PRIME Minister José Sócrates announced on Wednesday that the country’s VAT (IVA) rate of 21 per cent will be reduced by one per cent from July 1, 2008.
A negative impact of this decision will be the reduction of the government’s tax income by between 225 to 250 million euros this year.
This decision will represent a loss in tax income for the government of between 450 to 500 million euros in one year.
José Sócrates, who originally increased this VAT rate from 19 per cent to 21 per cent when he took office in 2005, has now announced the reduction with the Finance Minister, Teixeira dos Santos, during a press conference in Lisbon.
The government’s decision came after the Instituto Nacional de Estatística (INE), the national statistics institute, revealed that Portugal’s public debt last year decreased to 2.6 per cent.
The figures announced by INE were the lowest in the last 30 years and are already close to the target established for 2008, which is to reduce public debt to 2.4 per cent.
The government’s commitment to reducing Portugal’s public debt aims to meet the requirements set out by the EU agreement for stability and economic growth.
Although this decision will bring the Portuguese VAT rate closer to that of Spain, where this tax is fixed at 16 per cent, it goes against recent recommendations made by the EU Commission and Vitor Constâncio, the governor of the Bank of Portugal.
At the beginning of this year, Vitor Constâncio said that there was still no room for tax reductions in 2008.
When analysing the country’s programme for stability and economic growth, the EU Commission warned the government that it was being too optimistic about the country’s economic forecast.
In reaction to the government’s announcement, Portugal’s Communist Party released a statement congratulating the measure to reduce VAT, while also highlighting that people living in Portugal could have benefitted from this reduction since January, as proposed by the party.
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