28 SEP 2010
Portugal must brace for fresh austerity to bring the budget deficit under control and stem capital flight, despite signs that political consensus is unravelling.
By Ambrose Evans-Pritchard
The OECD club of rich states urged the country to extend its public wage freeze until 2013 and prepare to raise taxes "swiftly" on sales and property.
"If acute market stress were to resurface, further fiscal tightening measures may need to be contemplated. Widening sovereign spreads, if persistent, may put the economic recovery at risk. The immediate challenge is to foster investor confidence by rapidly consolidating the public finances," it said.
Portugal's socialist premier Jose Socrates had hoped to tighten gradually, relying on growth to trim the deficit from 9.3pc in 2009 to 7.3pc this year, but markets have given this a thumbs down. Yields on 10-year Portuguese bonds have reached a post-EMU high of 6.41pc, some 413 points above German Bunds.
Mr Socrates has struggled with a minority government since the Left splintered in 2009, with defections to Marxist groups in the Bloco de Esquerda. He has relied on opposition conservatives, who have so far refused to back his latest austerity plans – ostensibly in a dispute over tax policy. A key minister said last week that Portugal would become "ungovernable" without a deal.
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