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Portugal faces suffocating 2013 budget

By Axel Bugge

LISBON (Reuters) - Portugal's center-right government presents its 2013 budget on Monday, which will outline the harshest measures yet under Lisbon's 78-billion-euro bailout and is likely to mark the end of the country's so far reluctant acceptance of austerity.

The budget will face immediate opposition from angry Portuguese, who plan to march on parliament to demand the resignation of the government and an end to austerity, which has sent Portugal into its worst recession since the 1970s.

The 2013 budget is set to introduce sharp income tax hikes, which could amount to up to two or three months' wages for middle income workers, to ensure the country meets its budget goals under the bailout. Finance Minister Vitor Gaspar has described the planned tax increases as "enormous."

Economists fear that the tough measures, which will also include pension cuts, a financial transaction tax and higher property taxes, could push Portugal into a recessive spiral like Greece, further undermining Europe's German-inspired austerity drive for the euro's highly-indebted countries.

The austerity moves in the 2013 budget came after the government announced last month a rise in social security contributions, which it subsequently dropped after mass protests erupted. The opposition to the alternative tax measures is set to be equally strong.

Even Portugal's conservative president, Anibal Cavaco Silva, criticized the budget measure. "In the current circumstances, it is not correct to demand of a country being subjected to a budget adjustment process that it meets the targets at any cost," Cavaco Silva wrote on his Facebook page.

Before September, Portugal had shown a relatively high level of political consensus and support for cutting costs and the bailout it sought in 2011. But that support has been eroded, with the main opposition Socialists now pledging to vote against the budget when it is put to parliament at the end of the month.

Protests have now become frequent, though still peaceful. A general strike is planned for November 14.

LAST MINUTE DEBATE

The ruling center-right Social Democrats hold a comfortable majority in parliament together with their smaller allies, the rightist CDS. But the CDS has a long history of opposing higher taxes and analysts say the party's complete support of the government can no longer be taken for granted, especially if the economy deteriorates further.

Local media reported that the government was still locked in an internal debate at the weekend on the possibility of finding more areas for spending cuts in order to ease the tax hikes. The budget is expected to be detailed on Monday afternoon.

The economy is expected to contract at least 3 percent this year and the government expects a contraction of just 1 percent in 2013 -- a forecast widely doubted by economists. Unemployment is already at record highs above 15 percent and the government expects it to rise to 16.4 percent next year.

The 2013 draft budget may include new economic forecasts for next year.

This year's budget performance was undermined by tax revenues falling short of expectations as the recession deepened and unemployment rose beyond government forecasts.

(Reporting By Axel Bugge; Editing by Rosalind Russell)

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