• A fresh general strike has been called for mid-November after the Portuguese government imposed a further round of tax hikes. (Photo: Pedro Ribeiro Simoes)

Portugal unveils tax hikes to meet EU bail-out demands

04.10.12 @ 10:40

  1. By Benjamin Fox
  2. Benjamin email

BRUSSELS - Portugal's centre-right government unveiled across-the-board tax hikes on Wednesday (3 October) to ensure the country meets debt and deficit targets required under the terms of its bailout.

Finance minister Vitor Gaspar said that plans for an "enormous increase in taxes" in 2013 are necessary for the embattled country to meet its 2013 deficit target of 4.5 per cent.

The Portuguese economy is expected to report a 3 percent contraction in 2012 followed by a further 1 percent dip in 2013 - a third consecutive year of recession. Unemployment is also projected to peak at 16.4 percent rather than the 15 percent figure previously projected.

Among the headline tax rises were a one-off 4 percent tax on all incomes, with earners in the top band of €153,300 expected to pay an additional 2.5 per cent solidarity levy.

Gaspar added that the government would reduce the number of income tax brackets in 2013 to five from eight, pushing millions of workers into higher tax bands.

The government also intends to raise taxes aimed at the rich by increasing taxation of capital gains, assets, financial transactions, tobacco and luxury goods. However, it backed down on plans to increase employee payroll taxes from 11 per cent to 18 per cent.

The country's largest trade union, the the General Confederation of Portuguese Workers, announced on Tuesday (2 October) that it will call its 600,000 members out on general strike against austerity on 14 November. But the country's other, slightly smaller and more moderate confederation, the General Workers' Union, said it would not join the walkout.

The country is still expected to receive the remainder of its €78 billion bailout package agreed with the troika of the European Commission, IMF and European Central Bank which runs until mid-2014.

Meanwhile, the country is also laying the ground for an expected return to the bond market in September 2013 by selling €10 billion of 18 month and 3 year bills at rates between 3.5 and 5.5 percent.

Yields on 10 year government bonds have also fallen sharply in 2012 from 16 percent to 7.5 percent, although this figure remains higher than the 7 per cent figure regarded as the tipping point beyond which debt servicing cannot be maintained.

Portugal has been shut out of the bond market since requesting emergency funding in April 2011 and had its credit rating downgraded to junk status in January.

Despite the country's economic woes, the troika expects Portugal's debt mountain to peak at just over 120 percent in 2013 before falling.

A troika statement released in September insisted that the Portuguese debt burden "remains sustainable and will be on a firm downward trajectory after 2014."