Portugal's Constitutional Court on Thursday rejected a government proposal to cut salary for public sector employees between 2016 and 2018 and to impose a tax on public sector pensions.
But the court approved salary cuts for public sector workers in 2014 and 2015.
The salary cut and pension tax proposal is part of the government austerity measures submitted by President Anibal Cavaco Silva and Prime Minister Pedro Passos Coelho on July 31.
The court decision dealt a blow to the government's finances as it is struggling to meet its budget deficit goals agreed with the European Union. Now it has to find an alternative to make up its budget deficit of around 370 million euros (492 million U.S. dollars).
Portugal officially ended its 78-billion-euro bailout program with international lenders comprising the European Union, the International Monetary Fund and the European Central Bank in May this year but still needs sacrifices from its people to meet its deficit reduction targets.
The government should cut its budget deficit to 4 percent of GDP this year and to 2.5 percent of GDP next year.