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Portugal's government begins defense of austerity plan ahead of crucial Parliament vote - Budget 2011

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The Portuguese government will present its long-awaited 2011 austerity budget to parliament Friday afternoon amid continued uncertainty over its approval. The minority government of Prime Minister Jose Socrates needs the abstention, if not the support, of at least one other party to pass the budget. Portugal's main opposition, the Social Democratic Party, or PSD, had abstained from voting on the 2010 budget, permitting it to pass. But in recent weeks, the PSD said it won't approve the 2011 budget if the government insists on tax increases. Mr. Socrates had proposed in late September a series of harsh austerity measures aimed at cutting Portugal's budget deficit from 9.3% of gross domestic product in 2009 to 7.3% this year and 4.6% in 2011. An increase in the rate of the value-added-tax to 23% from 21% is set begin in 2011.

The government met with opposition parties Thursday to provide them with some details of the budget plan and newspapers have reported several measures included in the proposal. A new tax on banks will raise about €90 million ($126.6 million) a year from the country's five biggest financial institutions, Jornal de Negocios reported, citing its own calculations. People receiving monthly pension payments of €5,000 or more will pay an extraordinary 10% tax on that income, the newspaper also said.

The Diario Economico newspaper said Thursday that the leader of the PSD had hinted at some flexibility, saying parliament's inability to pass a budget law for 2011 will give Portugal a bad image. Portugal is under intense pressure from financial markets and the European Union to slash its yawning budget deficit. EU officials, Portugal's central bank and Standard & Poor's Corp. have welcomed the proposed austerity measures as necessary, but labor unions have called for a general strike Nov. 24.

Borrowing costs for Portugal continued to be high Friday, but were below records reached in September. The yield spread between Portuguese 10-year benchmark bonds and similar German bonds Friday stood at 3.82 percentage points from 3.845 percentage points Thursday. Lisbon's PSI-20 stocks index rose 0.2% to 7767.57 points.

Parliament has until the end of November to vote on the 2011 budget.

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