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Portuguese government forced to change tack after court rejects austerity measures

Coelho admits he may have to raise taxes after High Court judgment finds attacks on workers' pay illegal

PORTUGAL’S government said on Saturday that it was considering raising taxes after the country’s highest court rejected austerity measures in its 2014 budget.

The judgment by the country’s Constitutional Court late on Friday left a budgetary shortfall and Prime Minister Pedro Passos Coelho, whose government recently survived a no-confidence motion presented by the Communist Party, said he “cannot commit to not raising taxes” as the cuts were worth some €750 million (£609m).

The court, which has ruled against previous budget cuts five times, struck down several austerity measures proposed in the 2014 budget, including salary cuts in the public sector.

The judges also rejected a 5 per cent levy on unemployment benefits and a 6 per cent levy on ill-health related payouts, along with deeply controversial cuts in widows’ pensions.  It said the measures contravened rights of citizens which were spelled out in the constitution.
The court did, however, approve a measure to reduce supplementary pensions payouts in the public sector.

Ruling on a challenge by opposition parties, the court declared that any law which cut public employees’ wages without touching the incomes of other workers violated the constitutional principle of equality.

The ruling on wage cuts will have the biggest impact on the budget.

The government had planned to save more than €600m (£488m) this year by making cuts of  between 2.5 per cent and 12 per cent in the salaries of public employees earning more than €675 a month (£550). The proposed cuts were deeper than any made since 2011.

But the earlier cuts, too, became invalid on Friday because they were linked by statute to this year’s reductions — a technicality that could cost the government more than €1 billion (£810m) in back salaries.

The measures cutting pensions and tax benefits were made retroactive to January 1. By overturning them the court created an additional budget gap of €175m (£142m).

Portugal received €78bn (£64bn) in conditional bailout loans in 2011.

In return, the lenders — the European Union and the International Monetary Fund — imposed a three-year programme of sharp budget cuts and tax increases which has crippled the country’s struggling economy.

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