European Commission approves Portugal’s alternative measures to social security hike

The European Commission has approved alternative measures proposed by the Portuguese government to cover the hole in its finances resulting from its decision to withdraw a planned hike in workers’ social security contributions.

“We at the Commission have already given our approval to the alternative measures presented by the government,” EC President José Manuel Durão Barroso told reporters in Lisbon on Monday.

The government has not unveiled what the measures are but it had previously said they would come in the form of higher taxes on income and capital. The government is due to present its 2013 draft state budget by October 15.

“I am absolutely convinced that the government of the euro zone will follow the Commission’s recommendation and free the next tranche [of assistance] to Portugal due on October 8,” Barroso said.

Portugal is the beneficiary of a 78-billion-euro loan from the European Union and the IMF. In return for the bailout, the government has agreed to a draconian austerity drive that has sparked widespread discontent.

The government of Prime Minister Pedro Passos Coelho backtracked on a measure that would effectively have cut workers’ wages, after massive street protests.

Moody’s Investors Service on Monday described the decision to back down on the hike in social security payments as a “serious setback,” and called it "credit negative, because it could encourage opposition to the reform program and create the expectation that protests will be successful again."

The government is aiming to limit its budget deficit to five percent of GDP this year. Brussels recently gave Lisbon another year to bring the shortfall back within the EU ceiling of three percent of GDP as the country slipped deeper into recession this year.