LISBON (Reuters) - Portugal's parliament is expected to approve the biggest tax increases in the country's modern history on Wednesday, paving the way for a court battle over a budget which the government says is vital for keeping its international bailout afloat.
The government of Prime Minister Pedro Passos Coelho is searching for ways to guarantee revenues for meeting budget goals set under the 78-billion euro bailout deal with the European Union and International Monetary Fund.
The budget sets Portugal, which is suffering its deepest recession since the 1970s this year, on course for a third year of economic contraction in 2013 as households face the higher taxes and record unemployment.
The 2013 budget, which raises tax rates on income, property and financial transactions, is the government's third attempt in recent months to ensure its budget goals are met. The budget is set to pass in parliament but will face an almost certain challenge in the constitutional court.
The court already threw one savings plan out in July and a second government austerity plan was abandoned after street protests.
Parliament started the budget debate at 0900 GMT and it was uncertain exactly when the vote would take place.
"We have 130 lawmakers here who pretend to believe in a budget that nobody believes in," said opposition Socialist lawmaker Carlos Zorrinho, referring to the ruling coalition.
Political tension has been increasing and anti-austerity demonstrations have become more common in recent weeks in Portugal, which despite being one of the countries worst hit by the euro zone crisis had so far escaped unrest seen elsewhere.
Unions and 'Indignados', a group of young unemployed people, plan protests in front of parliament on Wednesday.
Political experts say the outcome of a court challenge is uncertain. "If the court finds something unconstitutional, it could still be something relatively easy to fix, or alternatively it could shoot down the budget and cause a political crisis," said Pedro Magalhaes, political scientist at the Social Sciences Institute of Lisbon University.
"It's hard to predict the outcome: it wouldn't be the constitutional court if it were predictable."
TOUGHEST PERIOD OF HISTORY
Passos Coelho said the 2013 budget aimed to help Portugal to "turn the page on one of the most difficult periods of our history", but the tax increases will cause even greater problems for ordinary Portuguese.
Portugal's judges' union has promised to challenge the budget on the grounds that it goes against tax equality enshrined in the constitution. The Socialists have also said they would challenge it, and the president could submit it to the court himself in the process of signing off on it.
On Wednesday, a group calling itself the "Congress of Democratic Alternatives" that includes left-wing politicians, urged a rejection of the budget, or "at least for the president to send it to be checked by the constitutional court".
Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said it was becoming ever more difficult to enact austerity plans. "Many Portuguese are beginning to think this route is not paying off," he said
The 2013 budget, relying on large increases in income tax, has strained the coalition government. The small rightist CDS party had made clear it would prefer spending cuts to achieve the targets, but backed down and has promised to support the budget in parliament on Wednesday.
With the government's popularity already at record lows, a general strike planned for November 14 and some economists warning Portugal could enter a recession cycle like Greece, additional doubt over austerity measures would hurt confidence further.
The economy is forecast to contract at least 3 percent this year and 1 percent in 2013 - and many economists think even this is far too optimistic.
The budget predicts unemployment will rise further to 16.4 percent next year from around 15 percent.
The concerns prompted the IMF to warn last week that the risks to Portugal's bailout have "increased markedly". Portuguese bonds have also reacted, beginning to reverse sharp declines in yields since the beginning of year.
(Additional reporting by Andrei Khalip and Daniel Alvarenga; Editing by Peter Graff and David Stamp)
