Portugal court rejects some government austerity measures

LISBON Fri Apr 5, 2013 7:12pm EDT

Judge Carlos Cadilha (R) reads a report next to Portugal's Constitutional Court President Joaquim Sousa Ribeiro in Lisbon April 5, 2013. REUTERS/Hugo Correia

Judge Carlos Cadilha (R) reads a report next to Portugal's Constitutional Court President Joaquim Sousa Ribeiro in Lisbon April 5, 2013.

Credit: Reuters/Hugo Correia

LISBON (Reuters) - Portugal's constitutional court on Friday rejected four out of nine contested austerity measures in this year's budget in a ruling that deals a blow to government finances but is unlikely to derail reforms two years after the country's bailout.

The measures rejected by the court should deprive the country of at least 900 million euros ($1.17 billion) in net revenues and savings, according to preliminary estimates by economists.

The Diario Economico newspaper said the government put the impact of the court's ruling at 1.3 billion euros. It did not cite its sources. Debt-ridden Portugal agreed to a 78 billion euro bailout in 2011 from the European Union and International Monetary Fund.

The entire package of austerity measures introduced by the 2013 budget is worth about 5 billion euros and includes the largest tax hikes in living memory, which were mostly upheld.

"It's a lesser evil. ... Putting it into perspective, a good manager and leader should not have difficulty finding room in a budget to accommodate this cut," said Joao Cantiga Esteves, economist at the Lisbon Technical University.

"We are talking about an impact of only 1.2 to 1.3 percent of Portugal's total spending," he added.

University of Lisbon political analyst Antonio Costa Pinto said that while the impact of the rejected measures was significant, it should not lead to the kind of political crisis that would have been possible had the court thrown out the bulk of the measures.

"The government will have to look very hard for measures to compensate for that and they'll have to talk to (lenders) about alternatives. But it's very difficult to imagine them throwing in the towel or behaving radically because of that."

The government has called a Cabinet meeting on Saturday, and would not provide any immediate comment. It has to cut the budget deficit to 5.5 percent of GDP this year from 6.4 percent in 2012, when it missed the goal but was still lauded by its EU and IMF lenders for its austerity efforts.

'MUDDLING THROUGH'

Analysts consider the outcome manageable and say the government should be able to cover the shortfall with additional spending cuts it has been working on at the request of lenders. Analysts say the lenders could also give Portugal more leeway in terms of budget targets.

Earlier in the day, Bank of America Merrill Lynch analysts wrote in a research note that even a negative ruling was likely to be "in line with our muddling through outlook," expecting Lisbon to resume negotiations with its lenders as a result.

On Wednesday, the government easily defeated a motion of no confidence, but the move united all the opposition in parliament against it. Socialist opposition leader Antonio Seguro said on Friday the court's ruling "reinforces our position in demanding the government's resignation."

Still, President Anibal Cavaco Silva, who has the power to dissolve parliament and fire the Cabinet, said on Friday the confidence vote clearly confirmed its legitimacy to govern. The centre-right coalition government has a comfortable majority in parliament.

The 13 constitutional court judges have been scrutinizing articles of the 2013 budget since January when opposition parties argued that cuts to pensions and welfare benefits undermined workers' basic rights.

The court rejected cuts in pensioners' and public servants' holiday bonuses, as well as reductions to sickness leave and unemployment benefits. They upheld tougher measures such as a reduction in the number of tax brackets, which alone brings in an estimated revenue of more than 2 billion euros.

Last year, the court also dealt a blow to government plans for more public-sector wage cuts, forcing it to resort to tax hikes instead. The austerity has provoked mass protests, but rallies in Portugal have been much more peaceful than in countries like Greece or Italy.

($1 = 0.7679 euros)

(Reporting By Sergio Goncalves, Andrei Khalip, Daniel Alvarenga; Editing by Shrikesh Laxmidas, Stephen Powell and Peter Cooney)

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