Portuguese Austerity Wins IMF Backing

by Ulrika Lomas, Tax-News.com, Brussels

14 September 2011

The International Monetary Fund (IMF) has welcomed Portuguese authorities' efforts to consolidate the nation's budget in the first review of the country's progress under a three-year financial assistance package.

The completion of the review will enable the immediate disbursement of EUR3.98bn in IMF funds, as part of a three-year financial assistance agreement between the nation and the Fund, bringing total funds received to EUR10.43bn. Portugal is under pressure to meet strict consolidation targets, following the receipt of funds, including from the European Union, with a total of EUR78bn allocated.

Following the review, Nemat Shafik, Deputy Managing Director and Acting Chair of the IMF's Executive Board, stated:

“The new government has signaled its strong commitment to the program, and good progress has been achieved on policy implementation.”

“The authorities are addressing recent fiscal slippages to ensure the 2011 program targets are met. They are committed to refocusing the 2012 budget on permanent expenditure measures.”

“Advancing structural fiscal reforms will significantly strengthen medium-term fiscal sustainability."

The government aims to cut the deficit to 0.5% of GDP by 2015, from 5.9% of GDP this year and 9.1% of GDP in 2010.

Portuguese authorities have implemented extensive measures to achieve the required fiscal adjustment. In May 2011, the government gained parliamentary support to reduce the list of products qualifying for lower rates of value-added tax (VAT), and an increase in sales tax on cars and tobacco. Other measures included abolishing the lower rate of corporate tax on income up to EUR12,500, a cap and freeze on individual income tax incentives and allowances, and the revaluation of properties for tax purposes ahead of a property tax rise scheduled for 2012.

In July, the government announced an unpopular 50% extroardinary tax on employees' christmas bonuses.

In September, a second major package was adopted, which included: an increase in the personal income tax rate applicable to income above EUR150,000 by 2.5% from 2012 and for the next three years; a 3% supplementary levy on corporate profits above EUR1.5m in 2012 and for the next three years; and the scrapping a number of tax breaks.

More measures are expected before the year is through, according to the country's Finance Minister, in order to accelerate the the country's consolidation efforts in 2012.

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