Portugal should focus on swift budget deficit reduction mainly through structural spending cuts, Bank of Portugal Governor Carlos Costa said on Wednesday after parliament approved the heaviest tax increases in the country's modern history.
Costa, who is also Governing Council member at the European Central Bank, said anti-cyclical policies where spending rises in periods of economic recession cannot be applied to struggling European countries under rescue programmes like Portugal.
"For these countries ... the margin for manoeuvre is extremely limited or even non-existent," he said in a speech, a copy of which was sent to Reuters.
"The priority should be a quick budget adjustment mainly based on structural spending adjustment...to regain credibility and put public finances on a sustainable path," he added.
Portugal's government has said tax hikes are the only way to guarantee that the country meets next year's budget deficit target of 4.5 percent as agreed under a 78-billion-euro (62.6 billion pounds) EU/IMF bailout. But it also vowed to work out a reform of state spending to avoid future tax hikes.
Costa said real progress had been made in budget consolidation, but warned that Portugal's recession and record unemployment were undermining the support base of the adjustment programme and austerity it implies.
(Reporting By Andrei Khalip; Editing by Michael Roddy)