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Austerity a vote-winner? This poll could be a shocker

A general election in Portugal this weekend will be closely watched by European leaders as it will show whether steep tax rises and spending cuts can win a general election.

According to the latest opinion polls in the run-up to the vote on Sunday, Portugal's ruling center-right coalition is likely to win more seats than the main opposition center-left Socialist Party, despite overseeing a long period of harsh cuts.

The result – set to fall short of an absolute majority -- will be closely watched by other European leaders as it could show whether a government that has imposed unpopular austerity measures as part of a financial bailout can be re-elected.

Portugal's ruling "Portugal Ahead" (PaF) coalition – made up of the center-right Social Democratic Party (PSD) and conservative People's Party (CDS-PP) – has been in power since 2011, the year the country requested a financial rescue.

Pedro Passos Coelho, Portugal's prime minister, greets a supporter during a political rally ahead of the election in Braga, Portugal, on Sunday, Sept. 27, 2015.
Paulo Duartes | Bloomberg | Getty Images

As part of the country's 78 billion euro ($87.9 billion) bailout from its fellow euro zone members, the International Monetary Fund and the European Central Bank, the government led by incumbent Prime Minister Pedro Passos Coelho has had to impose swathes of spending cuts and tax rises.

With a general election looming large, the public could well decide to avenge itself for those cuts by electing an opposition party.

Tight race

The polls remain tight, however, according to Antonio Barroso, vice president of risk consultancy Teneo Intelligence.

"With still around 30 percent of the electorate undecided, the race is likely to remain tight. Still, the ruling coalition is in a strong place to win the election," Barroso said in a note ahead of the election.

"The decision by the PSD and the CDS-PP to run together has allowed them to deliver electoral messages more consistently, which might help PaF to mobilize some undecided right-wing voters. In contrast, the left remains divided,"

The Socialist Party thus faced an uphill battle in the last days before the election, Barroso believed.

"The best chance for the socialists is to try to reverse the positive momentum of smaller left-wing parties by asking voters to strategically support the PS in order to kick out the right-wing ruling coalition. Short of such a change in the polls in the last days ahead of the election, the prospects of socialist candidate Antonio Costa becoming PM will be dim," he added.

If the coalition keeps its lead and Coelho is re-elected, he will be the first prime minister to be re-elected among the five euro zone states -- Portugal, Greece, Ireland, Cyrpus and Spain, which received a bank bailout -- that required emergency financial help between 2010 and 2013.

In Greece, voters turned against New Democracy, which was seen as far too eager to implement austerity measures as part of the Greece's bailout, and turned to leftwing anti-austerity party Syriza – although in the end it too relented amid capital controls and impending bankruptcy and this summer accepted a third bailout. Somewhat surprisingly, Syriza was re-elected earlier this month too.

Read More Greek election win overshadowed by reform urgency

Portugal could teach Greece a thing of two about bailout implementation. Despite the unpopularity of austerity measures in Portugal, which have included some of the biggest government spending cuts in 50 years and tax increases, fiscal discipline has appeared to have worked according to the data.

Having exited its bailout program successfully (and without much fanfare) in 2014, the economy looks like it is back on its feet. In fact, Portugal is seeing some of the best growth rates in the euro zone and the economy is expected to grow 1.6 percent in 2015, and 1.8 percent next year, according to the latest forecasts from the European Commission.

Showing it's in line to meet expectations for 2015, in the second quarter of the year, the economy grew 1.5 percent from the same quarter last year.

Read More Portugal 'fully back in the market'

Indeed, the day when Portugal's sovereign credit rating was downgraded to junk status by Standard and Poor's credit ratings agency in 2012 looks far off although its benchmark 10-year government bonds do fetch a higher yield (which reflects investor caution) than their euro zone counterparts, at around 2.5 percent currently.

Not all rosy

Despite the positive growth rates, two and a half years of recession -- which it finally exited in August 2013 -- has left its mark on Portugal and the country is not problem-free.

Unemployment remains rather high at 12.1 percent -- albeit lower than Greece, at 25 percent, and Spain, at 22.2 percent. Its debt pile is also one of the highest in the euro zone's, after Greece and Italy, at 130.2 percent of gross domestic product (GDP) in 2014, Eurostat data shows.

In a boon for the opposition Socialist party last week, Portugal's National Statistics (INE) Institute revised up the country's budget deficit for 2014.

The INE reported a budget deficit, in which government expenditure exceeds revenue, of 7.2 percent of GDP for 2014 after including the cost of a state rescue of Banco Espirito Santo, which raised the gap from 4.5 percent reported previously.

The government had argued that the rescue loans should not be counted towards the deficit, but Eurostat disagreed.

Portugal's government has pledged to keep its budget deficit below 3 percent in 2015, in line with European Union rules, but including the cost of the 4.9 billion euro bank rescue could scupper that target.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld