LISBON Portugal's Constitutional Court on Thursday dealt a new blow to government efforts to cut spending and keep the country's EU/IMF bailout on track, rejecting a bill that would have effectively allowed the state to fire public sector workers.
While the bill would have had a relatively low direct impact on the budget deficit in 2014, it was seen as important because of its potential longer-term structural effect on spending cuts.
The ruling may also alarm investors as it suggests the court could throw out more of the government's planned austerity measures, endangering the deficit targets set out in its 78 billion euro bailout deal that ends in mid-2014.
"The court decided to deem the norms (of the bill) unconstitutional ... due to the violation of guarantees of secure employment," the court said in a statement read out by a judge.
Prime Minister Pedro Passos Coelho declined to comment on the decision when approached by reporters while visiting the site of forest fires in central Portugal.
The court has rejected large parts of the government's deficit-cutting plans twice since the country accepted a bailout in mid-2011, each time forcing it to come up with alternative measures.
The parliament-approved measure, worth an estimated net 170 million euros in spending cuts in 2014, is one of a package intended to contribute to spending cuts worth 4.7 billion euros that Lisbon has promised its international lenders by the end of 2014.
"The government's task of budget consolidation becomes more difficult, and that will obviously come up in talks with the lenders next month," said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultancy in Porto.
But he did not expect any sharp rise in Portugal's bond premiums: "The government should be able to come up with alternative measures, and this one was rather small within the program. But it's symbolic and shows how difficult reducing the size of the state is in Portugal and Europe as a whole".
Representatives of Lisbon's European and IMF lenders will discuss next year's budget with the government during a bailout review starting next month.
That review was postponed due to a now-healed political rift within the ruling coalition in July that came even closer to derailing the bailout. Many analysts expect Portugal to require some sort of further support program after this one ends.
The bill was referred to the court by conservative President Anibal Cavaco Silva earlier this month. Unusually, the ruling was delivered two weeks before the deadline, with six of the court's 13 judges still on their summer holidays.
The opposition has vowed to challenge various other measures in the package prepared by the center-right government, including an extension of the working week by five hours to 40 hours for public sector workers that has already been signed into law.
The rejected bill would have effectively allowed public sector workers deemed surplus to requirements to be fired after a one-year period in which their salaries would be significantly reduced.
There were around 575,000 public sector employees in Portugal in June, about 2 percent fewer than at the end of last year, out of a total employed workforce of about 4.5 million.
(Reporting by Andrei Khalip; Editing by Hugh Lawson)