Portugal's government seeks growth plan that meets budget goals

LISBON Fri Apr 19, 2013 1:58pm BST

Portugal's Prime Minister Pedro Passos Coelho arrives at a room to deliver a statement at Sao Bento Palace in Lisbon April 7, 2013. REUTERS/Jose Manuel Ribeiro

Portugal's Prime Minister Pedro Passos Coelho arrives at a room to deliver a statement at Sao Bento Palace in Lisbon April 7, 2013.

Credit: Reuters/Jose Manuel Ribeiro

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LISBON (Reuters) - Portugal's government hopes to announce next week how it plans to drag the economy out of a deep recession without compromising budget goals agreed under its international bailout, the prime minister said on Friday.

Pedro Passos Coelho was speaking in a parliamentary debate a day after his administration approved new spending cuts to put the budget agreed with the European Union and International Monetary Fund back on track after the country's constitutional court rejected parts of this year's plan.

"Now that we are more confident on the path of budget consolidation, we have to bet on everything that promotes growth," he told parliament. "The government decided to hold an extraordinary cabinet meeting on Tuesday to approve a strategy of growth and industrial development."

The premier's plan reflects recent concerns among European policymakers about how far budget cuts aimed at containing the region's debt crisis have damaged economic growth.

EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters earlier the euro zone will slow its budgetary belt-tightening to help reinvigorate the economy.

Such a change in tack could at least simplify the acceptance in Brussels of Lisbon's potential tax incentives for companies making new productive investment. The government has said it was considering such incentives, but stopped short of outlining specific terms saying those had to be coordinated with Brussels.

A growth strategy is also aimed at trying to win back a broad political consensus for the bailout after the main opposition Socialists refused to back any more austerity.

The coalition government has a comfortable majority in parliament, but Lisbon's lenders want broader support to give the reforms a better chance of long-term success.

Still, Passos Coelho reiterated that the country had to scrupulously meet its budget tightening goals set out under the bailout in order to end the rescue programme as planned by mid-2014 and be able to rely on debt market financing.

"It is vital for Portugal to succeed in this process to secure market financing. Portugal does not want a second assistance programme," Passos Coelho said.

Portugal's European Union and IMF lenders last month eased Lisbon's budget goals, but it still has to slash the deficit to 5.5 percent this year from 6.4 percent last year, then to 4 percent in 2014 and 2.5 percent in 2015.

The government has already imposed the largest tax hikes in living memory from January, adding to other tax rises and spending cuts introduced since the mid-2011 bailout. Consumer demand and investment has collapsed, causing the deepest recession in Portugal since the 1970s.

The economy is expected to shrink 2.3 percent this year after last year's 3.2 percent slump before returning to meagre growth in 2014.

Despite the economic pain and growing protest, Lisbon's borrowing costs have dropped since the start of 2013, suggesting investors believe the European Union will make the bailout work.

(Writing by Andrei Khalip; Editing by Ruth Pitchford)

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