Speculations on Portugal's financial standing have shot up borrowing rates for the country to unsustainable levels. But determined to avoid a bailout, the government presses on with austerity.
The cuts are to equal savings of 0.8 percent of GDP this year
The Portuguese government announced tighter austerity measures on Friday, shortly before a eurozone summit that put more pressure on states with big deficits to reign in spending.
The cuts are aimed at reducing Portugal's budget deficit to 4.6 percent of gross domestic product this year, down from 7.3 percent. The government hopes to get its deficit within the eurozone limit of 3 percent by 2012, and to reach 2 percent by 2013.
Finance Minister Fernando Teixeira dos Santos said the "precautionary measures" would provide savings of around 0.8 percent of GDP this year.
Prime Minister Socrates says Portugal will not need a bailout
The cuts primarily affect health, publicly-owned companies and social welfare programs. Pensions above 1,500 euros ($2,075) per month face a new tax, and changes to financial and labor market rules include a reduction in layoff payments.
Economy Commissioner Olli Rehn called the budget cuts "significant" and showed Portugal's "engagement to ensure fiscal sustainability."
"The announced package will help Portugal regain control over debt dynamics and put an end to uncertainties," Rehn said in Brussels. "We will continue to closely monitor the situation in the context of enhanced surveillance."
Trying to avoid bailout
Speculation on the health of Portugal's finances has shot up the government's borrowing costs, with yield's on its 10-year bonds reaching 7.403 percent on Wednesday - levels widely considered to be unsustainable.
Portuguese Prime Minister Jose Socrates has repeatedly said his government will not need a bailout, similar to those granted Greece and Ireland from the European Union and the International Monetary Fund.
In the run-up to Friday's meeting of leaders from the 17-nation eurozone, Germany put more pressure on Greece to continue privatization efforts and on Ireland to bring its corporate tax rate up to standard EU levels.
Author: Andrew Bowen (AFP, Reuters, dpa)
Editor: Rob Turner