Portugal Shifts Tax Burden to Sales Levies to Support Incomes

  • Revenue from VAT to rise about 4 percent, government says
  • Income tax will raise about 3 percent less for treasury

Portuguese Finance Minister Mario Centeno said Friday his government plans to increase revenue with higher taxes on consumption this year, to compensate for cutting income taxes. He also said interest rates will be lower than previously forecast.

The reshaping of the fiscal system with lower direct taxes “supports the recovery of incomes. It’s that effort that allows a decline in the deficit,” Centeno told reporters at a press conference in Lisbon, detailing the government’s draft budget. The government expects an increases of about 4 percent in income from sales tax, a drop of some 3 percent in the money received from taxes on workers’ salaries and about a 5.5 percent decline in corporate-tax revenue.

The budget deficit will be 2.6 percent of gross domestic product this year, narrower than a previous target of 2.8 percent and less than a 3 percent shortfall in 2015, according to the plan. It sees economic growth of 2.1 percent this year, more than the European Commission’s Nov. 5 forecast for a 1.7 percent expansion, while unemployment will fall to 11.2 percent.

The Portuguese budget for this year has been delayed, after an inconclusive election on Oct. 4 led to weeks of political wrangling and a minority Socialist government promising to ease austerity.

The government will increase a tax related to consumer loans as well as levies on tobacco and oil products, while it plans to reverse cuts to state workers’ wages gradually. Centeno said the government will be “cautious” managing public debt and therefore reviewed, for example, the plan to reimburse its International Monetary Fund loans. Reviewing its debt management strategy led to a lower projection for its financing costs.

The government plans to submit its 2016 budget to parliament on Feb. 5, the minister said.

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