Portuguese Opposition Rejects Austerity Plans

Political uncertainty and a lack of substantive public sector reforms may compel Portugal to seek an international bailout.

Portugal’s opposition parties defeated austerity measures in parliament on Wednesday, pushing the country’s minority government to the point of collapse and fueling speculation that its prime minister, José Sócrates, might resign.

The liberal conservative opposition said the planned cuts in social security spending and unemployment benefits and increases in tax rates and public transportation costs went too far. They feared the measures would push Portugal further into recession.

The mounting political uncertainty is likely push Portugal’s already high borrowing cost up. With Greece, Ireland and Spain, the nation is one of Europe’s most troubled economies. It was widely expected to have to request a bailout from the European Union earlier this year. With the government’s proposed spending cuts and tax hikes rejected, it might finally have seek help from its fellow eurozone states.

Portugal’s socialist Prime Minister José Sócrates came to power in 2005 and won reelection in 2009 though without his former parliamentary majority.

Whether Sócrates resigns and carries on as caretaker prime minister or not, he will meet fellow European leaders on Thursday to discuss a permanent future bailout mechanism for the eurozone.

Portugal faces debt repayments of €4.2 billion next month with about €4 billion in cash reserves at present.

The socialist government introduced deep spending cuts in September of last year, aiming to cuts its budget deficit in half this year. In 2010, the deficit equaled 7 percent of GDP, down from 9 percent in 2009. The country’s national debt exceeds 80 percent of national income — far above the European norm.

With unemployment hovering near 10 percent and almost 20 percent of Portuguese living officially below the poverty line, the South European country is in dire need of reform. Its highly inefficient public sector, accounting for nearly half of GDP, has undermined overall competitiveness but neither of the main political factions has demonstrated a willingness to seriously cut spending.

Portugal’s labor laws are inflexible. Regulations on dismissals and the use of temporary contracts are burdensome and expensive while dismissing an employee can be difficult. The government maintains majority ownership of air- and seaports, railways and sanitation. Tax evasion is a problem and while corruption is limited, it is more widespread than in most of the rest of Europe.