Coelho said last week that income taxes probably will climb after he scrapped a proposal to raise the social-security tax rate. The CGTP labor group said Sept. 29 at a demonstration against austerity policies in central Lisbon that it may call a general strike. Portugal already has Western Europe’s poorest population in terms of output per capita.
“It will be very difficult for the Portuguese middle class to continue to bear increases in income tax,” Rogerio Fernandes Ferreira, president of the Portuguese branch of the International Fiscal Association and a former secretary of state for fiscal affairs, said during a Sept. 25 interview in Lisbon. “What’s going to be attacked once again is tax on income.”
Coelho, like his counterparts in Spain and Greece, is stoking social unrest by bowing to demands from creditor countries for better fiscal controls. Portugal’s progress in meeting terms of its 78 billion-euro ($100 billion) bailout from the European Union and International Monetary Fund has helped the nation’s bond market.
Borrowing costs dropped to the lowest since 2010 during a Sept. 19 sale of 1.29 billion euros of 18-month bills, while the difference in yield that investors demand to hold Portugal’s 10- year bonds instead of German bunds has narrowed to 7.5 percentage points from 16 percentage points on Jan. 31. The 10- year Portuguese bond rate is now about 8.9 percent, while two- year debt yields 5.1 percent.
Credit-default swaps on Portugal declined to a 19-month low of 453 basis points on Sept. 17 from a record 1,514 in January before climbing to 531 last week, data compiled by Bloomberg show. The contracts fell 20 basis points yesterday to 495.
EU and IMF officials have agreed to give Portugal more time to narrow its budget deficit. The government said last month it expects the deficit to equal 5 percent of gross domestic product in 2012, compared with the previous goal of 4.5 percent. It targets a deficit of 4.5 percent in 2013 rather than 3 percent, and plans to cut the shortfall below the EU’s 3 percent limit in 2014 to a 2.5 percent gap.
“It is difficult to identify if the drop in tax revenue is owed to an increase in the tax rate, or if it’s due to the recession, since cuts in civil servants’ salaries have also caused declines in private consumption,” said Rui Serra, the chief economist at Caixa Economica Montepio Geral in Lisbon. “There’s a risk that we are nearing the point at which a higher tax rate results in less revenue, and with some taxes, that point may already have been reached.”
To meet the deficit targets, the government plans to boost taxes on real-estate assets valued at more than 1 million euros beginning this year. For 2013, planned tax increases include higher charges on dividends, capital gains and private airplanes. Coelho said Sept. 24 that private-sector workers may lose part or all of their summer or Christmas salary payments.
Tax revenue will reach 24.7 percent of GDP this year, and then climb to 24.8 percent in 2013 and 2014, and to 24.9 percent in 2015, according to a budget plan released in April. Tax revenue rose to 23.5 percent in 2011 from 22.2 percent in 2010 and 21.7 percent in 2009. The figures don’t include social security contributions.
Coelho said Sept. 5 that while he was aware that the tax burden in Portugal was already high, his government wouldn’t succeed in narrowing the budget deficit with lower taxes.
Before coming to power in June 2011, Coelho’s Social Democrats called on more spending cuts rather than tax increases. “Families and companies have been bearing the austerity we have had until now,” Coelho said on April 11, 2011. “Now, austerity for the state will also be needed,” he said.
Portugal’s debt will be on “a firm downward trajectory after 2014” after peaking at close to 124 percent of GDP, the IMF, EU Commission and European Central Bank said Sept. 11. In July, the IMF said it projected Portugal’s debt would reach 118.5 percent of GDP in 2013.
The government projects that the economy will shrink 1 percent in 2013 after contracting 3 percent this year. It forecasts the unemployment rate will rise to about 16 percent in 2013 from 15.5 percent this year. Economic growth averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers.
CDS party leader Paulo Portas, who is foreign minister in the coalition government, wrote in a letter to party members in July that “the level of taxes has already reached its limit.”
The government is backed by Coelho’s Social Democrats and the CDS, which is the junior coalition partner, with a combined majority of 132 seats in the 230-member parliament. The two governing parties said Sept. 20 that they will set up a Coalition Coordination Council to improve cooperation after they differed on a social security tax proposal that was pulled.
Coelho said Sept. 13 it would be a “tragedy” for Portugal if Social Democrat and CDS members of parliament fail to approve the 2013 budget package. The proposal is due by Oct. 15.
“The government isn’t blind or deaf,” Coelho said Sept. 21. “I don’t confuse determination with intransigence. The effort we have to make hasn’t ended after one year.”
Portugal’s GDP per capita of about 16,000 euros is less than half of Ireland’s and about 16 percent lower than the Greek figure, making it western Europe’s poorest country, according to EU data. Greece’s average annual gross earnings were almost twice the Portuguese figure in 2009, and Ireland’s monthly minimum wage is almost triple that of Portugal.
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