Austerity budget raises tax and cuts spending

news: Austerity budget raises tax and cuts spending

NEXT YEAR’S state budget combines swinging tax increases with public spending cuts in a bid to meet the terms of the EU’s Growth and Stability Pact. The sluggish economy continues to provide the backdrop to the Socialist government’s austerity measures, reports Gabriel Hershman.

The economy is forecast to grow by just 1.1 per cent next year, less than initial government forecasts, but double the rate for this year. Unemployment is forecast to grow by 7.7 per cent next year, 0.3 per cent more than this year. But the government says it has integrated increased spending on unemployment benefit into its calculations.

The budget envisages total cuts of 3.29 billion euros by 2009. Most of the savings will come from public sector restructuring and reforms to health and social spending as well as rationalisation of existing services. José Sócrates’ government aims to save 1.18 billion euros alone by the end of next year. Cuts to public administration will save 603 million euros and reforms to the health sector and rationalisations will reap savings of 427 million euros and 155 million euros respectively. Each ministry will have a special finance controller to ensure that spending allocations are not exceeded.

Regional sub-health authorities will be scrapped next year as will about 30 special retirement regimes in the public sector. Primary schools with less than 10 pupils will be closed. Funds allocated to the Portuguese Institute of Sport will be cut from 84.4 million euros this year to 61.1 million euros next year.

New top rate of tax for earnings above 60,000 euros

The main source of receipts continues to be IVA. According to the government, this will reap 12.585 million euros for state coffers in 2006, following this year’s increase from 19 per cent to 21 per cent.

Spending cuts at the Ministry of Economy will mean less state support for businesses. The government also hopes to obtain 1.563 million euros from privatisations in the energy sector next year, such as the sale of five per cent of EDP.

Among the most significant tax-raising measure is a new 42 per cent rate of tax for earnings above 60,000 euros per year (4,285 euros a month). But those earning less than 7,500 euros a year will be exempt from IRS entirely. Only earnings above that level will be taxable – this year, the earnings’ ceiling was pegged at 8,283 euros.

There will also be a sharp rise in tax on tobacco – the price of a packet of cigarettes will rise by 13 per cent on the mainland and by nine per cent in autonomous regions.

Finance Minister Fernando Teixeira dos Santos said that the proposals made for a “credible” budget and one “without gimmicks” that did not resort to “extraordinary measures”(a reference to the previous government’s windfall sales of state property) to resolve the deficit problem.

He maintained that the measures stemmed from “a realistic macro-economic scenario” and a “rigorous evaluation” of the public sector. He added that public sector savings constituted a fundamental part of the effort to cut back on current primary spending.

Opposition parties attack measures

Political reaction to the budget was generally hostile. The Right criticised the tax increases, while the Left targeted spending cuts. The main opposition PSD (Social Democrats) refrained from any formal comment until Wednesday, but party leader Marques Mendes said he opposed all tax increases, whether direct or indirect. José Ribeiro de Castro, leader of the right-wing CDS-PP party, also criticised the measures. “The government should direct all its efforts towards reducing state spending and boosting economic growth,” he said.

The most savage criticism came from the far-left. The parliamentary leader of the Communist Party (PCP), Bernardino Soares, said that investment cuts would prove to be very damaging. “Instead of working to modernise the economy, they (the Socialists) are working to maintain the stagnation of the economy. In a country where inequalities are already so stark, the measures spell even more deprivations for those who have less, namely the workers.” Luís Fazenda from the Bloco de Esquerda (BE) also criticised it. “It is a budget fixated on reducing the deficit, but there is more to life than the deficit,” he said.

The reaction confirms what appears to be a recurring feature of Sócrates’ centrist government to date. It alienates its own natural constituency (public sector workers and trade unions) by raising taxes and pruning entitlements. But it also fails to placate its natural opponents (economists, industrialists and right-wing parties) who say that the spending cuts are half-hearted and insufficient.