Portugal PM says to raise workers' social security levy

LISBON Fri Sep 7, 2012 9:40pm BST

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LISBON (Reuters) - Portugal's Prime Minister Pedro Passos Coelho announced fresh austerity measures for workers on Friday, saying the country could not risk slippage in meeting its targets under a 78 billion euro bailout from the European Union and IMF.

Passos Coelho said the 2013 budget would include an increase in social security contributions to 18 percent from 11 percent for all workers, roughly equivalent to one month's salary.

"The financial emergency that the country submerged into in 2011 is still not over," Passos Coelho said in a televised announcement to outline the measures. "We have started to attack the problems we confront but we have not yet dominated them."

The move is yet another blow to the Portuguese, who have been confronted with across-the-board tax hikes and spending cuts since the country was forced to seek a bailout last year and entered its deepest recession since the 1970s.

The prime minister also announced a cut in the social security contribution of companies, to 18 percent from 23.75 percent, in a bid to boost employment which stands at a record high above 15 percent.

The measures were announced during a visit to Lisbon by inspectors from the European Commission, European Central Bank and International Monetary Fund to carry out the fifth review of Portugal's performance under the bailout. Passos Coelho said the review was close to completion.

Economists have said Portugal is likely to miss its budget deficit goals this year and next because the government and lenders underestimated the depth of the recession which has resulted in lower tax revenues.

"Do not be taken in by the complacency of those who think we have all the time in the world, or by those who defend that we had done enough to overcome the crisis and that now it is up to others to do the rest," Passos Coelho said.

Meeting next year's budget goals was made more difficult by a court ruling in July that prohibited a cut in salary benefits for public sector workers. Passos Coelho said the rise in social security contributions was intended to make up for the budget shortfall resulting from that decision.

Opposition politicians and businesses have urged the government not to adopt more austerity measures, fearing they could send the economy further into a downward spiral.

Economists and investors had speculated before the "troika" inspectors arrived that, given its good compliance record, Portugal might be granted some leeway on its fiscal goals.

The government has hoped Portugal would emulate fellow-bailout recipient Ireland, rather than Greece, in returning to growth after reforming its economy.

So far Lisbon has won strong praise in Europe for its single-minded focus on reforming the economy, however economic growth remains elusive. But Portuguese bonds have benefited strongly from the European Central Bank's (ECB) bond-buying plan, reducing the country's risk premium.

Passos Coelho said the ECB's plan was likely to help Portugal's eventual return to bond markets, as it hopes to do in a year under the current bailout.

The economy is expected to contract more than 3 percent this year.

Under the bailout, Portugal needs to cut its budget deficit to 4.5 percent of GDP this year and to 3 percent in 2013.

(Additional reporting by Andrei Khalip and Sergio Goncalves; Editing by Pravin Char)

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