Portugal's economy is expected next year to shrink more than previously predicted, Lisbon said Monday as it submitted its 2012 budget bill featuring tough budget cuts and tax hikes.

In a bid to distance itself from the crisis in Athens, Portugal has been swift to implement austerity measures demanded by international creditors in exchange for a 78-billion-euro ($107 billion) bailout agreed to last May.

"The situation in Europe and in the eurozone is one of the principal risks to the world economy and Portugal is at the center of this crisis," said Finance Minister Vitor Gaspar as he presented the budget, which he said would "lead to a contraction of gross domestic product of 2.8 percent, following 1.9 percent this year."

Lisbon had previously envisioned Portugal's economy would shrink by 2.3 percent in 2012; the Bank of Portugal had predicted 2.2 percent.

The tougher-than-expected cuts come after a 2011 budget overshoot of 3.4 billion euros.

Gaspar assured that the cuts were only undertaken as temporary measures to reduce Portugal's deficit. He said the economy could return to moderate growth in 2013.

General strikes

Union leaders called Monday for a general strike in protest of the austerity measures, which include suspending pay bonuses for civil servants, as well as health and education cuts and hikes on value added tax.

Private sector employees will be expected to work an extra half hour each day.

"These measures will not get the country out of the crisis, but will worsen poverty, unemployment and inequality," said Joao Proenca, who heads the main UGT union.

The recession could be Portugal's worst since the country returned to democracy in 1974 after decades of dictatorship.

Rising unemployment

Unemployment, already at its highest rate in Portugal since the 1980s, is expected to rise to 13.4 percent next year from 12.5 percent in 2011.

The country needs to reduce its public deficit from 9.8 percent of gross domestic product in 2010 to 5.9 percent by the end of this year to meet the conditions set by the European Union and International Monetary Fund.

With a comfortable majority in parliament, Prime Minister Pedro Passos Coehlo's coalition is assured to see the budget through to law during a November 29 vote.

Author: David Levitz (AFP, Reuters)

Editor: Mark Rossman