LISBON (Reuters) -Portugal's parliament threw out the minority Socialist government's 2022 budget bill on Wednesday, paving the way for snap elections and ending six years of relative political stability under Prime Minister Antonio Costa.
Costa's hard-left former allies sided with the conservatives to defeat the bill that envisaged income tax cuts for the middle class and increased public investment while cutting the deficit to 3.2% of gross domestic product from 4.3% in 2021.
The Communists and Left Bloc said Costa had ignored their demands for more protection for workers, improvements in the social security system and more public investment in the health service as he was too focused on deficit cuts.
Costa argued he could not risk damaging hard-earned international credibility in a country with one of the heaviest public debt burdens in Europe and which was subject to painful austerity from 2011 to 2014 under an international bailout.
While the rejection of a budget does not necessarily imply snap elections, President Marcelo Rebelo de Sousa warned on Monday that he would have no option but to dissolve parliament and hold elections two years ahead of schedule.
That entails consultations with the main political parties, Costa and the president's Council of State that could take several weeks.
In a statement published on the presidency's website, Rebelo de Sousa said he would meet Costa and parliament's speaker, Eduardo Ferro Rodrigues, later on Wednesday.
The president will then hold talks with the main political parties on Saturday, and the Council of State meeting is scheduled to take place next Wednesday. The statement did not mention an election.
Ferro Rodrigues consulted representatives of most parties on Tuesday at the president's request, and the two hard-left parties suggested that an alternative to the dissolution would be for the government come up with a new budget proposal, Expresso newspaper said.
Costa, who has ruled out resigning, could in theory still present a new budget bill, although he has also said he is ready to lead his party in any election campaign.
"The government leaves this vote with ... its head held high," Costa said with his ministers standing behind him. "They (Portuguese) can count on the government to continue to govern even under the most adverse conditions, without a budget."
If and when the president publishes the dissolution decree, elections must be held within 60 days.
He has indicated initially the ballot could occur in late January or early February, or possibly later, to give the main opposition Social Democrats time to hold an internal leadership vote in December and a congress in mid-January.
But analysts say an election alone will not solve the impasse, which could be exacerbated by the far-right party Chega's potential emergence as the third-largest force in parliament, as opinion polls suggest.
Polls show support for the Socialists little changed from the 36% they took in the 2019 election. The Social Democrats poll at about 27%. The hard-left parties are in single digits and set to lose seats.
(Additional reporting by Catarina Demony; Editing by Mike Harrison, Paul Simao and Nick Macfie)