Portugal joins Eurozone’s push into era of austerity

PORTUGUESE leaders agreed tough new austerity measures yesterday, joining a coordinated Eurozone push that has so far calmed the markets’ worst fears of a Greek-style debt crisis spreading.

Portuguese Prime Minister Jose Socrates and opposition leader Pedro Passos Coelho drew up steps to reduce the budget deficit by about €2bn (£1.4bn), half from spending cuts and half from increases in sales, income and profits taxes, a source close to the talks said. The cabinet approved the cuts yesterday afternoon.

At the weekend, Portugal’s government had said it would cut its 2010 deficit by one percentage point to seven per cent of GDP.

Like the harsh steps announced by Spain on Wednesday, the measures are the painful price indebted Eurozone states must pay for protection by the €750bn safety net announced by the EU and IMF at the weekend.

“The crisis of the future of the euro is not just any crisis, it is the strongest test Europe has faced since 1990, if not in the 35 years before,” said chancellor Angela Merkel of Germany, whose voters resent shouldering much of the cost of the potential bailouts. “This test is existential -- it must be passed.”

World stocks have gained around six per cent since the rescue package was announced. The euro was stronger yesterday but still close to recent lows against the dollar.

The pan-European FTSEurofirst 300 has climbed more than eight per cent this week, regaining losses suffered as investors’ confidence in the Eurozone withered last week. But safe-haven gold continued to trade near record highs.

“It’s going to be a long, challenging and bumpy road in order to stabilise the finances of many countries within the Eurozone, but it’s absolutely necessary that they take those first steps,” said Henk Potts, equity strategist at Barclays Wealth.

State-run Lusa news agency cited an unidentified government source as saying one of the proposals includes a five per cent wage cut for state companies’ managers and politicians.

• Five per cent pay cuts for senior public sector staff and politicians, increases of VAT, income tax and profits tax.

• Government aims to cut the deficit to 7.3 per cent of GDP in 2010 and 4.6 per cent in 2011. In 2009 it hit 9.4 per cent.

• All spending, bar pensions and interest payments will be frozen between 2011-2013 and state operating costs cut by 10 per cent over the same period.

• Plans to narrow budget shortfall from 13.6 per cent of GDP in 2009 to 8.1 per cent this year, 7.6 per cent in 2011 and 2.6 per cent in 2014.

• Public sector pay frozen until 2014 and allowances cut by an additional eight per cent on top of 12 per cent already announced in March.

• Main VAT rate is increased to 23 per cent. It had been raised to 21 per cent from 19 per cent in March.

• Excise taxes on fuel, cigarettes and alcohol increased by a further 10 per cent and one-off tax on highly profitable companies, new gambling and gaming licences and property taxes.

• Pensions frozen in 2010, 2011 and 2012.

• Projected deficit of 11.6 per cent of GDP prompted tax rises, spending cuts of €4bn, including a cut in public sector pay. Fresh savings worth €3bn planned for each of 2011 and 2012.

• Spending cuts totalling €15bn in 2010 and 2011. Civil service salaries cut by five per cent in 2010 and frozen in 2011, more than €6bn of public spending cut.

• Revised deficit targets of 9.3 per cent of GDP in 2010 and 6 per cent in 2011.