Portugal’s government is taking the bailed-out country deeper into austerity, announcing sharp tax increases next year that risk worsening a recession and stoking public discontent.
The draft budget for next year is one of the harshest in the country’s recent history and will take away the equivalent of a month’s wages from many workers.
The government on Monday says the measures are needed to cut the national debt as Portugal strives to restore its financial health. More than a decade of meagre growth compelled Portugal to ask for a 78 billion euro (US$101 billion) rescue last year to avert bankruptcy.
But critics say the latest batch of austerity measures will choke the economy, which is forecast to contract for a third straight year next year, and push higher the unemployment rate which already stands at a record 15.9 per cent.
As in other heavily indebted European countries, public hostility to cutbacks is running high as hard-hit workers balk at falling living standards. The coalition government, too, is showing signs of strain amid mounting criticism as leading figures in the governing parties have expressed deep reservations about the strategy.
Announcing “very significant” tax hikes, Finance Minister Vitor Gaspar said Portugal had no choice because it is locked into a three-year debt reduction program by its international creditors in return for the bailout.
“We have no room for manoeuvre,” Gaspar told a news conference. Portugal “has to stay the course”, he said.
With the government struggling to balance its books due to a slowdown in consumption and consequent drop in tax revenue, the bailout lenders – the International Monetary Fund, European Central Bank and European Union – recently eased Portugal’s budget deficit target for this year to 5 per cent from 4.5 per cent of the country’s 171 billion euro economy. The 4.5 per cent goal was pushed back to next year. In 2010 the deficit was 10.1 per cent.
Gaspar said he also intended to enact spending cuts worth 2.7 billion euro next year, partly by laying off 2 per cent of the country’s 600,000 public employees.
The tax increases are particularly hard on Portugal’s middle class. Due to the changes, someone earning 41,000 euro a year, for example, will pay 45 per cent income tax from January 1 compared with 35.5 per cent now.
Most workers fall into the 7,000-20,000 euro annual income bracket. Those people will pay 28.5 per cent income tax, up from 24.5 per cent now.
Previously, the top rate of tax of 46.5 per cent was for workers or married couples who together earned over 153,300 euro a year. That top rate will be lowered to cover single or joint earnings above 80,000 euro, which will be taxed at a rate of 48 per cent. That income will also be subject to a special “social solidarity” tax of 2.5 per cent.
Also, there will be a one-off 4 per cent surcharge tax on everyone’s earnings next year.
Capital gains tax will rise to 28 per cent from 25 per cent. Companies making annual profits over 7.5 million euro will pay an extra tax of 5 per cent on top of their 25 per cent corporate tax.
The budget foresees an economic contraction of 1 per cent next year, with the jobless rate rising to 16.4 per cent.
The centre-right coalition government has an overall majority in Parliament and can force through the austerity package. However, the broad political and social consensus around the terms of last May’s bailout – which committed Portugal to spending cuts and economic reforms – has unraveled.
The leader of the main opposition Socialist Party, Antonio Jose Seguro, said the measures were “a fiscal atomic bomb” that will wreck the economy.
Trade unions also reacted angrily.
The General Confederation of Portuguese Workers, the largest union group with some 600,000 members, has already announced a general strike against austerity on November 14.
Street demonstrations in recent months have been huge, attracting tens of thousands of people, but none of the protests has been violent so far.