Portugal avoided a possible collapse of its government after the country’s two leading parties ended on Saturday a month-long standoff over next year’s budget.
The deal is also likely to be welcomed by investors, who had pushed Portugal’s cost of borrowing to record highs late in September over concerns about the budgetary impasse and the government’s inability to cut its core deficit this year.
Portugal is among a handful of nations using the euro that have struggled to shake off investors’ concerns about their finances, especially after Greece’s near collapse this year, which required an emergency bailout.
Portuguese Prime Minister Jose Socrates had threatened on several occasions in recent weeks to resign if the Social Democrat opposition blocked next year’s budget proposal in parliament. The Social Democrats had vowed not to allow the government to introduce any further tax increases; Socrates had proposed these increases as part of an austerity plan intended to help reassure markets that -Portugal would meet its pledge to cut its budget deficit to 7.3 percent this year and 4.6 percent next year, down from 9.3 percent of GDP last year.
Under the 11th-hour deal, the Social Democrat leadership agreed that its lawmakers would abstain rather than vote against the budget plan. Parliament is scheduled to start its budgetary debate tomorrow.
“We have met the conditions for adopting a budget that will entail sacrifices from the Portuguese in order to ensure the financing of the country,” Portuguese Finance Minister Fernando Teixeira dos Santos told the Portuguese national television on Saturday.
As part of the deal, the Social Democrats agreed not to oppose a general rise in value-added taxation of 2 percentage points, to 23 percent, in return for some changes to the government’s initial tax plans, including the exemption of food products from the higher value-added tax.
These concessions, however, will force the government to seek an alternative financing solution to keep its deficit-cutting plan on track.