UPDATE 2-Portugal govt, opposition reach agreement on budget

* Initial talks had collapsed on Wednesday

* Brussels applied pressure for deal

(Updates with comments, background)

By Axel Bugge

LISBON, Oct 30 (BestGrowthStock) – Portugal’s minority Socialist
government and opposition Social Democrats (PSD) reached an
agreement on the 2011 budget on Saturday, averting a political
crisis in one of the euro zone’s financially weakest members.

The agreement comes after a lengthy showdown between the
government and the PSD which had threatened to derail the budget
and plunge the country into paralysis.

“I think this was a victory for Portugal and for the
Portuguese because it was shown that understanding is possible
on the essential questions that have a bearing on our future,”
Eduardo Catroga, the PSD negotiator, told reporters.

“It was very important to tell the country that we could
agree.”

Brussels, investors and Portugal’s large banks have piled
pressure on both sides to reach a deal. Failure to do so could
have forced the government to seek a financial rescue from its
European partners, as Greece did earlier this year.

Prime Minister Jose Socrates has promised to cut the deficit
to 4.6 percent of GDP next year from 7.3 percent this year and
needs the PSD to vote for the budget or abstain in order to pass
it. A first vote in parliament is scheduled for Wednesday.

Finance Minister Fernando Teixeira dos Santos said he hoped
the PSD would now support all necessary measures to ensure that
the government’s budget goals are met.

The agreement excluded some items from a rise in value-added
tax, or sales tax, reducing revenues for the government,
Teixeira dos Santos said.

The minister said those lower revenues would still have to
be compensated by income from other sources as the budget moves
through the commission stage in parliament.

“Through the deal, which reaffirms the necessity of a budget
deficit of 4.6 percent, I hope the PSD will fulfil its
commitment and that it will support the necessary measures to
meet this goal,” Teixeira dos Santos said.

Saturday’s agreement ensures the budget will get through the
first budget vote in parliament on Nov. 3. The final vote on the
bill will only take place at the end of next month.

Fears grew after talks between the government and the PSD
collapsed on Wednesday. But on Friday Socrates and PSD leader
Pedro Passos Coelho said they were open to new talks, suggesting
an agreement was possible after all.

Because the government rules without a majority it needs the
support of the opposition to pass legislation.

The PSD has insisted on more spending cuts and smaller
increases in taxes to cut the budget deficit, arguing that the
Portuguese state sector is bloated and needs deep reforms.

Socrates had threatened to resign if the budget was not
passed, which would have created months of uncertainty because,
under the constitution, a snap election could only be held in
May at the earliest.

The budget agreement means the key measures of raising
value-added tax to 23 percent from 21 percent and of cutting
civil servant wages next year by 5 percent remain intact.

(Additional reporting by Shrikesh Laxmidas and Elisabete
Tavares)
(Reporting by Axel Bugge; Editing by Peter Graff)

UPDATE 2-Portugal govt, opposition reach agreement on budget