New political  crisis threatens tax hikes, early elections and  second bailout

New political crisis threatens tax hikes, early elections and second bailout

Impact began on Friday last week when the Constitutional Court (TC) vetoed three of the government’s plans for the 2014 state budget.
The TC’s ruling instantly created an €800 million ‘hole’ which finance bosses are scrambling to work out how they can fill.
Tax hikes, new levies on holiday bonuses and a restructuring of IRS brackets seem certain – but there’s worse waiting in the wings.
According to Financial Times correspondent Peter Wise, the troika “will not approve the final €3.5 billion tranche” of bailout money until after the government has devised credible alternatives to the measures overturned by the TC.
In other words, the €800 million hole is a walk in the park by comparison to the real horrors ahead.
And it gets worse. The TC still has to rule on another potentially unconstitutional cost-cutting measure, the CES solidarity payment that the government brought in on pensions last year.
If that is vetoed as well, “it opens the way to the scenario of early legislative elections”, writes Correio da Manhã newspaper, stopping short of spelling out the bottom line, which the FT nonetheless grasps with total clarity.
“Risks persist for a new bailout loan,” said an opinion article repeated throughout the Portuguese press this week.
It’s nothing ‘new’, as economists have been predicting for months – if not years – but it comes as a huge blow to a government that has steadfastly maintained it is on track and sailing valiantly forwards to a credible future.
Behind all the column inches of political spin and bravado, there is another “elephant in the room” whose presence looms ever larger: the country’s deficit.
UTAO, the technical unit of budgetary support, has estimated that Portugal’s debt levels top 5.6% of GDP. That is more than the 4% defined by Prime Minister Pedro Passos Coelho for 2014 and light years away from the 2.5% target set by the government for 2015.
As Durão Barroso, soon-to-be-outgoing EC president, points out: “A rapid solution has to be found”, although whatever it is, it will undoubtedly further compromise economic growth.
While deputy PM Paulo Portas has criticised the TC for “condemning the country to live in fiscal slavery” and PSD spokesman Marco António Costa has accused it of “invading the legislative field”, television commentator and former finance minister Henrique Medina Carreira claims the country would be “much better off without the Constitutional Court”, which, he says, has become an anachronism that serves simply “to hold up the traffic”.
“The TC is from the era when we had escudos, which was completely different to current times,” he said on primetime TVI24 on Monday night, which opens the question: which will go first – the government or the Constitutional Court?

Behind the Constitutional Court’s ruling

The Constitutional Court’s decision vetoes the government’s plans to:
▪ reduce all state worker salaries over €675 per month;
▪ increase state worker health and unemployment contributions;
▪ recalculate state pensions downwards.
The decision is ‘instant’ in that civil servants should start reaping the benefits in this month’s pay packets.
CM explains how this would affect a civil servant earning €1,550 per month.
“If everything goes back to the situation of 2010 (when the government ‘introduced’ the cuts now ruled as unconstitutional), this civil servant will receive an increase of almost €200. Even without retroactive effects, this will mean a new budget will have to be presented in Parliament.”
Every point added to Portugal’s already sky high IVA (VAT) will generate an income to the state of €600 million, adds CM – but even if this is what the government decides to do, there are time factors to take into account. It would be unlikely to come into effect overnight, which will reduce the money that could come in this year – and that is before one considers what harm it will do to the already reeling economy.
Thus other ideas on the table include shifting IRS tax brackets (so that everyone pays more than they are paying now) and introducing new “extraordinary taxes” on holiday bonuses.
Announcing that he is “deeply concerned” by the minefield of decision-making ahead of him, PM Passos Coelho is playing what is left of the coalition’s cards close to his chest.
The government will respond to this situation, he says, at the appropriate time, while he will be making every effort to see that decisions “that seem incomprehensible” don’t plunge the country backwards and entail a new SOS for “external help” – in other words a second bailout.
One thin sliver of light on the horizon is the prospect of a cut in commercial interest rates – to encourage business lending across the Eurozone – expected to be announced by European Central bank boss Mario Draghi on Thursday, June 5.
Whether the cut will be enough to save Portugal remains to be seen.
By NATASHA DONN [email protected]