Portugal government warns of severe pay cuts, tax increases

LISBON, Portugal -- Portugal's prime minister warned his country Thursday to prepare for deepening hardship next year as the government expands its austerity plan of pay cuts and tax increases to slash the national debt.

Portugal is one of three eurozone countries that have needed financial rescue because of an unsustainable debt load. It took a $108 billion bailout in May, but Europe's debt crisis has endured as ailing countries like Portugal struggle to ease their debt burden and find sources of economic growth.

Despite a series of tax increases and pay and welfare cuts, Portugal is coming up short on debt reduction targets it agreed in return for the bailout.

Prime Minister Pedro Passos Coelho said that 70 percent of the permitted budget deficit this year was used up by the end of June.

"We are living through a national emergency," Passos Coelho said in a televised address.

"We have to do more, a lot more, than we expected" to bring down the deficit, he said.

The deficit was 8.3 percent in the first half of the year -- down from 9.6 percent last year but way off this year's goal of 5.9 percent. Portugal must meet the target to qualify for the bailout funds.

The government is transferring the pension funds of private banks to the state treasury to help lower this year's deficit.

Passos Coelho announced that civil servants will next year lose their Christmas bonus and vacation pay -- each equal to a month's salary. They are already subject to a pay freeze.

There will also be "very substantial" cuts in health care and education, Passos Coelho said.

At the same time, more goods will be moved into the top 23 percent bracket of sales tax, and earners will be allowed fewer tax deductions. Legally permitted working hours are also to be extended and the number of public holidays cut.

If the center-right government doesn't take tough and unpopular steps, Portugal will be "under intense pressure" to leave the 17-nation eurozone, Passos Coelho said.

"This is how we get our credibility back," he said of the expanded austerity program.

He appealed to the Portuguese to stand together through difficult times. Portugal has not so far witnessed any of the unrest seen in Greece, which also took a bailout and adopted austerity.

"We have targets to meet and we must meet them," Passos Coelho said.

The new measures are to be included in the 2012 budget, due to be unveiled next week.

A double-dip recession, which is forecast to continue next year, has made it harder for the four-month-old government to reduce debt levels because tax revenue has fallen while the jobless rate has risen to more than 12 percent.