PM hits taxpayers to curb deficit

news: PM hits taxpayers to curb deficit

• Sócrates is being acused of making an “irresponsible mistake”
• Sócrates is being acused of making an “irresponsible mistake”

SOCIALIST Prime Minister, José Sócrates, has unveiled a package of tax increases and savings to rein in Portugal’s burgeoning budget deficit.

The measures, which contradicted his election pledge not to raise taxes, drew fire from business leaders and the opposition as well as the Socialist Party’s natural constituency of unions and public sector workers.

Sócrates’ government was forced into action after figures indicated that this year’s budget deficit could soar to 6.8 per cent of GDP, the gravest breach yet of the EU’s Stability and Growth Pact.

The Prime Minister, addressing parliament, said he had to “break the vicious circle of escalating deficits and constant tax increases”. He announced he would ask the Commission for three years to bring the deficit below three per cent in view of the “exceptional seriousness” of the crisis. The package included tax increases and a clampdown on benefits enjoyed by public sector workers. The most immediate change will be an increase in the basic rate of IVA (Value Added Tax) from 19 to 21 per cent, affecting 62 per cent of consumer items. The new rate will be introduced before parliament debates the revised budget on June 29.

The intermediate 12 per cent rate of IVA and the minimum rate of five per cent will stay in place, but sales taxes on tobacco and fuel will also increase, almost certainly triggering rises in public transport and taxi fares.

The government has also introduced a new top-rate income tax rate of 42 per cent on earnings above 60,000 euros a year. This means that high earners will effectively be paying half their income to the state if one includes social security contributions of 11 per cent.

Attack on tax evasion

In addition, Sócrates announced the lifting of some banking secrecy laws as part of an attack on tax evasion and fraud, bringing tax declarations into the open. He also promised to remove a “vast list” of tax benefits and exemptions.

Deputies lose privileges

Perhaps more controversially, to his immediate audience at least, Sócrates also announced that parliamentary deputies would be stripped of “unjustified privileges”, a reference to a 1985 decree that entitles deputies to monthly subsidies once they leave parliament. The new legislation will respect “rights already earned” – hence deputies who have already served 12 years or more in parliament (the eligibility period) will not be affected by the new measure. But other deputies, mainly Socialist members who entered parliament at the time of the Guterres victory in 1995, will be less fortunate.

Mixed package alienates all sides

Reaction to the package was mostly hostile. Union leaders and far-left parties described it as a betrayal of ordinary workers and a continuation of the failed policies of the past. The measures they welcomed – the clampdown on secret banking and the increase in the top rate of tax – were seen as too little and too tame.

Communist leader, Jerónimo de Sousa, said Sócrates had introduced “the same measures as right-wing governments” and regretted that the “enormous wealth of affluent groups and big business would remain untouched”.

Francisco Louçã, head of the Bloco de Esquerda (BE), said the government had perpetrated an “irresponsible mistake” by increasing IVA and forecast that unemployment rates would continue to rise. Louçã said he would have introduced a ‘wealth tax’, similar to ones existing in France, Luxembourg, Holland and Sweden, claiming that such a tax would accrue between 250 and 350 million euros a year.

The left also criticised plans to curb automatic civil service promotions and bonuses and, in particular, a proposal to upgrade the retirement age of public sector workers to 65, the same as in the private sector.

The move will come about in incremental stages, but this concession failed to appease public sector unions, who plan to stage a demonstration in Lisbon on June 17. Manuel Ramos, from the Confederation of General Workers’ Union (CGTP), condemned the decision: “When employees entered public service, they signed up for predetermined entitlements that cannot just be withdrawn at the end of their careers,” he said.

The changes also worried police unions. António Ramos, president of the Union of Professional Police, whose members can retire after 36 years of service or opt for early retirement at the age of 55, said officers would not accept amendments to their special status. “We have retirement legislation that separates us from the general regime. The possibility of this changing has already led us to seek an emergency meeting with the Minister of Internal Administration, António Costa,” he said.

In the GNR, where retirement is at 60, there was also opposition to the move. Unions linked to the security forces (GNR, PSP, PJ, Policía Marítima and Guardas Prisionais) have announced that they will meet their opposite numbers in the Public Ministry and the judiciary to enlist support for concerted demonstrations.

Business leaders criticise “lack of courage”

Economists and business leaders said the package would do little to address deep-rooted structural problems, pointing out that the real cause of the crisis lay with the bloated public sector. They claimed that the government should have slashed state spending instead. Many business leaders also claimed the tax increases were counter-productive, liable to prolong the recession and undermine business confidence. Economist César das Neves said the measures failed to grapple with the real problems. “All the government has done is to say to the Portuguese ‘we have this expenditure and we have to get more money to pay for it’. What they should have said is ‘we have this expenditure and we are going to reduce it,’” he maintained.

Carlos Barbosa, president of the Portuguese Automobile Association, maintained the government had missed an opportunity. “Increasing IVA is an act of stupidity. They do not have the courage to go to the heart of the issue and trim the state budget. Raising the price of petrol products is also a very sinister move that will bombard the automobile sector with more taxes,” he said.

SCUTs remain toll-free

The government decided not to introduce tolls on SCUT routes, a measure perceived as too unpopular in the light of forthcoming local elections. The new leader of the opposition Social Democrats Party (PSD), Marques Mendes, criticised the increase in IVA and said the government should have had the courage to persevere with tolls. “A government that lacks the courage to impose tolls where they should be introduced is a government without authority,” he said. Former PSD Prime Minister, Cavaco Silva, also criticised the package, saying it would undermine competitiveness.

Instability and ‘bloated’ public sector

Many observers believe that Portugal’s political instability has played a large part in budgetary discipline. There have been at least 17 governments since 1976, including three within the past year, producing constant fluctuations in policy.

But most independent commentators also see Portugal’s excessive public sector budget as central to the perpetual crisis. Cristina Casalinho, chief economist at Banco BPI SA, says economic decline can be traced back 30 years to withdrawal from overseas colonies and consequent pressure to boost spending. “When the colonies proclaimed their independence, most of the civil servants in them returned to Portugal and the state had to employ them. We have had a bloated public administration ever since and it’s a very heavy burden,” she says.

Portugal not alone

There are likely to be two long-lasting repercussions to the budget deficit, internationally and at home. In the EU, Portugal is not alone in breaking the terms of the Stability Pact. Greece, France and Germany have all now breached the three per cent ceiling that was introduced to avoid excessive spending and bolster confidence in the single currency. But Portugal’s forecast deficit of 6.8 per cent is far higher than any other transgressing deficit yet encountered and the new figures are almost certain to provide further ammunition to those calling for a relaxation of the pact.

Honeymoon is over

At home, Sócrates’ U-Turn almost certainly spells the end of his three-month honeymoon with voters. Heavyweight figures inside the Socialist Party will now have to explain to party activists and the country why he reneged on his election promise not to raise taxes. The Socialist government’s large majority mean that the measures should receive a smooth passage in parliament, but they are also liable to engender greater cynicism and distrust of the political establishment.

By Gabriel Hershman