UPDATE 1-Portugal to cut state wages in 2014, exit bailout

Tue Oct 15, 2013 4:23pm EDT

By Sergio Goncalves

LISBON Oct 15 (Reuters) - Portugal presented its 2014 budget on Tuesday, which it hopes will lead the country out of its bailout programme and return it to normal debt market financing along with its first positive economic growth since 2010.

But the budget promised heavy spending cuts to hit public sector wages and pensions in 2014 as harsh austerity continues to take its toll on the country which has gone through its worst economic crisis since the 1970s under the bailout.

The budget bill also showed the country will overshoot its 2013 budget deficit goal as it did in 2012.

"The budget's proposals are difficult, but decisive for our future," said Finance Minister Maria Luis Albuquerque at a press conference. "It represents the government's determination to accomplish the adjustment programme in June and start a cycle of lasting consolidation and economic growth."

The country's 78-billion-euro bailout formally ends in mid-2014 when Portugal should return to financing itself normally in bond markets, which it stopped doing in 2011 when its debt crisis first hit.

The budget bill showed Portugal plans to issue 10.5 billion euros in government bonds next year to help meet bond redemptions of 13.5 billion euros and net financing needs of 11.6 billion euros. The lenders are still to contribute nearly 8 billion euros in 2014 until the end of the programme.

The budget aims to slash the budget deficit to 4 percent of GDP next year from 5.9 percent in 2013. This year's budget deficit target agreed with the lenders was 5.5 percent, after 6.4 percent in 2012. Still, the finance minister played down the overshoot this year, saying the country was "on a good path" and meeting its commitments.

The budget sees gross domestic product expanding 0.8 percent in 2014 -- restoring positive economic growth to Portugal for the first time since 2010 -- after a decline of 1.8 percent this year.

The budget bill includes wage cuts for public sector workers ranging from 2.5 percent to 12 percent on monthly salaries of over 600 euros. Pension cuts should bring savings of 728 million euros.

The government envisages total spending cuts worth 3.18 billion euros out of a total budget consolidation effort of 3.9 billion euros next year.

The government and the lenders have acknowledged that the deficit targets and Portugal's return to market financing face challenges from the Constitutional Court that has previously rejected some government austerity measures. The opposition has long pledged to challenge new spending cuts in court.

Key elements of the budget were announced at the beginning of the month with the completion of the latest review of the economy by officials from Portugal's bailout lenders, the European Union and International Monetary Fund.

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