Portugal Extends 2012 Austerity Measures

by Ulrika Lomas, Tax-News.com, Brussels

18 October 2011

Portugal’s Prime Minister Pedro Passos Coelho has recently unveiled details of the centre-right government’s budget proposals for 2012, containing additional fiscal measures and planned expenditure cuts to ensure that the country meets its deficit reduction targets this year, as agreed under the terms of its international bailout deal.

Underscoring the need to avert a “national emergency”, to regain credibility and to avoid intense pressure to leave the eurozone, the Prime Minister explained that much more has to be done than initially anticipated to reduce the deficit. Next year, the process of adjustment will have to be much deeper and comprise more demanding measures, he warned.

Under the government’s latest plans, Christmas and holiday bonuses are to be abolished for public sector employees earning in excess of EUR1,000 (USD1,387) a month and reduced in most other cases in 2012 and 2013.

Prime Minister Passos Coelho also revealed plans to raise the rate of value-added tax (VAT) imposed on many products to the top rate of 23%, to reduce the number of income tax breaks, to extend legally permitted working hours in the private sector by half an hour and to cut the number of public holidays.

The government also plans to implement substantial cuts in both health care and education.

The Prime Minister’s latest announcement follows a statement by Portugal’s Finance Minister Vitor Gaspar at the beginning of September in which he announced further tax measures to assuage concerns that Portugal would be unable to achieve the ambitious fiscal consolidation plans previously laid out by the government.

At the time Gaspar said that the government plans a second raft of measures for 2012 to ensure that Portugal meets its consolidation targets, which entail reducing the budget deficit to 0.5% of GDP by 2015. The government is attempting to slash the deficit to 5.9% this year.

Further ambitious structural reforms have been deemed necessary by the government to deliver on the country's commitment under the European Union's Excessive Deficit Procedure to reduce the deficit below 3%.

In his announcement, Gaspar said the government proposes to revoke a number of tax breaks.

Further savings will be achieved from the public sector by reducing generous pension payments and implementing a public sector hiring freeze.

Previously, the government had announced an unpopular 50% extraordinary tax on employees' Christmas bonuses.

Under the terms of its EUR78bn international bailout agreement agreed in May with the European Union and the International Monetary Fund, Portugal is required to reduce its budget deficit to 5.9% of gross domestic product this year, and subsequently to 3% by 2013.

Portugal’s 2012 budget is due to be unveiled shortly. Given its substantial majority in parliament the government is virtually guaranteed approval of its budget proposals.

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