Portugal's government is pushing ahead with more deeply unpopular austerity policies.

It announced plans today to save €800m this year - about 0.5% of annual GDP - by slashing spending on public sector staff, goods and services.

The government said the new money-saving measures are needed to meet deficit targets stipulated by creditors who gave the country a €78 billion bailout two years ago.

With the recent rescue of Cyprus indicating the euro zone's financial crisis is far from over, the bailout lenders - the IMF, ECB and European Commission - are insisting that Portugal abide by its three-year bailout agreement. 

That involves painful cuts to public spending and tax increases to reduce debt.

If it does not comply, the creditors will not disburse the bailout loans, which are paid in installments. They said in a brief statement that discussions on Portugal's progress are continuing.

Portugal's deficit target for this year is 5.5%. Last year, it stood at 6.4%, above the 4.5% target. In 2010, it was 10.1%.

However, there are signs the austerity strategy is backfiring. Despite following its austerity programme closely, Portugal has repeatedly missed its deficit goals. That is partly because the measures have hurt the economy, which contracted 3.2% last year and is forecast to shrink 2.3% in 2013 for a third year of recession in a row.

As the economy shrinks, the government loses vital revenue it needs to lower debt. And as joblessness increases, the government faces higher social welfare bills. The unemployment rate, currently at 17.5%, is forecast to climb to 18.5% in 2014.

The government is trying to plug a €1.3 billion hole in its budget after the Constitutional Court recently ruled that some of this year's austerity measures were unlawful. After the €800m, it still has to make up for the rest of that shortfall.

Officials said the latest cuts, which are to be presented in detail next month, will likely result in staff cuts and prompt some public services to be scrapped.

Government official Luis Sarmento, who oversees the budget, said the steps "will place public services under great pressure."

The government drew up the measures - announced after a late-night Cabinet meeting - under the eyes of inspectors from the bailout lenders. The inspectors were in Lisbon to make sure Portugal does not backslide on the May 2011 agreement.

The government's job has become harder as street protests have mounted. Also, the broad political consensus that initially surrounded the bailout agreement has frayed, leaving the government isolated.

Prime Minister Pedro Passos Coelho invited the leader of the main opposition Socialist Party to a private meeting at his official residence yesterday. Passos Coelho said in his written invitation to Antonio Jose Seguro that Portugal has to follow a "very narrow" path to economic recovery and that political consensus is "fundamental" to achieve the country's goals.

But after the 90-minute meeting Seguro said he could not sign up to the government's approach. Austerity "isn't working," Seguro stated.