IMF outlines spending cuts for Portugal

LISBON Wed Jan 9, 2013 12:47pm EST

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LISBON (Reuters) - The IMF has identified 4 billion euros of public spending cuts in Portugal, the government said on Wednesday, starting a debate on what could be deeply unpopular reductions of the welfare state that it says is unsustainable.

The government launched an initiative in the autumn to cut 4 billion euros in spending through root-and-branch reform of the state and asked the International Monetary Fund to help identify where the cuts should fall.

The government released the report Wednesday afternoon, but only after it was published earlier by daily Journal de Negocios, sparking heated debate on the airwaves about what promises to be further erosion of the welfare state.

The report listed large-scale layoffs of public sector workers and reductions in pensions, but also suggested education, health and unemployment benefits could be cut to save money.

"What is obvious, is that what we have today is not sustainable, we can do better with fewer resources," said Carlos Moedas, the government's secretary of state in charge of monitoring measures under a 78-billion-euro bailout.

"We have to construct a state that does not weigh so heavily on citizens and the taxes they have to pay."

Consideration of the cuts comes at a tough time for the Portuguese who face the largest tax hikes in living memory this year as the government seeks to boost revenues to ensure the budget goals of the bailout are met.

Portugal entered its deepest downturn since the 1970s last year and unemployment is at record highs, above 16 percent.

The spending cuts aim to prepare the country's public sector for the expiry of the bailout from the European Union and IMF. Under the rescue plan, Portugal is scheduled to return to financing itself in the bond market in the second half of this year.

With opposition to Portugal's bailout rising sharply in recent months, any of the proposed cuts would most likely be met with anger by the Portuguese, who fear their welfare state is already being eroded by austerity measures.

The country's largest union, the CGTP, issued a statement on Wednesday with the title "Reform of the State to promote social terrorism."

The government's 2013 budget has already been challenged in the country's Constitutional Court by the left-wing opposition and if deep reductions in state spending are adopted they could also face challenges.

While the cuts were not originally part of the country's bailout, which was signed in 2011, they will be evaluated by the country's lenders - the European Union and IMF - in the next overview of the economy in February.

Bailout minister Moedas said the IMF's report will be just one contribution to the debate on the reforms needed, which he hoped would be as far-reaching as possible.

Among the possible measures outlined by the IMF was a cut in civil servants of between 10 and 20 percent, which would save between 795 million and 2.7 billion euros.

The report also found that an across-the-board cut in pensions of 10 percent would save 2.3 billion euros, although it identified various alternatives, including only cutting future pensions which would save 600 million euros.

($1 = 0.7667 euros)

(Additional reporting by Daniel Alvarenga and Sergio Goncalves)

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