MELGAÇO, Portugal—This small town is facing another year of austerity enforced by Portugal's bailout lenders, but there is one category of expenses the mayor says he won't cut: birth incentives—the awards of up to €1,000 ($1,300) to new mothers, as well as free nursery services and tax breaks on homes for young couples.

"That's an area we must continue doing what we can to help," said António Rui Esteves Solheiro, who has governed Melgaço for more than three decades. "It's about our future."

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