An extraordinary cabinet meeting was held by the Portuguese government on Saturday after a court ruling that parts of the 2013 budget are unconstitutional.
Prime Minister Pedro Passos Coelho said the Constitutional Court had made meeting the country's commitments to international lenders difficult.
The BBC reports the court rejected four out of nine austerity measures in the budget. These were scrapping of summer holiday bonuses for public sector workers and pensioners, and cuts to unemployment and sickness benefits.
The prime minister met President Anibal Cavaco Silva late on Saturday to discuss the next steps.
Afterwards, the president said that the coalition government should remain in office and that the country should honour its international commitments.
The ruling would deprive the state of some 1.5 billion euros in savings considered necessary to meet the terms of a bailout by the EU and the International Monetary Fund.
On Wednesday, the government survived a no-confidence motion in parliament brought by the opposition to highlight growing discontent over austerity measures. Unemployment is at a record high.