Portugal in heavy spending cuts

Portuguese Prime Minister Pedro Passos Coelho has announced severe cuts in public spending. Source: AAP

PORTUGUESE Prime Minister Pedro Passos Coelho has announced severe cuts in public spending following a decision by the constitutional court rejecting a number of austerity provisions in this year's budget.

In an address to the nation last night, Mr Coelho said there would be no new tax hikes in 2013 but that measures would be taken to "contain public spending in the areas of social security, health and education".

On Friday the court ruled that several measures in the budget were unlawful, including the scrapping of a 14th month of salary for civil servants and retirees, as well as cuts to unemployment and sickness benefits.

The government condemned the decision, which will see it lose out on about 1.2 billion euros ($A1.5 billion) in savings, saying it would make it difficult to achieve the budget cuts needed to meet the terms of a 78 million euro European Union-International Monetary Fund bailout.

Portugal's position is now "more fragile" than before, Coelho said, and could harm its intention to negotiate with the EU an extension on deadlines to reimburse its loans.

But it was out of the question to request another bailout, Coelho said, adding "the government will respect all of the objectives of the aid program".

The 2013 austerity budget, approved by parliament last year, was expected to bring Portugal 5.3 billion euros in savings in a bid to haul the embattled eurozone country out of the crisis.

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Portugal in worst recession in 37 years

PORTUGAL'S statistics agency says the economy contracted 3.2 per cent last year - its sharpest annual downturn since 1975.

Portugal is enacting broad debt-reduction measures, including tax hikes and pay and pension cuts, in return for a 78 billion euro ($100 billion) international financial lifeline it received in May 2011.

Those austerity policies are widely blamed for the deepening recession and growing hardship.

The National Statistics Institute said on Monday that a drop in private consumption and slower export growth were the main factors behind the slump, with the economy shrinking 3.8 per cent in the fourth quarter.

Unemployment stands at 17.6 per cent, the third-highest rate in the 27-nation bloc after Greece and Spain.

The economy contracted 1.6 per cent in 2011. The government predicts a 2.0 per cent contraction this year.

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