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Portuguese Lawmakers Approve Austerity Budget

by Ulrika Lomas,, Brussels

30 November 2012

Despite opposition from the Socialists, the Portuguese National Assembly recently adopted the centre-right government’s 2013 austerity budget, providing for new taxes totaling around EUR4.3bn (USD5.6bn) next year and for spending cuts of approximately EUR2.7bn.

As Portugal prepares to enter its third year of recession, the record tax rises planned for next year are expected to increase tax revenues by around 30%.

The 2013 budget provides for a reduction in the number of income tax brackets from eight to five. The rate in the current third income tax bracket is to rise from 24.5% to 28.5%, while the top marginal rate of income tax is to increase from 46.5% currently to 48%, in addition to the imposition of a 2.5% solidarity tax. Furthermore, the threshold for application of the top rate of income tax is to be lowered from EUR153,300 currently to EUR80,000 under the plans.

The hardest hit, middle-income earners in Portugal with annual income of between EUR40,001 and EUR80,000 will be subject to a new 45% rate of marginal income tax, compared with 35.5% currently.

An additional 4% surtax on personal income exceeding the annual minimum salary is to be introduced in 2013.

Other measures contained in the budget include plans to increase corporate capital gains tax from 25% currently to 28% and to increase excise taxes on alcohol and tobacco. Civil servants will next year forfeit their Christmas bonus, and cuts will be made in the area of pensions and public healthcare.

The government decided last month, however, not to go ahead with plans to raise the employee social security contributions from 11% to 18%, following fierce protests.

Defending the budget back in October, Portugal’s Finance Minister Vitor Gaspar insisted that there is currently no scope for maneuver and that the fiscal consolidation measures are vital to ensuring that the country meets its targets as agreed under the terms of its EUR78bn bailout deal, secured last year, and to maintaining credibility.

Gaspar emphasized that the fiscal effort demanded in the budget will be distributed “fairly” between labor and capital income and between the public and private sector.

According to Gaspar, the budget will enable the country to reduce its budget deficit from 5% of gross domestic product this year to 4.5% next year and to 2.5% in 2014.

Portugal’s economy is expected to shrink by 3% this year and to contract by 1% next year (a figure deemed optimistic by experts), before rising again by 0.8% in 2014.

Opposition parties have threatened to challenge the 2013 budget in the constitutional court.

TAGS: court | capital gains tax (CGT) | tax | pensions | Portugal | gross domestic product (GDP) | budget | excise duty | tax rates | social security | individual income tax

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