Portugal tightens finances to avoid Greek crisis

Portugal announced new austerity measures today to avoid a debt crisis like the one engulfing Greece, cutting welfare benefits and government hiring as well as selling assets and raising taxes.

The announcement came two days ahead of a bond issue in which Portugal will try to raise €830m.

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

The two 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 €6.6bn from privatisations, trimming welfare benefits and slashing other 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 eurozone 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 European Union 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 said he expected the privatisations over the next four years to bring revenue equivalent to 3.6% of Portugal’s gross domestic product.

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.

Mr Teixeira dos Santos said he would create a new tax rate of 45% for people earning more than €166,000 a year and raise the ceiling on entitlements for tax breaks, but otherwise he ruled out tax increases.

Planned spending on new military equipment projected 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, although it has not said whether the measures will be put to a vote in Parliament.

The government has included some of the the planned austerity measures, including a contested pay freeze for civil servants, in its 2010 state budget, which parliament is expected to approve on Friday. The budget was delayed by a general election last year.