Bailed-out Portugal to make new cuts in 2014 budget

Bailed-out Portugal will put forward  new spending cuts demanded by its creditors in a draft budget for 2014 on Tuesday which risks deepening discontent over austerity measures. "There is no alternative to reducing spending," said Prime Minister Pedro Passos Coelho on the eve of the presentation of the spending plan. "If we are not able to meet our goals, the price to be paid will be much higher," he added. Portugal, which is trying to regain full access to debt markets with the end of a three-year 78-billion-euro ($106 billion) rescue plan in June 2014, has vowed to bring its deficit down to 4.0 percent of output next year from 5.5 percent in 2013. The country tried in vain to get its creditors, the European Union and International Monetary Fund, to raise its deficit target to 4.5 percent in 2014. It wanted more leeway to ease austerity measures and offer more support to boost economic growth. To meet the 2014 deficit target the ruling centre-right coalition government, which took a heavy beating in local elections last month, has to trim spending by about 4.0 billion euros next year. Raising the retirement age to 66 from 65 and lengthening the work week for civil servants to 40 hours from 35 hours are among the measures on the table to reduce spending. "The middle class will continue to be the big victim of this financial crisis which Portugal is living. While so many sacrifices have been demanded of them, the Portuguese have remained sensible," said Antonio Domingues Azevedo, head of the Association of Chartered Accountants. Street protests against austerity measures -- including tax increases and public worker pay cuts -- introduced in exchange for the bailout Portugal received in May 2011 have brought tens of thousands of people into the streets. The demonstrations have so far been non-violent. The 2014 budget has already come under fire from unions and left-wing opposition parties. Portugal's largest union, the CGTP, has called it "a stab in the back" while the main opposition Socialists have blasted it as "an attack against the social welfare state". The government is walking a tightrope as it seeks to meet the demand of the country's EU-IMF creditors whole avoiding an eruption of social discontent over the austerity measures. It also faces divisions within its own coalition. In July it narrowly survived a political crisis in July when key ministers resigned over widespread public resistance to further austerity policies. Portugal's 10-year bond yield has climbed down since the political crisis and is now around 6.4 percent. But this level is still too high to allow Portugal to resume regular bond issuance next year after the bailout programme ends. "The 2014 budget is the last chance for Portugal to prove that it sticks to its goals and can return to the markets without getting a second bailout," a European source told AFP. Portugal exited a two-year recession in the second quarter with 1.1 percent growth but its debt is still ranked below investment grade by Fitch Ratings, Moody's Investors Service and Standard & Poor's. Hurdle of Constitutional Court The wildcard in the government's efforts to meet its deficit targets is the Constitutional Court, which has blocked public sector pay and pension cuts and other austerity measures. In April, the court also ruled against several austerity measures in the government's 2013 budget worth 1.3 billion euros, including a controversial slashing of bonuses for civil servants and pensioners. "The big risk for Portugal right now is the Constitutional Court. If it does not play the game, it will be difficult to respect the 4.0 percent (deficit) limit," said a source close to the Portuguese government's negotiations with its creditors.