Portugal announces 'enormous' tax rises

Riot police stands in front of the Portuguese Parliament during a protest in Lisbon on September 15.

Story highlights

  • Portugal announced sweeping new tax increases amid a powerful backlash
  • Move an effort to keep the country's faltering bailout programme on track
  • Lisbon would miss the budget deficit target by the equivalent of 1.1 percentage points

Portugal announced sweeping new tax increases in an effort to keep the country's faltering bailout programme on track amid a powerful public backlash against increased belt-tightening.

The new round of what the government described as "enormous" tax rises came as Lisbon revealed it would miss this year's recently relaxed budget deficit target by the equivalent of 1.1 percentage points if it failed to take exceptional measures.

Vítor Gaspar, finance minister, said on Wednesday these tax measures, including an additional 4 per cent levy on 2013 earnings, would replace a planned "fiscal devaluation" involving deep pay cuts, which the government withdrew following mass anti-austerity protests.

An unexpectedly strong backlash against austerity has fractured Portugal's mainstream consensus in support of deficit-reduction measures and highlighted the political difficulties facing eurozone governments struggling to implement increasingly tough fiscal reforms. The main trade unions immediately called a general strike for November 14 following Mr Gaspar's statement.

Despite fiscal struggles, Lisbon received encouragement from investors earlier on Wednesday, exchanging €3.75bn of government bonds due next year for longer-term debt.

László Andor on Europe's job crisis
László Andor on Europe's job crisis


    László Andor on Europe's job crisis


László Andor on Europe's job crisis 04:22
Global economy: Spending vs. saving
Global economy: Spending vs. saving


    Global economy: Spending vs. saving


Global economy: Spending vs. saving 04:41
Helping kids understand financial crisis
Helping kids understand financial crisis


    Helping kids understand financial crisis


Helping kids understand financial crisis 01:51

Mr Gaspar described the exchange as an unequivocal step towards regaining access to long-term debt markets within the coming year. He said it also moved Portugal closer to Ireland as a country that was making solid progress with its international bailout programme.

The bond exchange will reduce a €9.7bn debt redemption that falls due in September next year by about 39 per cent to €5.98bn, postponing part of the repayment until October 2015. Ireland has made similar exchanges in recent months to ease its way back into long-term debt markets.

Mr Gaspar said that Portugal had gained "precious time" through the exchange and shown that it could "finance itself at sustainable rates".

Nonetheless, some European officials have privately acknowledged that Lisbon's three-year rescue programme which is scheduled to end in mid-2014 may have to be extended by another year.

The new tax package will raise the average rate of income tax from 9.8 per cent to 11.8 per cent. New taxes on capital earning and homes worth more than €1m would also be introduced.

Mr Gaspar's announcement came shortly after government acknowledged that, without additional measures, the deficit would reach 6.1 per cent of output this year, above the new target of 5 per cent, which Portugal's international lenders agreed in September to relax from a previously agreed 4.5 per cent.

Most of the shortfall is to be recovered through the sale of a concession to run ANA-Aeroportos de Portugal, Portugal's state-owned airports authority, as well as cut backs in national contributions to EU aid schemes.

Lisbon's use of extraordinary measures to meet deficit targets for the second successive year reflects the "strong headwinds" that the EU and International Monetary Fund say Portugal is facing from the global economy.

After contracting an expected 3 per cent this year, the Portuguese economy is forecast to shrink a further 1 per cent in 2013, with unemployment climbing further above the current record level of almost 16 per cent.

However, using extraordinary revenue to meet deficit goals means Portugal will have to make a bigger adjustment than planned over the next two years to meet the 2.5 per cent of output target agreed for 2014.

In September, a planned social security reform triggered massive demonstrations and vehement opposition across the political spectrum

Pedro Passos Coellho, the prime minister, will face two censure motions in parliament on Thursday, tabled by small left-wing parties against his austerity measures. In addition, the centre-left Socialists, the main opposition party, plan to vote against the government's 2013 budget proposals in October.

Although the governing centre-right coalition is in no danger of being defeated over the censure motions or the budget, the prime minister's U-turn threatens to weaken the international confidence Portugal has gradually built up over the past year.

Moody's, the rating agency, this week said his "surrender" on social security was likely to encourage opposition to the adjustment programme and "create the expectation that protests can be successful again". This could prove "detrimental to market confidence".

      Europe's financial crisis

    • German Chancellor Angela Merkel talks with Finance Minister Wolfgang Schaeuble during a session at the Bundestag (lower house of parliament) on June 25, 2013 in Berlin.

      Schaeuble: 'Don't see' bailouts

      German Finance Minister Wolfgang Schaeuble says the eurozone's problems are not solved, but "we are in a much better shape than we used to be some years ago."
    • IBIZA, SPAIN - AUGUST 21:  A man dives into the sea in Cala Salada beach on August 21, 2013 in Ibiza, Spain. The small island of Ibiza lies within the Balearics islands, off the coast of Spain. For many years Ibiza has had a reputation as a party destination. Each year thousands of young people gather to enjoy not only the hot weather and the beaches but also the array of clubs with international DJ's playing to vast audiences. Ibiza has also gained a reputation for drugs and concerns are now growing that the taking and trafficking of drugs is spiralling out of control.  (Photo by David Ramos/Getty Images)

      Spain keeps partying

      Summer could not have come soon enough for Lloret de Mar, a tourist resort north of Barcelona. Despite the country's troubles, it's partying.
    • The Euro logo is seen in front of the European Central bank ECB prior to the press conference following the meeting of the Governing Council in Frankfurt/Main, Germany, on April 4, 2013.

      OECD: Slow recovery for Europe

      The global recovery has two speeds: That of the stimulus-fed U.S. and that of the austerity-starved eurozone, according to a new report.
    • The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.

      Europe's new threat: Slow decay

      The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
    • Packed beaches and Brit pubs? Not necessarily. Here's what drew travelers to one of Spain's most beautiful regions in the first place

      Spain aims for big tourist summer

      Spain's economic crisis is in its sixth straight year yet tourism, worth 11% of GDP, is holding its own, one of the few bright spots on a bleak horizon.
    • Photographer TTeixeira captured these images from a May Day protest in Porto, Portugal, Wednesday by demonstrators angered by economic austerity measures. "People protested with great order, but showed discontent against the government who they blame for this economic crisis," she said. "They want the government to resign and the Troika [European Commission, International Monetary Fund and European Central Bank] out of this country."

      May Day protesters flood Europe

      As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
    • Croatian Prime Minister Zoran Milanovic delivers a speech in Mostar, on April 9, 2013. Prime Ministers from Bosnia's neighboring countries arrived in Bosnia with their delegations to attend the opening ceremony of "Mostar 2013 Trade Fair".

      Croatia PM: We need Italy to recover

      As Croatia prepares to enter the 27-nation European Union, the country's Prime Minister says Italy must return to being the "powerhouse of Europe."
    • Anti-eviction activists and members of the Platform for Mortgage Victims (PAH) take part in a protest against the government's eviction laws in front of the Popular Party (PP) headquarters in Mallorca on April 23, 2013.

      Spain's unemployment hits record

      Spain's unemployment rate rose to a record high of 27.2% in the first quarter of 2013, the Spanish National Institute of Statistics said Thursday.
    • People protest against the Spanish laws on house evictions outside the Spanish parliament on February 12, 2013 in Madrid, Spain.

      Welcome to Madrid: City of protests

      Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.