By Sergio Goncalves and Victoria Waldersee
LISBON (Reuters) - Prime Minister Antonio Costa will unveil Portugal's first draft budget with a surplus on Monday, seeing off pressure to loosen the purse strings by negotiating support from an animal rights party and lawmakers from the resort archipelago of Madeira.
Costa's Socialists fell just eight seats shy of a parliament majority in October's election, winning him a second term after four years of sound economic growth.
Having increased its parliamentary representation, the centre-left party decided this time against seeking a formal alliance in parliament with two far left parties, instead deciding to negotiate case by case.
In the first challenge to this approach, Costa's former partners, Left Bloc and the Communists, as well as the largest opposition party, the center-right PSD, asked for a cut in value-added tax on energy to 6-13% from 23% to back the budget.
Such a cut would cost 0.2%-0.4% of GDP. Had Costa accepted it, a budget surplus would have been impossible, a government source told Reuters.
The government had already announced a 0.2% surplus target for 2020.
Instead of giving in, Costa has been negotiating with the four lawmakers from environmentalist animal rights party PAN, three PSD lawmakers from the archipelago of Madeira and the single representative of the eco-Socialist party Livre, to reach the majority of 116 seats at a much lower price.
Madeira wants a hospital, subsidies on flights for residents to the mainland and a weekly ferry route.
"If our demands are met, we have no problem approving the budget," Miguel Albuquerque, the PSD head of Madeira, told reporters.
PAN and Livre, while making demands such as lower veterinary prices for PAN and exemption from court fees for victims of domestic violence for Livre, also advocate increased taxes, leveling out the costs of their support.
The two parties have not yet publicly confirmed they will support the budget, but sources close to the talks say they're optimistic a deal will be reached.
"The demands of Madeira cost around 200 million euros, but will be phased across several years, and PAN and Livre's proposals were already in the government's plans and so don't cause any surprises," the government source said.
How the Left Bloc will vote is still unclear. Contacts are maintained and Costa asked the European Commission to allow Portugal to vary the VAT on energy according to consumption levels, thus buying time and some margin of maneuver.