Portugal: Government hikes taxes to reach deficit targets
October 15, 2012
On 15 October, the government presented its budget draft for 2013, which aims to cut the fiscal deficit to 4.5% of GDP from the 5.0% of GDP shortfall estimated for this year. In 2014, the government plans to reduce the fiscal deficit to 2.5% of GDP, below the 3% threshold stipulated in the EU Stability and Growth Pact. According to the budget, the government expects the economy to contract 3.0% this year and 1.0% next year, before bouncing back to 1.2% growth in 2014. The draft foresees an increase in revenues of EUR 4.3 billion in 2013, stemming from the largest rise in taxes in the country's democratic history. The lion's share in the rising tax (EUR 2.8 billion) results from an increase in income tax rates, which will now range from 14.5% to 48% (previously: 11.5% 46.5%). In addition, the government will implement a 4% income surtax on all salaries and the so-called solidarity tax of 2.5% on wages above EUR 80,000 (down from the previous EUR 153,000 mark). The budget also contemplates introducing a financial transaction tax of up to 0.3% on most securities and derivatives and 0.1% on high-frequency trading. On the expenditure side, the government plans to reduce the number of civil servants by 2% and to cut the number of sub-contractors by half. In addition, the executive plans to freeze pensions and to lower unemployment benefits as well as sickness leave subsidies. The budget is in line with the targets agreed with the ECB-IMF-EC Troika on 11 September and, if ratified by Parliament on 31 October, would ensure the continuity of the EUR 78 billion bailout programme. That said, in addition to widespread social discontent, the new round of austerity measures has met strong resistance from opposition parties as well as some members of the government coalition. Moreover, even if the budget goes through, it may face opposition from the constitutional court, which has already overruled a government measure to cut spending earlier this year. The International Monetary Fund (IMF) acknowledged the difficulties the government of Prime Minister Pedro Passos Coelho is facing with the new budget, stating that "the announcement of further austerity measures to underpin the 2013 budget is testing the broad-based political and social consensus that has buttressed the program to date." According to a staff report on the fifth review of the rescue program for Portugal, the "measures are tilted more to the revenue side than staff would have preferred," as Portugal already has a "relatively high" tax burden. However, the IMF recognized that "authorities found it challenging to identify more expenditure cuts at this stage", and that "room for maneuver had diminished" as public debt-to-GDP ratio is expected to peak at 124% of GDP in 2014 according to the latest projections (Consensus: 123.7% of GDP).