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Middle class hammered over Troika measures

Chris Graeme takes a look at what the bailout really means for Portugal.

Portugal’s already squeezed middle class will bear the brunt of a €78 billion bailout package agreed by the European Commission/European Central Bank/International Monetary Fund (Troika) last week.

In return for the massive loan, to be paid in instalments over the next three years and which Portugal will have to repay over 10 years at interest rates between 3.25% and 4.25%, the future government elected on June 5 will have to make sweeping structural reforms to the civil service, judiciary, public administration, public companies and armed forces.

During its three weeks in Lisbon, at the Ministry of Finance and Portugal headquarters of the European Union, the Troika left no stone unturned in what is perhaps the most comprehensive overhaul to government institutions since the April 25 Revolution in 1974.

For starters, there will be reductions in income tax deductions on health and education, which in practice means the cost of schooling and healthcare, for all but the poorest in the country, will increase.

Deductions will also be either severely curtailed or scrapped on home loans, subsidies to pay for elderly residential care and renewable energy – previously an important sweetener in the government’s cornerstone policy to make Portugal more energy self-sufficient.

The Portuguese middle class will pay more income tax from January 2012, although the present PS government claims it will not raise Value Added Tax to 25%, something that the opposition PSD party states it might review if it wins the election.

Tax increases

Tax hikes will not only affect the better off in Portuguese society, which was already hammered this year, but will now affect the third, fourth, fifth and sixth income scales, i.e. all but the poorest sections of society.

It means all families and individuals earning between €7,410 and €66,045 per annum – around 1.4 million families – will have to pay more tax.

The so-called Single Social Tax (Taxa Social Única), the equivalent of company-paid national insurance contributions in the United Kingdom, will suffer reductions, meaning bosses will pay less contributions for their employees who, in turn, will have to fork out more on social security deductions.

The Troika believes that by easing the social contribution burden on bosses, companies will become more competitive and productive as operational and labour costs fall, thereby reducing the costs of goods and services produced.       

In order to keep the Portuguese banking system in operation, Portuguese banks will receive a €12 billion lifeline via the European Central Bank, but in return will have to bolster capital ratios to 10%.

The Troika has given the green light to a range of privatisation schemes for public companies as well as the end of the government’s so-called ‘Golden Shares’ in private companies such as Portugal Telecom (PT), Energias de Portugal (EDP) and the national grid operator REN by 2011.

The liberalisation of public utilities, including the mooted eventual sale of the government’s participation in the water company Águas de Portugal, will spell the end of subsidised energy affecting 5.8 million electricity clients and 1.28 million gas clients with price increases of between 6.6% to 7% for the middle classes and 4.6% for the poor.

VAT on utility services will also be increased to either 13% or 23% on electricity and gas bills.

In the case of EDP, its CEO António Mexia has already stated that he is in favour of complete privatisation because “it is important that the company is in total control of its own future”.

Privatisation

Other companies expected to go under the hammer include the national airports authority ANA, the privatisation of the national airline TAP, the selling off or dismantling of bank BPN, the privatisation of one State-run RTP TV channel, the end of spendthrift public private partnerships and the shelving of big-ticket public works projects.   

Other tax hikes announced this week include property tax IMI and those applied on tobacco.

The demanding Troika measures have been inspired by the very Stability & Growth Pact austerity measures (PEC IV) worked out by the current Portuguese government and presented to Brussels in March via the back door which the opposition PSD party threw out of parliament and led to a major political crisis and the fall of the government.

The ‘troika’ believes that if the government rigidly sticks to the plan, the government will be able to reduce accumulated public debt by €6.5 billion by 2013.