Austerity plan

The minority Socialist government of Portugal struck a deal late on Friday to allow a crucial austerity budget to be passed for next year, reducing the budget deficit to 4.6 percent of gross domestic product.

The government made a number of concessions to the center-right Social Democrats (PSD), who had called for a reduction in public spending rather than an increase in taxes.

The agreement follows a lengthy stand off between the two sides, and follows warnings of a political crisis affecting the country's financial future.

"I think this was a victory for Portugal and for the Portuguese because it was shown that understanding is possible on the essential questions that have a bearing on our future," Eduardo Catroga, the PSD negotiator, told reporters. "It was very important to tell the country that we could agree."

The agreement reaffirms the goal of reaching a public deficit of 4.6 percent of GDP by the end of 2011, in contrast to the 7.3 percent expected for this year.

"We have met the conditions for adopting a budget that will entail sacrifices from the Portuguese in order to insure the financing of the country," Finance Minister Fernando Teixeira dos Santos said.

Under the deal, the Socialists have kept an increase in the VAT value-added tax, a kind of sales tax, from 21 percent to 23 percent on most products. However, the PSD were successful in having some product categories exempted.

Because the government has no majority, it will need the support of the opposition - or at least an agreement to abstain from voting - to pass the budget legislation.

Prime Minister Jose Socrates had threatened to resign if the spending plans were not passed, raising fears that months of political uncertainty could follow. Under the country's constitution, it would not be possible to hold a general election until May.

Talks resumed after warning

The sides halted talks on Wednesday, but resumed them on Friday after warnings from Portuguese President Anibal Cavaco Silva.

"The current financial situation of the country is very serious and cannot cope with attitudes that will lead to the start of a political crisis," Silva said.

Failure to reach an agreement could have forced the government to seek a financial bailout from its European partners, as Greece did earlier this year.

Unions have responded to the planned austerity measures with a call for a general strike on November 24.

Author: Richard Connor (AFP, Reuters)
Editor: Kyle James