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Portugal Gives Green Light To 2012 Austerity Budget

by Ulrika Lomas,, Brussels

01 December 2011

Amid protests, and despite fears of plunging the debt-ridden country yet further into the mire of recession, Portugal’s parliament has adopted the centre-right coalition government’s severe austerity budget, providing for a number of tax rises as well as for sharp cuts in public sector wages.

In exchange for the international bailout package, the government had pledged to implement an extensive austerity and reform programme to reduce the deficit from 9.8% of gross domestic product (GDP) last year, to 5.9% this year and to 4.5% next year.

In order to meet the tough fiscal targets provided for under the terms of its EUR78bn (USD105.2bn) international bailout agreement concluded with the European Union and with the International Monetary Fund in April, and to create a path for sustainable growth, the government’s 2012 budget provides notably for an increase in tax imposed on income from capital, as well as for an increase from 13% to 23% in the value-added tax (VAT) rate imposed on various products, in particular in the catering industry.

The budget also provides for the suspension of year-end bonuses for civil servants.

The government had already agreed with banks to a partial transfer of their pension funds to the state social security budget, and announced plans back in June to impose an extraordinary 50% tax on 2011 year-end bonuses.

Defending the budget in parliament ahead of the crucial vote, Portugal’s Finance Minister Vitor Gaspar acknowledged that the budget was indeed demanding and indicated that next year’s budget would be just as demanding, while underscoring the importance of regaining market confidence.

Portugal’s main opposition party, the Socialists, abstained during the final vote.

Adoption of the budget comes at a difficult time for Portugal as the country struggles with the slowdown in the global economy and with the ongoing crisis in the eurozone.

The government and European Commission recently revised downwards their forecast for growth for 2012 to –3%. A slight recovery is not expected until 2013, due to a forecast increase in exports.

TAGS: tax | economics | pensions | European Commission | value added tax (VAT) | Portugal | fiscal policy | public sector | gross domestic product (GDP) | budget | tax rates | social security | individual income tax | Europe

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