Portugal sees third year of recession

Portugal govt. announces tax rises and spending cuts in its in 2013 budget.

Portugal's Finance Minister, Vitor Gaspar. Picture: AFP/Francisco Leong

LISBON - Portugal's centre-right government on Monday announced sweeping tax rises and spending cuts in its 2013 budget, which promises a third year of recession and hardship under the strict conditions of a 78-billion-euro (62.2 billion pounds) bailout.

Finance Minister Vitor Gaspar warned that failure to continue on the path of austerity could be catastrophic as about 2,000 protesters gathered outside parliament to demand the resignation of the government.

The budget includes the toughest tax hikes yet under the country's bailout programme, which will amount to up to three months' wages for middle-income workers. It has ignited the greatest outpouring of anger so far in Portugal's economic crisis.

"The margin of manoeuvre for unilateral decisions is non-existent, a rejection of the 2013 budget would mean a rejection of the bailout programme," said Gaspar, adding the bailout plan was the country's only choice.

"Asking for more time (under the bailout) would lead us to a dictatorship of debt and to failure."

Opposition Socialists called the tax hike "a fiscal atomic bomb" saying it denied the country growth and jobs creation.

Gaspar stuck to the government's previous projection of a 1 percent contraction of GDP in 2013, which would mark the country's third year of recession but which economists say is much too optimistic considering the hit to consumers from the budget.

Portugal entered its deepest recession since the 1970s this year, when GDP is seen slumping 3 percent, which has pushed unemployment to record highs near 16 percent.

Some economists say that the measures, which also include pension cuts, a financial transaction tax and higher property taxes, could push Portugal into a recessive spiral like Greece, further undermining Europe's German-inspired austerity drive for the euro's highly indebted countries.

Gaspar said new taxes would amount to 4.3 billion euros in 2013, representing 80 percent of next year's austerity measures, but rejected it would lead to a recessive cycle.