Portugal’s Constitutional Court has rejected three items in the 2014 State Budget but luckily for the treasury the judges’ decisions will not be backdated, but the financial hole will have to be plugged by an increasingly frustrated Treasury.
At issue was a cut in salary for state workers earning over €675, a 5% cut in sick pay, a 6% cut in unemployment benefit and changes to widows’ pensions. All have been rejected as cost saving measures.
The likelihood of a more general tax rise to compensate is now back in play.
Another problem is the Troika that now is holding back its last €3.5 billion payment under the bailout programme as this tranche was dependent on the above savings being approved.
In a Financial Times article today there was a suspicion that a new bailout soon may be needed and that in the short-term Portugal’s government needs to raise taxes in order to plug the €800 million hole that has suddenly appeared in the state's budget for the year.
The likely options include a VAT increase and/or a special tax on summer and Christmas holiday pay bonuses.
The international funding community expects the government to sort this situation out as it is not the first time that budgets have been set, only to have key parts knocked back by the Constitutional Court as being ‘unconstitutional.’
Interest rates are creeping up on state bonds while this situation is allowed to run on and decisive action is required from a government still reeling from a poor European election result.
