Portugal - Domestic policy

Durão Barroso's top priority has been reversing the downturn in the economy. The government's finances are in a shambles, and at the outset of his term, Durão Barroso's minister of finance, Manuela Ferrira Leite (known as the "Iron Lady" for her uncompromising stance on issues), acted quickly. In one of her first speeches, she announced severe spending cuts for social programs, including health, social security, and education. Durão Barroso's tough stance on spending, reflected in these announcements, carried over into other spheres as well.

Upon taking office Durão Barroso immediately pledged to reform the tax code by reducing corporate and personal income taxes, but suggested an increase in the value-added tax as a way to make up for the revenue lost in other tax cuts. He also pledged to privatize some areas of public service. He contended that the government had become bloated; as the deficit crept higher, it approached the acceptable limit for countries of the EU. Tough criteria of the EU plague Portugal's economy—the EU has set a deficit limit of 3% of GDP for its member countries, with fines imposed on countries whose deficits exceed the limit. Portugal's deficit was officially reported at 2.4% in 2001, but many observers believed that questionable accounting practices kept the deficit artificially low. In February 2002 the EU considered issuing warnings to both Portugal and Germany, where the deficit had reached 2.7% of GDP.

In the Cavaço Silva years prior to Guterres's election, Portugal moved along a path of free-market policies with austere economic measures. Many consider these policies—coupled with the billions of dollars in aid provided by the EU and other foreign sources—to have propped up the economy in the 1980s and early 1990s. But the EU was focusing on the economies of the countries who are candidates for membership, and continuing aid to Portugal was by no means guaranteed.

The government under Durão Barroso, in coalition with Portas and his PP colleagues, was prioritizing the economy, tighter controls on immigration, and tightening of drug laws. Despite his own uncooperative stance when his party was in opposition, Durão Barroso and his central bank governor, Vitor Constancio, stressed the need for unity to support the difficult austerity programs the government must implement to right the economy. Trade union leaders were vocal in their disapproval of proposed budget cuts. As recently as May 2000, civil service and transport unions affiliated with the Communist and Socialist parties went on strike to press for higher wages to cope with an 11% increase in fuel taxes that affected public sector workers.

In mid-2002, Durão Barroso announced the Guterres administration had concealed the actual state of Portugal's financial health, as the EU threatened to impose punitive sanctions on the country for violating the body's Stability and Growth Pact, limiting state budget deficits to 3% of GDP. A governmental task force revealed the real figure for Portugal was 4.1%. Durão Barroso took credit for revealing the high figure, while claiming the previous administration was responsible for incurring it. If Portugal refuses to take serious austerity measures to right the deficit, the EU can dictate severe spending cuts or tax increases, and if this fails, it can impose fines of up to 0.5% of Portugal's GDP. Portugal was the first EU country to be considered for such sanctions. Worse news came in early 2003, when Portugal became the first EU country considered to be in a recession. Unemployment was at its highest level in five years, and the IMF forecast Portugal's economy would grow in 2003 by 0.4%, the worst performance in the euro currency zone.

Portugal's economic woes had detrimental effects on other domestic policy issues in 2002–03. When the chief of staff of Portugal's military criticized Durão Barroso's government in October 2002 for limiting defense spending, saying the move would cripple the armed forces, Durão Barroso demanded his resignation, and when he refused, had him dismissed by the president. In late 2002, the government approved legislation allowing the state to set limits on immigration from outside the EU. Portugal also fears an influx of Eastern European immigrants when 10 newly-invited applicants to the EU are to accede to the body in 2004. As of March 2003, there were around 400,000 legal immigrants in Portugal, nearly 5% of the population, one of the highest proportions in the EU. Paulo Portas, Durão Barroso's coalition partner, stated: "If we exaggeratedly allow entry to immigrants, not only will we not have jobs, we will also not have the conditions for social integration."

Portugal is not meeting targets set by the Kyoto Protocol for limiting greenhouse gas emissions. Ten of the EU's 15 nations are falling behind in their efforts to meet the standards set by the Protocol, with Portugal, along with Ireland and Spain, one of the worst offenders.