Portuguese court throws out 'unconstitutional' pay and pension cuts

The court ruling will not be applied retroactively to cuts which were applied in January, but will come into immediate effect.

"Budget execution has reached half way (through the year) and so these substantial amounts could damage budget consolidation targets," said Joaquim de Sousa Ribeiro, president of the supreme court.

Even so, the decision is set to cost the Portuguese government around €700 million.

The move is the latest in a series of court rulings deeming planned austerity measures to be unconstitutional that have challenged the centre-right government of Pedro Coelho since Portugal was forced to take emergency loans in 2011.

As with previous rulings, however, it leaves the government needing to propose alternative spending cuts or tax rises to make up the lost revenue.

Portugal exited its three-year €78 billion bailout programme at the start of May without requesting any further loans, just as Ireland had done in November 2013.

Despite a successful return to the financial markets, where interest rates on ten year bonds have continued to fall, reaching 3.6 percent last week, the country faces a rocky economic future.

The Portuguese economy shrank by 0.7 percent in the first three months of 2014 after returning to growth in the second half of last year. Despite the setback, it is forecast to grow by 1.2 percent through 2014.

Meanwhile, although unemployment has fallen to 15.2 percent from a peak of 17.7 percent, youth unemployment, at 35 percent, is a long-term structural problem for the Portuguese economy.

Portugal must trim its budget deficit to 4 percent by the end of 2014 and to 2.5 percent in 2015.

The country's debt is also a problem – with the bailout having increased the overall indebtedness from 93 percent of GDP to 129 percent.

For its part, the European Commission will give its verdict on Portugal’s progress on Monday (2 June), as part of an annual report containing economic recommendations for all 28 EU countries.

Although a number of countries remain on the EU executive’s 'watchlist', the average deficit rate has fallen to 3 percent, just inside the limit set by the bloc’s stability pact, and all countries, barring Croatia, are expected to record growth this year.

"After years of focusing on stabilizing the crisis we are now looking at growth," a Commission official commented last week ahead of the report.

He added that the Commission's recommendations would "promote reforms that boost demand and competitiveness".