Portugal uses privatizations, welfare benefit cuts to drive down debt

Portugal uses privatizations to drive down debt

LISBON, Portugal — Portugal announced new austerity measures Monday to avoid a debt crisis like the one engulfing Greece, cutting welfare benefits and government hiring as well as selling assets and raising taxes on the well-off.

The announcement comes two days ahead of a bond issue in which Portugal will try to raise euro750 million ($1.02 billion). Greece was able to tap bond markets last week after also announcing more deep cutbacks to shore up its finances.

The two countries’ troubles have fueled a Europe-wide debt crisis that has undermined the euro and led the European Union to consider setting up a new European monetary fund to help support the euro.

Portugal aims to raise euro6 billion ($8.2 billion) from privatizations, trim welfare benefits and slash other state expenditure in an effort to reduce the country’s heavy debt load, Finance Minister Fernando Teixeira dos Santos said.

The measures are part of a four-year austerity plan devised to convince financial markets and other eurozone countries that Portugal has its finances in order.

The plan “rests, essentially, on a reduction in public spending,” Teixeira dos Santos told a news conference.

Portugal’s budget deficit is projected to have hit a record 9.3 percent of gross domestic product last year, prompting fears it could face similar problems to Greece where a budget crisis has brought violent demonstrations, rattled the European Union and undermined the 16-country euro currency, of which Portugal is a member.

Portugal’s public debt is expected to climb to 85.4 percent of GDP this year, up from 76.6 per cent in 2009, and Teixeira dos Santos said he predicts it will peak at 90.1 percent of GDP in 2012 before falling back.

Teixeira dos Santos said he expected the privatizations over the next four years to bring revenue equivalent to 3.6 percent of Portugal’s gross domestic product.

The center-left Socialist government also wants to keep annual pay hikes for state employees below the rate of inflation up to 2013, cut welfare benefits and scrap some tax breaks.

Teixeira dos Santos said he would create a new tax rate of 45 percent for people earning more than euro150,000 ($205,000) a year and raise the ceiling on entitlements for tax breaks, but otherwise he ruled out tax increases.

“We are focussing on reducing spending and avoiding tax hikes,” Teixeira dos Santos said.

Planned spending on new military equipment projected for the next four years will be cut by 40 percent, and a plan to build a high-speed rail link to Spain will be postponed for at least two years.

The minority government was consulting Monday with opposition parties over the plan, though it has not said whether the measures will be put to a vote in Parliament.

The government has included some of the the planned austerity measures, including a contested pay freeze for civil servants, in its 2010 state budget, which parliament is expected to approve on Friday. The budget was delayed by a general election last year.

State spending cuts will be across the board, Teixeira dos Santos said. About 75 percent of current expenditure goes on salaries and welfare policies.

He said that increasing pay by less than the inflation rate would cut the state’s wage bill to 10 percent of GDP from just over 11 percent.

Staffing levels will be cut by allowing one new employee to be hired for every two that leave the civil service.

The government also wants to reduce outlays on welfare by 0.5 percent by 2013 by trimming benefits. Temporary measures introduced in recent years to ease the effects of the economic downturn, including financial help for companies hiring new workers, will be phased out.

The government is also expecting some relief from an improving economic growth rate which Teixeira dos Santos said is forecast to reach 1.7 percent in 2013.

The government estimates the economy contracted 2.7 percent last year. It predicts growth of 0.7 percent this year.