left Socialist government also wants to keep annual pay hikes for state employees below the rate of inflation up to 2013, cut welfare benefits and scrap some tax breaks.

The minister said he would create a tax rate of 45% for people earning more than €150,000 a year and raise the ceiling on tax break entitlements.

Planned spending on military equipment for the next four years will be cut by 40%, and a plan to build a high-speed rail link to Spain will be postponed for at least two years.

The minority government was consulting opposition parties over the plan, but has not said whether the measures will be put to a vote in parliament.

The government has included some of the measures in its 2010 state budget, which is expected to be approved on Friday.