Government faces no confidence motion

SPECIAL REPORT by CHRIS GRAEME [email protected]

Prime Minister José Sócrates’ PS socialist government is facing a vote of no confidence in the Portuguese Parliament over the controversial State Budget for 2011.

Agreement on the budget, which is vital to restore Portugal’s flagging financial reputation in the eyes of international financial ratings agencies and organisations, seems likely to elude the Government well into November if opposition PSD, CDS-PP and Bloco Esquerda parties turn it down.

The State Budget for 2011, which has been called the most important Portuguese budget in 25 years, was supposed to be delivered to the President of the Portuguese Parliament, Jaime Gama, by 8pm last Friday evening.

Instead, the Budget only arrived close to midnight on Friday and even then it was incomplete.

Presented to the media on Saturday morning, by Finance Minister Fernando Teixeira dos Santos, opposition parties, on studying it over the weekend, slammed the State Budget for 2011 as “incomplete”, “unclear” and predicted it would “pave the way for a recession”.

In a nutshell, measures proposed by the Government to redress the nation’s public finances, apart from the rise in VAT to 23 per cent and the five to 10 per cent shaved off public sector salaries announced last week, include a rise in national insurance contributions by four per cent, unemployment benefits cut by 6.5 per cent, a merger of certain government agencies to cut costs, a freeze on defence spending, an increase, from January, in IRS income taxation and raising the State’s ceiling on debt by 6.6 per cent of the GDP.

The twice yearly holiday subsidies paid in July and December will also face cuts of between 3.5 and 10 per cent while the Portuguese National Health Service (SNS) will see its budget slashed by an average of 6.4 per cent in some areas and as much as 13 per cent in others.

Under the terms of Portuguese Law, the State Budget should have been delivered in its entirety by October 15 2010. This year was the first time in two decades that this rule had not been met.

Deficit reduction

On Friday night, before delivering the 1,500 page budget on a 16 Gigabyte blue and white pen to the Assembleia da República, Fernando Teixeira dos Santos told journalists in a brief statement that the budget was “very hard for the Government to do”, that it would mean a “serious effort on the part of all Portuguese” and lastly that it was “vital that it was passed by Parliament”.

“This country needs to have a budget and this is the budget that the country needs,” he said. “It includes measures that allow a reduction in the deficit and will contribute towards restoring the confidence of those who loan to Portugal.”

But the budget immediately came under fire from politicians, commentators and economists because it was vague on detail and, in the opinion of some critics, unworkable.

The Government aims to bring the State’s public deficit down to 7.3 per cent by the end of the year and 4.6 per cent by 2011. Some economists and experts now say that is almost impossible.

Despite being incomplete, what is known is that total expenditure, including public debt, from State integrated services for 2011, is predicted to be 177,812 million Euros.

The Government is also requesting an authorisation from Parliament to up the State’s debt ceiling for 2011 by six per cent or 11,573 million Euros, to act as a safety cushion against unexpected overspends.

On the taxation receipts side for 2011, the Government is expecting to net around 33257,7 million Euros, up 3.8 per cent on 2010.

The Government estimates that its net financing needs in 2011 will reach 10.7 billion Euros with revenue from privatisations bringing in 1.87 billion Euros. Public spending would be slashed by 3.7 billion Euros and taxation revenues would increase by two billion Euros.


Over the weekend, the State Budget for 2011 received a chorus of protests from both the left and the right.

António Nogueira Leite, a PSD economist and adviser to PSD leader Pedro Passos Coelho said: “I don’t like what I’ve seen. It isn’t transparent and will contribute towards pushing the country deep into recession.”

Assunção Cristas of the CDS party slammed the “complete lack of a greater effort to cut Government debt” while her party called it a “savage attack on the fragile middle class”.

Economist Eduardo Catroga labelled the State Budget 2011 proposal as “bad” and accused the Government of having “strangled the Portuguese economy” as a consequence of “incorrect policies over the past five years”.

Another economist, Mira Amaral, said it had yet to be explained what had “gone wrong” with the agreement made with the PSD in May, which meant an increase in receipts by one billion Euros and a corresponding decrease in spending by a billion Euros.

He said that it would be the middle class that would “foot the bill” through tax increases and added that education and health would suffer on what was a “brutal attack on Public and Social Services”.

Communist leader Jerónimo Sousa said it was time “the Prime Minister stepped down” and blamed “bankers for foisting the budget on the Portuguese people”.

The leader of the left-wing Bloco de Esquerda, Francisco Louçã, also accused the country’s bankers of pressurising the Government and PSD into pursuing a budget that would penalise the working and middle classes so as to “secure and guarantee their continued financial operations”.

VAT rises

In terms of VAT (IVA) tax increases on everyday items, including foodstuffs, the State Budget 2011 means that from January  prices will increase from between 1.7 per cent to 16 per cent on items that were taxed at either six, 13 or 21 per cent.

Products currently taxed at six per cent VAT, such as fizzy drinks like Coca Cola, will increase by 15.8 per cent to 23 per cent VAT. Flavoured milks and milkshakes will soar by 16 per cent to 23 per cent VAT while Italian-style cooking sauces and purees will skyrocket by seven per cent from 13 per cent VAT as a 23 per cent VAT rate is slapped on.

Spreading and liquid cooking margarines, crisps and wheat snacks, jams and preserves, sauces, stocks and vinegars, cut flowers, pot plants, carton and bottled fruit juices will also all increase in VAT from either 13 or 21 per cent to 23 per cent.        

Essential household items such as shampoo and conditioner, toothpaste, toilet paper, washing up liquid, washing machine and dishwasher detergents, breakfast cereals, white sugar, biscuits, ice creams, alcohol and pet foods will all increase from 21 to 23 per cent VAT.

Other items, services and equipment that were taxed at six per cent VAT and will now be increased to 23 per cent VAT include soya-based deserts, milk-based vitamin or protein drinks, fire detection and extinguishing equipment and subscriptions and tickets for gyms, swimming pools and other sporting clubs and premises.

Further tough austerity measures are being introduced by the Government in the wake of German Chancellor Angela Merkel’s Christian Democrat party stating publicly last month that Portugal wasn’t doing enough to avoid Greece’s fate and needed to step up efforts to overhaul the economy.

The difference in yield between Portuguese 10-year bonds and German bonds, Europe’s benchmark, rose to a record 441 basis points in late September as markets were concerned that Portugal was not doing enough to cut its deficit and might follow Greece in seeking an IMF and EU bailout.

And according to the Bloomberg sources quoted on October 16, Portugal’s economy will barely expand next year as slowing growth in Europe and austerity measures to cut the Euro-region’s fourth biggest budget deficit would choke the country’s economic recovery.

Currently, Portugal’s public debt as a percentage of GDP will reach close to 87 per cent by 2011 from 82 per cent this year.

The IMF predicts the Portuguese economy will contract 1.4 per cent next year while ratings agency Standard & Poor’s expected the economy to shrink by 1.8 per cent next year and stagnate in 2012 – technically a recession.

Comments from the opposition about the State Budget for 2011

• It will contribute towards pushing the economy deep into recession

• Education and health will suffer from the brutal attack on Public and Social Services

• Savage attack on the fragile middle class

• It’s time the Prime Minister steps down

• Bankers pressurised Government into pursuing a budget that would penalise the working and middle classes so as to secure and guarantee their financial operations.

Do you have a view on this story? Please email Editor Inês Lopes at [email protected]