Portugal's unpleasant economic medicine

Trade union leaders in Portugal have called for a nationwide protest in May, following what they say was a successful strike on Thursday by public sector workers over pay cuts.

But politicians have vowed to rein in spending lest the country default on its debt, says the BBC's Sarah Rainsford in Lisbon.

Across Portugal schools closed, hospital doctors walked off shift and rubbish collectors left piles of waste in the streets.

Trade union officials b

That deficit tripled to a record 9.3% last year as the government increased spending during the recession. Portugal is now under pressure from the European Union to cut that.

But the unions say their members are being wrongly targeted in the austerity drive, having already suffered a 7% pay cut in real terms over the past decade.

Paulo Taborda, of the union umbrella group Common Front, argues that what public sector employees actually need is a pay rise.

"If there is no wage rise then people won't have money to spend and the economy can't start growing again," he says.

Opposition concern

The pay cuts are already written into the budget for 2010, alongside a commitment not to replace half of the civil servants who leave. There is also a 50% tax on bankers' bonuses.

The austere budget is currently being debated inside the sumptuous main hall of parliament, the Palace of Sao Bento, part of a former monastery with an ornate painted ceiling, stone statues and wall-carvings.

The main opposition Social Democratic Party (PSD) will abstain from voting on the budget next week so that it can pass.

That will be a relief for the government, which no longer has a majority in parliament - but also an indication of the opposition's concern.

"The situation here is not the same as in Greece, but we should be realistic - we are on the same path," says opposition MP Paulo Mota Pinto, pointing to the country's low savings rate, a reliance on external funds, and low productivity.

"We have to address the problems in our economy," he stressed, but dismissed talk of a possible default.

"Portugal has not defaulted since the 19th century. We have a history of being reliable."

'Feasible plan'

The government says it will cut the budget deficit by 1% this year, mainly through increased economic growth.

It has then committed to reducing the deficit to 3% of GDP by 2013, the maximum allowed under the eurozone's Stability and Growth Pact (SGP).

The full plan is set out in an all-important document, prepared for the European Commission, which will only be revealed in Lisbon this weekend.

"The markets are waiting to see concrete measures, and see that the commitment to reducing the deficit is translated into a feasible plan," says Alberto Soares, chairman of Portugal's government debt agency.

"I do think it's possible. The government's determination will now be translated into policy."

One much-cited reason for optimism here is experience.

The Socialist government has cut a huge budget deficit before, when it soared beyond the EU limit in 2005.

Crucially, economists say the effects of many measures taken then - like addressing tax evasion and streamlining public institutions - are only just starting to be felt.

But all the talk of austerity is worrying those who have benefited from government stimulus spending programmes, as it attempted to kick-start economic growth.

'Terrible year'

In a Lisbon suburb, Miguel Osorio showed me the result of his recent business expansion - a new motorbike showroom, filled with expensive bikes and spare parts.

He employs three trainees there and in his workshop - all of whose wages are subsidised by the government.

Unemployment in Portugal is now more than 10%.

"I would not have been able to employ them otherwise. It is very expensive," Mr Osorio explains. "When a company wants to grow step by step this kind of programme is very good."

The fate of major infrastructure spending projects like the Lisbon-Madrid high speed rail link also remains unclear.

"We have had a terrible year, but Portugal's deficit and debt are actually in line with EU levels," points out Millennium-BCP bank chief economist, Goncalo Pascoal.

Even so, he is certain Portugal can cut spending.

But Mr Pascoal says the government also needs to focus on boosting exports to help this small, battered economy into recovery.

"We need to make our goods and services more attractive. This is crucial when our debt is not sustainable," he argues, pointing to efforts to improve education and skills and remove red tape already underway.

"We need to be more productive and competitive. The figures show this is happening, but it is a slow process."

First though, the government has some unpleasant medicine to administer. Experience and recent re-election will help, but cutting spending yet again will not be easy.