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Portuguese government faces dissent from allies in tax decree vote

By Andrei Khalip

LISBON (Reuters) - Portugal's president approved a decree on Tuesday cutting the social security tax companies pay on the minimum wage, but parliament looked set to block the measure in a move that could expose cracks in the government's alliance with the far left.

President Marcelo Rebelo de Sousa said he signed the government-decreed tax cut because it had been agreed in a collective bargaining process between the minority Socialist government, unions and employers.

The measure would be "favorable to the economy and support corporate investment".

"What the president had to do has been done. What happens next is not in the president's hands," Rebelo de Sousa told reporters.

In a parliamentary debate soon afterwards, most parties to the right and left of the ruling Socialists reaffirmed their opposition to the measure. As allowed under the constitution, the Communist Party requested a parliamentary vote on the decree.

The decree reduces the levy applied to the salaries of workers earning the minimum wage by 1.25 percentage points to 21.5 percent and was designed to compensate for an increase in the basic wage this year to 557 euros per month from 535 euros.

Above the minimum wage, the rate remains 22.75 percent.

Both the Communists and Left Bloc - usually allies of the Socialist government - have long objected to compensating companies for minimum wage increases and their rejection of the decree will not come as a surprise to the government.

But the government had hoped that the main opposition Social Democrats, who traditionally support such tax cuts for firms, would back the measure.

Still, the Social Democrats ruled out support in a maneuver their leader Pedro Passos Coelho, a former premier who was unseated after an inconclusive election in late 2015, said would demonstrate the government had no reliable parliament majority.

Prime Minister Antonio Costa defended the Communists and Left Bloc, saying they were consistent in their stance, but attacked Passos Coelho.

"There is no rift with the Communist Party and the Left Bloc, they have consistently been against this measure. What we do have is huge incoherence within the Social Democratic Party, which has done a huge about-turn," he told lawmakers.

Left Bloc head Catarina Martins also focused her fire on Passos Coelho, accusing him of a "lack of principles".

The first-ever alliance of the center-left Socialists with the hard left, now in its second year, has already survived longer than most analysts had expected, with many forecasting a quick split after EU pressure for more fiscal consolidation.

Still, some concerns about the return of political and fiscal instability linger on.

(Reporting By Andrei Khalip, editing by Axel Bugge and Richard Lough)

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