Lisbon unveils new batch of deficit-cutting measures

Portugal on Friday announced another battery of fiscal measures to ensure it keeps its budget-deficit reduction program on track as European leaders met to thrash out measures to overcome the euro-zone debt crisis.

Finance Minister Fernando Teixeira dos Santos announced additional "cautionary" measures equivalent to 0.8 percent of GDP for this year when the government is aiming to trim its budget deficit to 4.6 percent of GDP from 7.3 percent last year. "As an additional precaution for 2011, the consolidation measures will be strengthened," Teixeira dos Santos told a news conference in Lisbon.

He also unveiled cuts in spending over the next two years worth 2.4 percent of GDP combined with increased revenues of 1.3 percent of GDP to lower the shortfall in the administration's finances to 3 percent of GDP in 2012 and 2 percent in 2013.

The European commissioner for economic affairs, Olli Rehn, welcomed the new package as a "significant new commitment" by Portugal to getting its finances back in shape. "I welcome and support this package of far-reaching and concrete measures," Rehn said. "It is an important strengthening of Portuguese macroeconomic policies."

The markets, however, were less than supportive. The yield on the five-year Portuguese government bond almost touched the 8-percent mark and was trading above the yield on the benchmark 10-year bond of around 7.5 percent.

Speaking in Brussels ahead of the European Union summit, Prime Minister José Sócrates said it was "important to convince everyone" that Portugal will meet its deficit-reduction targets. There shouldn't be the "slightest doubt" about the government's commitment to doing so.

The gamut of new measures includes what Teixeira dos Santos called a "special contribution" from those with pensions of over 1,500 a month euros, similar to the average 5-percent cut in public-sector wages already in place.

The Sócrates administration is also aiming to cut spending costs in medicines and other aspects of the health system, and reap further savings from the "rationalization" of the educational system. The administration costs and investments of state-owned companies will also be trimmed, while transfers to the country's regions will be reduced.

On the revenue side, the government plans to overhaul the structure of the value-added tax and limit tax reductions on income.

The government also announced a series of proposed structural reforms with a view to speeding up the process of fiscal consolidation. These include an overhaul of the severance payment system, making it cheaper for employers to sack workers