Portugal faces deep cuts to school
and hospital funding after a court ruled it was unfair to cut perks
enjoyed by protected civil servants.
The government must now scramble to find other areas to make savings as it tries to meet the terms of its international bailout programme.
The decision deepens the divide between a protected class of civil servants and other workers, whose lives have become far more precarious during the worst recession since the 1970s.
Although public sector pay has
fallen faster than in the private sector during Portugal's economic
crisis, state workers still earn on average double the wages of the
private sector.
Meanwhile, all Portuguese have been hit since January by the largest tax hikes in living memory, and many economists believe more austerity measures will prolong and deepen the slump.
'This decision left me very
worried. Civil servants benefit, but not the private sector. It's in the
public sector where the government has to cut,' said Sonia Castro 39,
an unemployed secretary.
Jose Manuel, a 56-year-old taxi driver from Lisbon, said the only outcome he sees is that 'our lives will get worse.'
The European Commission and
particularly Germany have urged Lisbon to waste no time in coming up
with new savings in order to keep its bailout programme on track.
On Sunday, Prime Minister Pedro Passos Coelho reaffirmed Lisbon's commitments to its fiscal tightening goals under an EU/IMF bailout, promising to compensate for the court decision with other spending cuts.
Mr Coelho has managed to avert the court's decision bringing down his government. He survived a no-confidence vote last week and won President Anibal Cavaco Silva's support to stay in office.
Portuguese benchmark bond yields
jumped almost 20 basis points in early trading on Monday following
Friday's constitutional court ruling - a sign of investor concern.
'The key thing here now is that there is no political crisis, that the government stays on and that it is not planning to renegotiate bailout targets. It could have turned out much worse,' said Filipe Garcia, head of Informacao de Mercados Financeiros, an economic consultancy in Porto.
Mr Coelho's pledge to meet targets with more spending cuts means Lisbon will now have to find another 0.8 percent of Gross Domestic Product (GDP) to satisfy the 'troika' of lenders - the EU, European Central Bank and International Monetary Fund - which demand austerity in return for bailout loans.
Lisbon has already promised its lenders to cut 4 billion euros progressively in spending between 2013 and 2015 - and the pace of the cuts will now have to accelerate.
Political scientist Viriato Soromenho Marques said the spending cuts were unlikely to cause new constitutional problems for now. 'But most importantly, they will cause problems with people's living standards, which are already very low.'
The government now plans to cut spending in areas like the healthcare system, pensions and education.
'They'll have to find solutions that don't run against the constitutional court's line, but I think it's possible to implement savings even in healthcare without getting barred by the court,' Garcia said.
'Judging by their early response, the government has a backup plan ready.'
Analysts said freezing
investment in hospitals was one possible measure that could save
hundreds of millions of euros, as well as raising the share of medical
bills paid by patients.
Analysts say cuts will still have to fall on the public sector wage bill and pensions which make up 60 percent of state spending. But protecting the perks of those with steady civil service jobs means imposing more pain on contractors. Some economists say new cuts are still a better option than more tax hikes.
Lisbon has to cut the budget deficit to 5.5 percent of GDP this year from 6.4 percent in 2012, when it missed its goal but was still lauded by lenders for its efforts.
The government must now scramble to find other areas to make savings as it tries to meet the terms of its international bailout programme.
The decision deepens the divide between a protected class of civil servants and other workers, whose lives have become far more precarious during the worst recession since the 1970s.
Divisions: Lisbon has been the scene of regular
protests over the government's cuts to public spending. A court has now
rejected austerity measures that would have reduced public sector perks
Meanwhile, all Portuguese have been hit since January by the largest tax hikes in living memory, and many economists believe more austerity measures will prolong and deepen the slump.
Jose Manuel, a 56-year-old taxi driver from Lisbon, said the only outcome he sees is that 'our lives will get worse.'
Protests: The government has to search for
others areas to cut after the court said it was unfair to single out
civil servants for reductions. Here demonstrators march against
government austerity policies in Lisbon
On Sunday, Prime Minister Pedro Passos Coelho reaffirmed Lisbon's commitments to its fiscal tightening goals under an EU/IMF bailout, promising to compensate for the court decision with other spending cuts.
Mr Coelho has managed to avert the court's decision bringing down his government. He survived a no-confidence vote last week and won President Anibal Cavaco Silva's support to stay in office.
Demands: Portugal's Prime Minister Pedro Passos Coelho is under huge pressure to reduce his country's public spending
'The key thing here now is that there is no political crisis, that the government stays on and that it is not planning to renegotiate bailout targets. It could have turned out much worse,' said Filipe Garcia, head of Informacao de Mercados Financeiros, an economic consultancy in Porto.
Mr Coelho's pledge to meet targets with more spending cuts means Lisbon will now have to find another 0.8 percent of Gross Domestic Product (GDP) to satisfy the 'troika' of lenders - the EU, European Central Bank and International Monetary Fund - which demand austerity in return for bailout loans.
Lisbon has already promised its lenders to cut 4 billion euros progressively in spending between 2013 and 2015 - and the pace of the cuts will now have to accelerate.
Political scientist Viriato Soromenho Marques said the spending cuts were unlikely to cause new constitutional problems for now. 'But most importantly, they will cause problems with people's living standards, which are already very low.'
The government now plans to cut spending in areas like the healthcare system, pensions and education.
'They'll have to find solutions that don't run against the constitutional court's line, but I think it's possible to implement savings even in healthcare without getting barred by the court,' Garcia said.
'Judging by their early response, the government has a backup plan ready.'
Concern: Portugal's Parliament has been riven
with division over how the government should respond to the country's
economic woes
Analysts say cuts will still have to fall on the public sector wage bill and pensions which make up 60 percent of state spending. But protecting the perks of those with steady civil service jobs means imposing more pain on contractors. Some economists say new cuts are still a better option than more tax hikes.
Lisbon has to cut the budget deficit to 5.5 percent of GDP this year from 6.4 percent in 2012, when it missed its goal but was still lauded by lenders for its efforts.
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