Portugal PM, PSD leader agree new austerity steps

Portugal's prime minister and the leader of the main opposition party on Thursday agreed on additional austerity measures to cut the 2010 budget deficit by around 2 billion euros to avoid a Greek-style debt crisis, a source close to the negotiations said.

The package is expected to be approved at a cabinet meeting on Thursday after talks between Prime Minister Jose Socrates and PSD party leader Pedro Passos Coelho and half the savings would come from tax hikes.

Socrates' Socialists need the support of the opposition to pass bills in parliament.

The maximum value-added tax rate would rise to 21 percent from 20 percent, an additional tax on large companies' and banks' profits would be imposed, while income taxes would also have a yet unspecified increase, the source added.

"There is already an understanding on the new measures, for an amount of around 2 billion euros. Around half will come from the spending cuts and the other half from the revenue increase" the source said.

On the spending side, a cut in top level public sector wages like state-run company managers and politicians is proposed.

The minority Socialist government said at the weekend it would cut the budget deficit to around 7 percent of gross domestic product this year compared to 8.3 percent as outlined in its Brussels-approved medium-term budget consolidation strategy, but did not then specify how.

The medium-term strategy aims to slash the budget deficit to 2.8 percent in 2013 from last year's highs of 9.4 percent.

The cross-party understanding comes a day after Spain announced additional cuts in public spending and civil service wages designed to reduce its budget deficit, and three days after the creation of a trillion-dollar euro zone safety net.

Debt-stricken Greece has had to implement severe additional austerity measures after resorting to a 110 billion euro bailout package from the European Union and the International Monetary Fund earlier in May.