EU says OK with Portugal alternatives to scrapped tax hike

LISBON (Reuters) - Portugal has presented alternative austerity measures to the European Commission, which sees them as good enough to replace a social security tax hike that had to be dropped after mass protests, Commission chief Jose Manuel Barroso said on Monday.

The measures, which the government has yet to announce, are needed for Portugal to meet its fiscal goals under a 78 billion euro ($100 billion) EU/IMF bailout.

The government has said it would probably compensate for the ditched measure mostly via income, capital and assets taxes, but did not provide details and would not say when it was likely to outline specific measures.

The government must present its 2013 draft budget by October 15.

"We at the commission have already given our approval to the alternative measures presented by the government," Barroso said in remarks broadcast by Portuguese television.

He said he expected euro zone governments to approve the disbursement of the next bailout tranche for Portugal at their October 8 meeting and hoped "it will not be stalled by changes to one of the measures presented by the government."

On September 7, the government said it planned to hike the social security tax for workers to 18 percent from 11 percent in 2013, while also lowering the levy for companies to 18 percent from 23.75 percent in order to promote jobs creation.

But it had to drop the proposal after mass protests in the streets and criticism from entrepreneurs, politicians and unions. Protests continued even after the government scrapped the plan, showing more taxes will be hard to swallow.

Earlier on Monday, Moody's ratings agency warned that the government's surrender was its "most serious setback so far" and said it was "credit negative because it could encourage opposition to the reform program... and create the expectation that protests can be successful again."

It added that frequent demonstrations would be bad for market confidence about Portugal, which had been improving thanks to the government's generally strong track record of compliance with the lenders' conditions. Moody's rates Portugal at "junk" Ba3 level.

Even so, Portugal's benchmark 10-year bond yield was little changed on Monday at around 9 percent. It has fallen sharply from January's record highs of over 17 percent and is now trading at pre-bailout levels despite some recent gains.

(Reporting By Andrei Khalip; Editing by Ruth Pitchford)