Portugal Braces for its Biggest Ever Tax Hike

Portugal Braces for its Biggest Ever Tax Hike

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Lisbon Skyline at Nighttime

Lisbon Skyline at Nighttime

Portugal’s Parliament voted to press ahead with a record austerity budget that would add taxes to pay, purchases and property.  It’s the most far reaching set of tax hikes in modern Portuguese history, and it is being bitterly opposed by parliamentary Socialists, organized labour and street protests.  It also faces a challenge in the Portuguese constitutional court where it may be declared illegal.

Portugal’s Parliament is about to pass one of the most hard-hitting austerity budgets in its history.  Confounding the assumption that taxation goes with spending, the budget offers both severe cutbacks and record tax hikes.

The rises in taxation are the most far-reaching in the country’s modern history, and will affect all aspects of Portuguese life, applying to income tax, purchases and property.  Its proponents say the move is essential in Portugal is to hit the fiscal targets imposed as part of the country’s €78 billion bailout.  This is the third attempt by Pedro Cuelho’s government since July to comply with the IMF and EU stipulations, which require €1.2bn to be shaved from Portugal’s budget deficit by 2013, without deepening Portugal’s worst recession since the 1970s.  It’s expected to encounter serious opposition from several quarters: it’s being challenged in the courts, and there is a general strike planned for November 14.

The measures have split the Portuguese parliament, Portuguese society and concerned Portugal’s neighbours.  Spanish Prime Minister Mariano Rajoy said ‘it’s essential for the European institutions to collaborate’ if Spain is to reach its own targets, and there is increased support for Europe’s failing economies in the form of the European Central Bank’s Outright Monetary Transactions (OMT) bond buying program.  Meanwhile inside Portugal’s Parliament Socialist Deputy Sergio Sousa Pinto said ‘this is a degrading decision and brings shame on this house.’  He spoke amidst claims that the budget would mean the loss of the equivalent to two months’ salary for some Portuguese families.

For the Portuguese economy the trap Greece has fallen into looks eerily predictive.  Greece has cut government spending and unemployment has rocketed as a result, damaging the economy as demand slumps.  Portugal faces an unemployment rate of 15%, predicted to rise to 16.4% in 2013.  The loss of jobs and the cuts in household income implied by the new budget suggest an upcoming fall in demand even as the Portuguese economy struggles to rise to its feet.  The European Commission says it expects Portugal to see a 7.1% slump in domestic demand this year and a further 2.1% drop in 2013.  While Portugal benefits from certain changes in the price of labour, its GDP is still expected to fall by 3% this year and a further 1% contraction is expected in 2013.

Meanwhile the support base of Mr. Cuelho’s Socialist government is deserting him in droves.  Mr. Cuelho’s first two attempts at producing austerity packages that were acceptable to Portuguese people.  The first, in July, was declared illegal by the country’s constitutional court.  After action by civil servants and a march on September 15 in which rotten tomatoes and fireworks were thrown at police while crowds chanted ‘no food, no peace,’ the second was abandoned, despite its promises to raise benefits and support welfare.

November 14’s general strike will be Portugal’s third this year.  But the really decisive influence is likely to be wielded by the country’s constitutional court.  Parliament has approved the measures but won’t vote on them finally until later in November.  It’s possible that the constitutional court will declare them illegal under the Portuguese constitution.