Portugal warned of further spending cuts

Portugal has been warned of further spending cuts, following two years of tough austerity measures since it needed an international financial rescue.

Prime minister Pedro Passos Coelho told his country yesterday to brace for even harder times after a court ruling forced his government to find more savings through steep spending reductions.

He said in a sombre televised address to the nation that his centre-right government must slash public services because of a court decision to disallow some of its latest tax hikes.

A new crackdown on public spending will focus on social security, education, health services and state-run companies, he said.

That is likely to bring more layoffs as Portugal scrambles to restore its financial health after it needed a 78 billion euro (£66 billion) bailout in 2011.

"Today, we are still not out of the financial emergency which placed us in this painful crisis," Mr Passos Coelho said.

Portugal's worsening problems threaten to reignite the eurozone's financial crisis not long after Cyprus became the fifth member of the 17-nation bloc to require rescue.

The Portuguese economy contracted 3.2% last year and is forecast to shrink 2.3% in 2013 for a third straight year of recession. The unemployment rate, currently at a record 17.5%, is forecast to climb to 18.5% in 2014.

European leaders have for three years struggled to contain the financial crisis, and Portugal's ongoing problems illustrate the dilemma of finding a balance between austerity measures and growth policies.

Many Europeans want to abandon the austerity path and start spending again to create jobs and wealth.

The Constitutional Court on Friday prohibited pay cuts for government workers and pensioners included in this year's state budget, leaving the government just nine months to make up for the sudden shortfall of 1.3 billion euros (£1.1 billion).

"After this decision by the Constitutional Court, it's not just the government's life that will become more difficult, it is the life of the Portuguese that will become more difficult and make the success of our national economic recovery more problematic," Mr Passos Coelho said.

He noted that Portugal has made progress on reducing its budget deficit, which stood at 10.1% in 2010. Last year, it was 6.4%.

Even so, the three main international ratings agencies still classify Portuguese government bonds as junk.