November 25, 2013 / 2:25 PM / 4 years ago

Portugal budget vote to trigger challenges to austerity

LISBON, Nov 25 (Reuters) - Portugal's parliament will vote on Tuesday on an austere 2014 budget, almost certainly triggering a spree of constitutional challenges that may threaten its smooth exit from an international bailout next year.

The Constitutional Court has already overturned a series of previous public spending cuts. Opposition parties have said they will challenge new ones once the budget is passed.

The threat could force the government to seek alternative measures, most likely tax hikes. The danger is that that could undermine an economy just recovering from its worst downturn since the 1970s.

President Anibal Cavaco Silva already started the court process during the weekend, requesting it to review a planned cut in public sector workers' pensions that makes up a key part of the government's savings plan for next year. This was a separate law to the budget and the court now has 25 days to review it.

"A negative ruling would force the government to find alternative measures to replace the potential lost savings," Antonio Barroso, a London-based political analyst at advisory firm Teneo Intelligence, wrote in a research note.

"This would put the coalition under considerable pressure given the limited options available at this point."

The 'troika' of lenders in Portugal's bailout - the European Commission, the International Monetary Fund and the European Central Bank - have also identified challenges by the court as potentially the biggest threat to Lisbon's efforts to meet budget goals and to exit the bailout next year.

The problem is that the scale of the measures that could be challenged, both those included in the budget and other plans, amounts to more than 1 billion euros. A previous law to increase public employees' working hours is also pending a decision by the court.

"It is probable that the requests for reviews (by the court) will be repeated like other recent measures were challenged," said Antonio Costa Pinto, a political scientist at the University of Lisbon.

"The most obvious, the main measure to be challenged, are the salary cuts in the public sector."

The government has repeatedly said its overriding priority is to meet budget goals as the best way to regain the necessary confidence to exit the bailout as planned in June 2014 and return to financing itself in debt markets. In 2014, the government needs to cut the budget deficit to 4 percent of gross domestic product from 5.5 percent this year.

The government has not ruled out requesting some sort of precautionary loan from creditors after the bailout expires.

TOUGH BUDGET

Rui Barbara, an economist at Banco Carregosa, said after tough budget consolidation in 2011 and 2012, this year's effort has not been as tough.

"The point is that in 2014 the (budget) consolidation effort will return to being substantial," said Barbara. "I have difficulty believing that the 'troika' would accept any kind of relaxation of the deficit goal up front, before being sure that the measures were not possible to implement. The alternative seems to be eventual new tax increases."

The government has repeatedly said there is no 'plan B' to find alternative revenues but local media have reported that one possibility is to raise value-added tax further on many products.

Still, the Portuguese have seen the biggest tax hikes in living memory this year and direct and indirect taxes have repeatedly risen since the country was bailed out in 2011. More tax hikes could undermine a hoped for return to growth next year.

At the same time, protests against austerity have started up again in recent weeks, including by several thousand police last week. The country's largest union, the CGTP, is planning a protest on Tuesday to coincide with the budget vote.

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