José Sócrates, Portugal’s prime minister, on Thursday announced tough new austerity measures, including a “crisis tax” on wages and big companies, designed to more than halve the country’s gaping budget deficit in less than two years.

He said the new austerity drive, which follows similar moves bySpain, Greece and Ireland, was part of a broad European Union effort, including a €750bn emergency plan, to support the euro 

“These measures are absolutely necessary to defend our country, Europe and the euro,” he said.

The additional spending cuts and tax increases aim to reduce the budget deficit from 9.4 per cent of gross domestic product in 2009 to 7 per cent this year and 4.6 per cent in 2011. Portugal has initially targeted deficits of 8.3 per cent of GDP this year and 6.6 percent in 2011.

“The world has changed – and how – over the past two weeks,” Mr Sócrates said, explaining why he had decided to break recent pledges not to increase taxes.

The scale of the planned deficit reduction surprised trade union leaders, who called for a “mobilisation” against what one described as a “harsh and unjust” programme that would stall economic growth.

Describing the measures as essential to defend Portugal’s credibility in international financial markets, Mr Sócrates announced a one percentage point increase in value-added tax to 21 per cent and increases of up to 1.5 per cent in income tax.

The increases, which are being called a “crisis tax”, include a 2.5 percentage point rise in corporate tax to 27.5 per cent on annual profits above €2m. Politicians and public sector managers will also see their salaries cut by five per cent.

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