Jose Socrates promised no tax rises but will increase VAT

Prime Minister Jose Socrates said he would raise value-added tax to 21% from 19% now, and cut public spending.

The result, he said, would be to get the deficit down to 6.2% of gross domestic product this year and 2.8% of GDP by 2008.

Some projections see this year's figure at 6.8%, more than twice the EU limit.

First to fail

The EU's EU's Growth and Stability Pact says countries need to keep deficits below 3% of GDP, a broad measure of the size of the economy.

The programme is consensual, is coherent, is credible, has short-term effects and resolves the long-term problems of the economy Luis Campos e Cunha, Portuguese finance minister

Portugal became the first of the 12 countries in the eurozone to breach the pact's limit in 2001.

Since then, several others - most notably the eurozone's economic titans, France and Germany - have followed suit, albeit by the same margin as Portugal.

The pact says that countries in breach have a year to get back in line.

However, France and Germany have both exceeded the limit for several years in a row.

The EU is declining to specify how long Portugal is being given.

"It's obvious that the adjustment cannot be done in a year," said European Economic and Monetary Affairs Commissioner Joaquin Almunia in an interview with Portugal's Publico newspaper.

Deficit dynamics

Lisbon, for its part, is promising to pass the plan in parliament this week before sending it to Brussels by 9 June.

The Portuguese programme is "consensual, is coherent, is credible, has short-term effects and resolves the long-term problems" of the economy, said Portuguese finance minister Luis Campos e Cunha.

But the VAT hike and the spending cuts could hit Portugal's economic growth. Employers fear the VAT increase will discourage consumer spending, and trade unions are planning to strike over civil service reforms.

Unemployment in Portugal is at an eight-year high of 7.5%.

The four-year programme - timed to fit the current government's term in office - assumes that growth will come down to 0.8% this year, from the 2.4% originally forecast by the previous government.

Mr Socrates' government, which was elected in February, is hoping economic growth will rise in future years to 1.4% in 2006 and 2.6% in 2008.