More tax hikes announced for 2013 State Budget

Sweeping tax hikes were announced this week to meet budget goals imposed by the troika

By ANA TAVARES [email protected]

Following the huge wave of public criticism and one of the largest protests in Portugal, which led to the drop of the Taxa Social Única (TSU) measure, many expected that the Portuguese Government would take a milder approach to austerity and announce lighter measures at the press conference led by the Minister of Finance on October 3. However, in his own words, Vítor Gaspar announced a “huge tax increase” of more than 30% in IRS (income tax), which is expected to earn the Government around €3 billion – more than what the executive was estimated to pocket with the increase of the workers’ contributions to Social Security.

The Minister spoke for 20 minutes, praising Portugal’s external credibility extensively, before starting to list the new austerity measures. As he had previously announced during the press conference regarding troika’s fifth evaluation on September 11, Vítor Gaspar confirmed that the number of tax brackets will be reduced from eight to five, reflecting an increase of the IRS average effective tax rate from 9.8% to 11.8%.

But the IRS increases don’t end here: the Minister of Finance also revealed that the Government will impose an additional income tax of 4% on all workers in 2013. This means that the average effective tax rate will be in fact 13.2%, which represents a tax increase of more than 30%. This additional tax will be taken from the workers’ salaries every month, according to the new IRS withholding tables.

In fact, whilst the Minister said that the measure would earn the government “more than €2 billion” (from a tax revenue of €10 billion in 2012 to over €12 billion in 2013), many estimate that the IRS increase is worth nearly €3 billion.

Holiday bonuses

As part of the new measures, which will be included in the government’s State Budget proposal for 2013, the executive will also restore one of the holiday bonuses of public employees and one-plus-10% bonuses of pensioners. However, according to many political and public figures who commented on the minister’s speech, this is a deceiving measure, as many public workers will still lose one wage due to the IRS rise.

Describing it as a more “fair and balanced” set of austerity measures, Vítor Gaspar said that workers with a higher income will pay more IRS, whilst those with lower income will pay less. In fact, the lower tax bracket of 11.5% will remain the same, but on the other hand the higher tax bracket will increase from 46.5% to 54.5%. “We are protecting families with lower income, which represent around two million families,” said the Minister of Finance, adding that these new measures will be more beneficial for private sector workers than the TSU increase.

Reinforcing the idea of more equity, the Minister also announced that those who earn more money will have to pay an additional solidarity tax of 2.5%.

Regarding corporate income (IRC), Vítor Gaspar announced heavier taxes in 2013 for companies with an annual profit of more than €7.5 million, but refused to specify the value of the increase.

He also added that capital gains, luxury items, cigarrettes and financial transactions will be taxed more heavily, but again didn’t mention any figures.

Following a journalist’s question regarding the tax on financial transactions, Vítor Gaspar did say that the added tax of 0.2% on such transactions earned the French government between €300 million and €350 million since the measure was first imposed in August 2012. “The figures would be much lower in Portugal,” he said, adding that the measure is still being discussed with his Eurozone peers.

No limits for IMI increase

One of the most damaging measures for property owners also sees the government dropping the property tax (IMI) increase limit, which was set to protect home owners from excessive IMI rises after the revaluation process that is taking place until the end of 2012. According to this limitation, the property tax in 2013 could not increase by more than €75 compared to the previous year or by a third of the difference between the value set by the new evaluation and the amount of IMI tax paid previously. These rules have now been dropped by the government, leaving many property owners subject to huge IMI increases.

The Minister also revealed that the Government approved a new set of plans to fight tax evasion along with other measures, such as the renegotiation of several public-private partnerships (PPP), which will be further explained during the presentation of the state budget for 2013 on October 15.

Assuring that the government will focus on cutting down public expenditure in 2014 by 1.75% of GDP (Gross Domestic Product), Vítor Gaspar ended his speech by saying that “this is the path that leads to economical recovery; this is the path that restores financial independence and political responsibility; this is the path that ensures Portugal’s future”.

New measures still fail to please

Although Vítor Gaspar reinforced the idea of economical recovery by praising Portugal’s return to the debt markets on Wednesday (October 3), the criticism regarding the new austerity measures was soon heard after the Minister’s press conference.

Jerónimo de Sousa, the leader of the Communist Party (PCP), said Vítor Gaspar “had announced another scandalous theft”, whilst Socialist Member of Parliament (MP) Pedro Marques called it “a brutal attack on middle class”. The member of the Socialist Party (PS) also added that the Government is “handing benefits with one hand and taking them back with the other. These measures are not an alternative to the TSU increase, they are a tax rise that goes way beyond that.”

Whilst defending the newly announced measures, the Social Democratic MP Paulo Batista Santos said that “this is a more equitable model”. On the other hand, the vice-president of the Popular Party (CDS-PP) parliamentary group Hélder Amaral assured that his party, which is part of the PSD/CDS-PP coalition government, will look for alternatives “on the expenditure side to make up for the increasing tax burden”.

Macroeconomic climate remains dark

After claiming that the unemployment rate in 2013 would reach 16% at a press conference on September 11, the Minister of Finance Vítor Gaspar has now announced a slightly higher figure. According to the Minister, “the macroeconomic climate in Portugal is unfavourable” and the unemployment rate next year might increase by four decimal points to 16.4%.

Vítor Gaspar also confirmed the projections he’d made during troika’s fifth evaluation: the GDP will decrease by 3% in 2012 and by 1% in 2013. “However, I do believe that the GDP will start to grow in the second half of 2013,” he said.