Government austerity plan to cut tax breaks

By CHRIS GRAEME [email protected]

The Portuguese government has pledged to bring its public spending deficit back to below three per cent of the European Union’s Growth & Stability Pact by cutting public spending and slashing tax breaks.

However, Finance Minister Fernando Teixeira dos Santos has promised that he will not raise direct taxes for the vast majority, which could harm Portugal’s fragile economic recovery.

Instead, he will target the richest in society earning 150,000 euros per annum or more with a 45 per cent income tax rate.

The government is also toying with plans to raise the retirement age by two years for public administration workers, by 2015, as well as bringing public sector pensions in line with general social security payments to cut expenditure.   

The Government has until 2013 to reduce the budget deficit from 9.3 per cent to just three per cent.

Failure to do so will risk stiff penalties from the EU, a further dressing down from the International Monetary Fund and ratings agencies, and higher borrowing costs on the international money markets.

The pledge to reduce expenditure was formally given on Saturday by the Secretary of State for the Presidency, João Tiago Silveira, at the end of an extraordinary meeting of the Council of Ministers, which approved the government’s Growth & Stability Programme for 2010-2013.

“This plan has two essential aspects. Firstly, it is characterised by financial and fiscal stability and, secondly, by a reduction in public spending,” he said.

In order to increase its receipts, the government will have to slash tax benefits to families and companies as well as social loans.

The government is also considering selling the family silver by privatising the public owned insurer Fidelidade, selling off a further share in power provider EDP, energy company Galp, postal service CTT, electricity network distributor REN and air carrier TAP.  

The government is also banking on economic recovery in the second half of 2010 and 2011 to increase taxation receipts. Forecasts suggest that macroeconomic GDP activity will grow 0.7 per cent in 2010, 0.9 per cent in 2011, 1.3 per cent in 2012 and 1.7 per cent in 2013.

The heat is on for Portugal to reduce its overall public debt by 2013 if it is to avoid a Greek-style tragedy. Public debt is currently forecast to increase from 85.4 per cent of GDP in 2010 to 90.1 per cent by 2012 if drastic action isn’t taken.

It has ruled out cutting public sector salaries, a proposal put forward by the leader of the opposition, Manuela Ferreira Leite, but will strictly reduce admissions over the next three years.

And after having already frozen pay packages for public company employees, it will now cap the amount of borrowing that both public companies and local authorities can make.

projects on ice

Some road building projects, which had been agreed as part of the measures to kick-start the economy and keep people in jobs, will also fall by the wayside. Now only those contracts that have already gone out to competitive tendering will press ahead.

And although the TGV high-speed rail link between Madrid and Lisbon and Portugal’s new international airport will go ahead as scheduled, plans for branch lines between Porto and Vigo and Porto and Lisbon have been put on ice.

Some unemployment, back-to-work and start-up grants will also be abandoned as part of the government’s austerity measures.

While not going into specific details, the Government, which has to present its proposals to the EU Commission by the end of the month, hopes that they will calm investor and ratings agencies nerves.