A Portuguese court has ruled that tough austerity measures aimed at keeping the country’s €78bn bailout programme on track are in breach of the constitution, blowing a hole in the government’s 2013 budget.
In a long-awaited decision late on Friday night, the constitutional court rejected cuts in state pensions and public sector wages in a ruling that could force Pedro Passos Coelho, the prime minister, to negotiate alternative deficit reduction measures with international lenders.
The decision also threatens to destabilise Mr Passo Coelho’s leadership of his centre-right coalition. Amid opposition calls for his resignation, he convened an emergency cabinet meeting on Saturday to discuss the repercussions of the court ruling.
Economists calculated that the measures deemed unconstitutional represented between €900m and €1.3bn in government revenue and savings, about 20 per cent of the €5bn the government planned to gain from austerity measures this year.
After three months of deliberation, the 13 judges rejected four out of nine contested austerity measures.
The ruling is the latest in a series of troubles for the embattled prime minister following the resignation on Thursday of a senior cabinet minister and the government’s defeat of an opposition no-confidence motion on Wednesday.
The rejected measures were part of a tough austerity budget involving what the government described as “enormous” tax increases, aimed at meeting deficit targets required under Portugal’s bailout agreement.
It is the second consecutive year that Mr Passos Coelho has been forced to rewrite his budget after judges rejected austerity measures they considered to have flouted the constitution.
Under the existing 2013 budget, approved in parliament in November, Portuguese families face the biggest tax increases in living memory as the government seeks to increase income tax revenue by 30 per cent.
The court rejected cuts in state pensions and public sector pay equivalent to about 7 per cent of annual income as well as cuts in sickness and unemployment benefits.
A contested “solidarity” tax surcharge ranging from 3.5 to 10 per cent on pensions of more than €1,350 a month was accepted by the court as well as a 50 per cent cut in overtime pay rates for public sector workers.
President Aníbal Cavaco Silva, opposition parties, trade unions and the justice ombudsman had asked the court to examine the legality of different sections of the budget they believed could contravene constitutional requirements for fair, progressive and non-discriminatory budget measures.
Pedro Santos Guerreiro, editor of the Jornal de Negócios, a business daily, said it was difficult to understand why the government had approved “high risk” budget measures likely to be ruled unconstitutional.
In March, international lenders agreed to give Portugal a second extra year to meet fiscal targets established as part of its bailout programme. But economists said the relaxation this year would not be enough to accommodate the cost to the state implied by the court ruling.