By Andrei Khalip

By Andrei Khalip


LISBON (Reuters) - Portugal's budget negotiations between the minority Socialist government and its left-wing backers in parliament are heading towards a deal that would involve providing more income to pensioners, the leader of the Left Bloc said on Tuesday.


The government, which has promised the European Commission it would keep cutting the budget deficit even as it reverses many of the austerity measures of the previous administration, has to present a draft budget by mid-October.


Some analysts have expressed concern that after pressure from Brussels for more fiscal consolidation, the new budget would split Portugal's first-ever alliance of the centre-left Socialists with the hard left that began in November.


Political instability could also exacerbate investor worries about Portugal's faltering growth and its credit ratings.


But so far, all signs indicate a smooth budget process. Left Bloc's Catarina Martins has signaled no outright challenge to the course of budget consolidation if the government agrees to increase pensions, especially for low-income pensioners.

"We are getting towards a deal on important matters and that gives us some confidence about the possibility of a budget that would correspond to the agreement that we've had" on parliamentary support for the government, she said.

Martins spoke to reporters after meeting Prime Minister Antonio Costa, who also received the leaders of other parties with seats in parliament.

But Jeronimo de Sousa, the leader of the Communist party, whose support is also crucial to ensure the parliamentary majority, was more restrained, saying progress was "still clearly insufficient".

"We've shown we are here to cooperate. It is an ongoing process," de Sousa said, urging the government not to give in to "blackmail" from Brussels. "We will support what is positive for the people and we will oppose what works against the workers."

Left Bloc's Martins singled out pensions as the most acute issue because retirees have so far only lost income in recent years. She also wants to end a crisis-time income tax surcharge, which has already been scaled down in this year's budget.

"Considering the low pensions, the poverty among the elderly, the recovery of pensioners' incomes has to be a priority," she said, adding that although there were differences with the government on various matters, the parties were working to bridge them.

(Additional reporting By Sergio Goncalves, editing by Axel Bugge, Larry King)