UPDATE 2-Portugal parliament approves austerity budget

Tue Nov 27, 2012 11:01am EST

* Opposition Socialists reject budget

* Focus now turns to constitutional court

LISBON Nov 27 (Reuters) - Portugal's parliament gave final approval on Tuesday to a 2013 budget which promises a third year of recession and the biggest tax hikes in modern history to ensure international bailout terms are met.

Lawmakers from the ruling Social Democrats and their junior coalition partners from the rightist CDS voted for the bill, ensuring passage thanks to their parliamentary majority, but all other parties voted against.

"The government is aware of the difficulties we have to overcome," Finance Minister Vitor Gaspar told parliament before the vote.

The government argues austerity is the only way to ride out Portugal's debt crisis, which has pushed the economy into its worst recession since the 1970s and increased the jobless rate to record levels, at 15.8 percent. It is seen rising further in 2013 to 16.4 percent.

A few thousand protesters gathered outside parliament to oppose the bill, which far-left opposition lawmakers have promised to challenge in the country's constitutional court.

The heavy reliance on tax hikes included in the budget is in itself the result of a decision by the constitutional court early this year which shot down an attempt by the government to cut holiday payments for civil servants.

The main opposition Socialists voted against the budget, demonstrating the collapse of the consensus that existed in Portugal surrounding its 78 billion euro ($101 billion) bailout. It was a Socialist government that first sought the bailout for Portugal in 2011 and last year it abstained in the budget vote.

"The country needs a budget to get out of the crisis. Instead it will get a budget that deepens the crisis," Socialist leader Antonio Jose Seguro told parliament. "These tax increases represent a fiscal nuclear bomb for the Portuguese."

Lawmakers from the Communist Party and the small Left Bloc have promised to challenge the budget in the constitutional court. The head of the country's judges' union has also said the budget may be illegal.

But before it can be challenged, President Anibal Cavaco Silva has to sign off on the budget and turn it into law, something which could take several weeks. The president himself could also send the budget to the court to check its legality.

If the court were to overturn the budget, it would represent a big setback for the government in meeting the bailout's terms.

The budget aims to cut the budget deficit to 4.5 percent of GDP next year from 5 percent this year. It envisages a 1 percent decline in gross domestic product, which many economists think is far too optimistic, after this year's slump of 3 percent.

The OECD forecast on Tuesday that the economy will contract 1.8 percent next year and warned that the country risks falling into a downward spiral.

Tax revenues fell short this year, undermined by the worst recession since the 1970s. Still, the government is hoping the sharp tax hikes in 2013 will guarantee sufficient income to meet budget goals.

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