Bickering classes

4 October 2010 By Fiona Maharg-Bravo

Bond investors are punishing Portugal more than its larger neighbor Spain. Both countries face similar challenges, and Spain’s may in some ways be more acute. The difference is that Portuguese politicians haven’t yet agreed on how to tackle it.

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Portugal on Sept. 29 announced a 5.1 billion euro austerity package aimed at meeting its budget deficitreduction targets in 2010 and 2011. José Sócrates, the prime minister, unveiled the plan as figures for the first seven months of the year indicated that Portugal was unlikely to be able to cut its deficit from a record 9.4 percent of GDP in 2009 to 7.3 percent this year.

The new measures include a 5 percent cut in public sector wages and a 2 percentage point increase, to 23 percent, of value added tax. The budget must be approved by parliament in mid October, but the centreright opposition Social Democrats (PSD) have so far refused to support any tax increases proposed by the minority Socialist government.

JeanClaude Trichet, president of the European Central Bank, said last week that Portugal was moving in the "right direction."

(An earlier version of this column erroneously said Portugal's budget deficit was 9.4 percent this year, instead of last year).

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