Tags: EU | Portugal | Financial | Crisis

Portugal's Parties Agree to Slash Debt to Avoid Crisis

Thursday, 25 Mar 2010 11:21 AM

Portugal's minority government and the main opposition party agreed Thursday on an austerity plan designed to reduce the country's huge debt burden and avoid following Greece into a deeper financial crisis.

The pact is likely to reassure financial markets about Portugal's commitment to reducing a budget deficit which last year reached 9.3 percent of national income.

The deal also eased political pressure on the beleaguered center-left Socialist government, which has struggled to find a broad consensus for its four-year program of spending cuts.

The center-right Social Democratic Party's support, coming after some of its own proposals were included in the package, ensured the proposal's approval in Parliament.

Lisbon's growing debt has unsettled investors and contributed to the recent weakness of the euro currency, which Portugal uses.

A leading credit rating agency, concerned about the government's ability to service its borrowings, on Wednesday downgraded Portugal's debt.

Despite the downgrade by Fitch Ratings, Portugal's debt is still considered investment grade and remains a few notches above the rating for Greece, where the deficit is expected to have hit 12.7 percent last year.

The austerity plan cuts welfare benefits, slashes military spending and freezes pay levels for some 700,000 government employees. It also foresees asset sales.

Though the program rises direct taxes only on the well-off, it also eliminates some tax breaks and exemptions and introduces higher ceilings to qualify for some welfare benefits. Together, those measures translate into a bigger tax bill, especially for middle-class families.

Small, left-of-center parties oppose the austerity plan.

The government aims to cut the deficit to 8.3 percent at the end of this year and to 2.8 percent, under the 3 percent limit stipulated for euro zone countries, in 2013.

Portugal estimates its economy contracted 2.7 percent last year but will grow 0.7 percent this year.

Despite the prospect of tougher economic times, the Socialist Party has kept a strong lead in surveys of voting intentions.

The Social Democrats are currently embroiled in a leadership contest which will be settled Friday.

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