Portugal: Rejection of austerity measures in public sector

In 2014, Portugal's Constitutional Court ruled that a number of the coalition government's austerity measures were unconstitutional. The government’s response was a new austerity package that extended the possibility of wage cuts to 2018 and included permanent cuts to public pensions. The Constitutional Court accepted only the nominal wage cuts for 2014 and 2015.

Three articles of 2014 budget declared unconstitutional

On 30 May 2014, five months after Portugal's 2014 budget law (in Portuguese, 1.5 MB PDF) came into force, the Constitutional Court (TC) ruled on petitions presented by members of parliament from the Socialist Party, Communist Party, Left Bloc and Greens, and by the Ombudsman asking the court to investigate the constitutionality of four of the law's articles. The court's ruling on the state budget law focused on:

  • new cuts in nominal wages in the public sector (Article 33); 
  • the reduction in supplementary pensions in the public enterprise sector (Article 75);
  • additional taxes on unemployment benefits and on sick pay (Article 115);
  • cuts to pensions paid to widows, widowers and surviving civil partners (Article 117).

The Constitutional Court ruled three of these measures – Articles 33, 115 and 117 – unconstitutional but did, however, approve Article 75, which reduces supplementary pensions in the public enterprise sector. However, it declared that these decisions would not be implemented retroactively.  

Wage cuts for lower-paid public workers

Article 33 of the budget law reduced the total gross pay of public sector employees earning €675–€2,000 per month on a progressive scale of 2.5%–12%. And it cut all wages above €2,000 by 12%. This carried forward to 2014 wage cuts that had been imposed by the budget laws for 2011, 2012 and 2013. However, the new budget increased the percentage cuts significantly: in the previous three years, these had been between 3.5% and 10%. The cuts were also extended to employees earning between €675 and €1,500 per month. 

The government, a coalition of the Social Democratic Party (PSD) and the People's Party (CDS), estimated that the 2014 budget cuts would save about €643 million, representing 0.4% of gross domestic product (GDP). These potential savings also came from other cuts, which were not challenged in court, such as:

  • a ban on pay increases for promotions or bonuses paid to managers of public companies and public institutes;
  • a reduction in overtime payments;
  • an increase of weekly working time from 35 to 40 hours without equivalent compensation.

However, the Constitutional Court considered excessive, and therefore constitutionally unlawful, the new reductions in wages – particularly the extension of wage cuts to those earning less than €1,500 per month. The court ruled that these cuts violated the principle of equality enshrined in Article 13 of the Portuguese constitution.

Additional tax on unemployment benefits and sick pay

Article 115 of the budget law set a 5% levy on unemployment benefits and 6% on sick leave benefits. The Constitutional Court ruled this measure to be unconstitutional on the grounds that the legal regime governing such benefits already reduces the standard of living of those who are unemployed or sick. Any further cut would make already vulnerable people suffer further. Unemployment benefit varies between a minimum of €419.22 and a maximum of €1,048.05 per month and is reduced by 10% after six months. The amount of sick pay ranges between 55% and 75% of average earnings, with a minimum of €125.70 per month. The Constitutional Court declared that taxing these benefits violated the principle of proportionality enshrined in Article 2 of the Portuguese constitution.

Cuts to survivors' pensions

Article 117 of the budget law determined that pensions for widows, widowers or surviving civil partners would be substantially reduced if recipients already had pensions of more than €2,000 per month. This measure would be retroactive, applied to both current and future recipients. Such pensions would, in effect, be means-tested, an innovation in the Portuguese system. However, since the new provision did not take into account all additional income other than pensions, the Constitutional Court ruled that this violated the principle of equality enshrined in Article 13 of the Portuguese constitution.

New austerity measures presented

In July 2014, the government responded to the court's ruling with a new austerity package. Its objective was to compensate for the estimated €500 million shortfall in budget savings created by the court's ruling on the original cuts.

Compliance with the Memorandum of Understanding signed by Portugal with the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB) – the troika – was no longer the justification for this new package because the Financial Assistance Programme agreed between Portugal and the troika was concluded in May 2014. The aim of the new package was to ensure compliance with the terms of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

The new austerity package, approved by the Portuguese parliament on 25 July 2014 as Parliamentary Decree 264/XII (in Portguese, 124 KB PDF), again attempted to cut expenses in the public sector by setting out cuts in nominal wages for the next four years until 2018, and introducing a ‘sustainability’ levy on public-sector pensions. This time, however, the government asked the President of the Republic to put the package before the Constitutional Court so that it could rule on the constitutionality of these measures before they came into force. The court's deliberation was published in two judgements on 14 August 2014 covering pay cuts for workers paid out of public funds in 2014–2105 and 2016–2108 and proposed creation of a sustainability contribution

Constitutional court rules on second austerity package

The second austerity package included a cut in public sector pay, similar to that in place from 2011 to 2013, of between 3. 5% and 10%, and only on wages above €1,500 per month. Article 4 of the Decree set out that:

  • the pay cut would be subject to a 20% reduction from 1 January 2015;
  • budgets from 2016 onwards would provide additional reductions, depending on budget availability;
  • total reversal of the pay cut would be complete within four years. 

The Constitutional Court ruled that the wage cuts for the final quarter of 2014 and for 2015 were constitutional. However, it ruled that the cuts proposed for 2016 violated the principle of equality enshrined in Article 13 of the Portuguese constitution. The court argued that it was not acceptable to apply, without review, a reduction in nominal wages for such a long period (2014–2018). The cumulative effect would be eight consecutive years (2011–2018) of cuts in nominal wages in the public sector.

The new package's 'Contribution to Sustainability' proposed a levy on public-sector pensions that was intended to replace the current temporary ‘Extraordinary Contribution to Sustainability’. However, the new policy would have imposed permanent cuts of between 2% and 3.5% on all public pensions, current and future, above €1,000 per month. The Constitutional Court rejected this, ruling that it violated the principle of protection of trust enshrined in Article 2 of the Portuguese constitution.

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