Portugal forecasts economy to contract 2.8% in 2012

Portugal's economy is next year expected to shrink further than was previously forecast, the government said Monday as it submitted its tough 2012 budget, while unions responded with a strike call. Finance Minister Vitor Gaspar told a press conference that Portugal was "at the heart of the crisis" affecting the eurozone and that the floundering world economy "will lead to a contraction of gross domestic product of 2.8 percent, following 1.9 percent this year," in Portugal. The government had previously envisaged the economy would shrink by 2.3 percent in 2012 and 1.8 percent this year. The Bank of Portugal had put the estimates at 2.2 percent and 1.9 percent, respectively. The draft budget, previewed by Prime Minister Pedro Passos Coelho and his centre-right government on Thursday, contains toughened austerity measures the government says are needed to meet conditions set by debt-wracked Portugal's international creditors. Gaspar said a 3.4 billion-euro hole in the books since the beginning of the year was behind the stricter programme than that recommended by the European Union and the International Monetary Fund last May. "It's clear that the starting point of the (2012) budget is a lot more unfavourable than that laid out in the financial assistance programme," he said at the conference. Earlier Monday union leaders called for a general strike against the deep spending cuts proposed. The head of the main UGT union, Joao Proenca, who called for the strike alongside his counterpart Manuel Carvalho da Silva of the CGTP union, slammed the budget that lawmakers will vote on by the end of the month. "These measures will not get the country out of the crisis, but will worsen poverty, unemployment and inequality," he said. The date and nature of the strike "will be decided soon", Carvalho da Silva said. The prime minister insisted the biting cuts are needed to tackle what he described as a "national emergency" in a televised address Thursday. With an absolute majority in the assembly, Passos Coehlo's coalition, in power since June, is assured of its adoption. The proposal includes the temporary suspension of 13th and 14th month salary payments for civil servants and pensioners who earn more than 1,000 euros a month. In the private sector, employees will be requested to work half an hour more per day. VAT is set to be hiked while the health and education budgets will be slashed. Passos Coelho said the "measures are temporary and will remain in place only during the financial aid programme", in his Thursday address. Portugal in May received a 78-billion-euro bailout from the European Union and International Monetary Fund, conditioned on a tough austerity programme to be executed over three years. The country needs to reduce its public deficit from 9.8 percent of gross domestic product in 2010 to 5.9 percent by the end of this year. The cutbacks envisioned in the draft budget are "inevitable", said the Diario Economico newspaper Monday, while questioning if "these sacrifices will solve (Portugal's) problems". Tens of thousands of people flooded the streets of Lisbon on Saturday to protest against Passos Coelho's budget and the demands imposed by the EU and IMF amid crippling unemployment which stands at 12.3 percent.