Portugal unveils harsh austerity budget

Portugal revealed details of its draft 2013 budget on Monday, which included a raft of tax hikes and spending cuts. The budget, considered one of the harshest in recent history, comes just days after mass street protests against austerity.


The Portuguese government pushed ahead on Monday with a draft 2013 budget that includes massive tax rises and spending cuts, just two days after mass street protests against further austerity.

"The proposed budget is the only one possible ... we don't have any room for manoeuvre," Finance Minister Vitor Gaspar told journalists after submitting the budget bill to lawmakers.

The new measures, a condition of debt-rescue funding, include a 4 percent surtax and a reduction in pensions and social benefits.

Gaspar confirmed that the average tax rate would climb from 9.8 percent this year to 13.2 percent under the budget proposal.

The average tax rate is also increased, reducing from eight to five the number of bands for income tax, with the top rate of 48 percent kicking in at 80,000 euros, nearly half the previous level.

"The 2013 government budget is a tough one for Portuguese," said the minister. "The increase in the tax burden is very significant."

The government pushed ahead with the austerity budget despite last month having had to backtrack on an initial package of measures, and a poll last week suggested that 70 percent of the people oppose the government's policy.

In May 2011, the IMF and EU rescued Portugal from impending debt meltdown with a bailout worth 78 billion euros ($100 billion) conditional on budget and structural reforms.

The people have made clear in street protests their fatigue with austerity tied to the bailout which averted national bankruptcy.

In the last month, there have been many strikes and protests and on Saturday tens of thousands of people protested in the streets of Lisbon and in several other towns.

But Gaspar warned that "calling into question the budget will call into question aid" under the country's bailout programme.

He said the country had to implement the reforms required as part of the bailout to regain its financial independence, and that if they slow the adjustment "we will be under a prolonged tutelage of our creditors."

The increases could worsen a recession in Portugal. Official data suggests that the economy could shrink by 3.0 percent this year with the unemployment rate being close to 16.0 percent.

"Insult to the Portuguese people"

It is "a fiscal atomic bomb", said Socialist Party Leader Antonio Jose Seguro. For the Communist Party, it amounts to a "massacre."

The main trade union CGTP said it was "an attack on the dignity of the people".

The daily newspaper Diario Economico declared it to be "an insult to the Portuguese people."

The so-called troika of creditors, the International Monetary Fund, European Union and European Central Bank, have agreed to ease the targets for reduction of the public deficit.

This must now be 5.0 percent of output this year and 4.5 percent in 2013. But this concession was conditional on extra measures.

Even Portuguese President Anibal Cavaco Silva, who comes from the Social Democrat Party of Prime Minister Pedro Passos Coelho, has expressed concern.

"In current circumstances, it is not right to require a public deficit target from a country undergoing a process of budget adjustment which it is respecting come what may," he said on his Facebook page.

The situation is particularly delicate because the Portuguese, who up to now seemed to accept the need for austerity, have radically changed their attitude.

Their hand could be strengthened by a new and controversial study by the International Monetary Fund on the so-called fiscal multiplier which appears to suggest that the degree of budget correction in several countries in western Europe is doing more damage to growth than generating benefits.

This is likely to provide fuel for those who oppose rapid reduction of deficits, as usually urged by the IMF.

But the findings are contested by some analysts.

They say that the IMF analysis covers the wrong selection of countries and so presents an unduly gloomy picture of growth which in any case may turn out to be stronger than the data shows so far.


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