After last weekend’s humiliating results in the European elections, Portugal’s coalition government has sailed slap into another political maelstrom. The only way out seems to be to increase taxes, but political pundits warn that could be the tip of the iceberg that finally brings this Executive down.
It is not a surprise scenario. Commentators saw this coming when the PSD/ CDS-PP majority opted to ‘make permanent’ the unpopular pay and pension cuts for public sector workers brought in in 2010.
But while the focus is on where tax hikes are most likely to bite, the elephant in the room is the country’s deficit – relentlessly creeping upwards despite all the government spin on how “things are getting better”.
UTAO, the technical unit of budgetary support, has estimated that Portugal’s debt levels top 5.6% of GDP. That is frighteningly more than the 4% defined by Prime Minister Pedro Passos Coelho for 2014. Thus rumblings that Portugal will need a second bailout are once again gathering momentum.
Meantime, the immediate “news” is that the Constitutional Court has vetoed three of the government’s plans for the 2014 state budget. (see box)
The decision, writes Correio da Manhã newspaper, means that civil servants should go back to receiving the pay packets they got pre-2010 (when the government first started slashing benefits).
As unions welcome the decision, celebrations are nonetheless muted, as everyone is aware that ‘new’ measures will simply be devised to bring in the government’s ‘lost income’.
In an editorial entitled “Who pays now?”, CM’s sub-editor Miguel Alexandre Ganhão writes: “ Are there really any reasons for jubilation? As has happened following other decisions taken by the Constitutional Court, the inevitable effect of these vetoes is the increase of taxes, or the creation of a special tax that is aimed at something or other considered to be a “luxury”.
“The energy sector is already paying a special tax, the financial sector pays an additional tax, the pharmaceutical sector is negotiating a contribution…
“And the people will pay more taxes”.
“IVA will increase penalising all economic activity which has already “slipped” this year”, he warns, again alluding to the “elephant in the room”.
The government nonetheless remains “tranquil”, at least on the exterior. Talking to journalists as the news came in on Friday, regional development minister Poiares Maduro said Constitutional Court’s ruling needed “deep analysis”, to be undertaken “with all tranquility”.
As public sector union SINTAP suggested the news spelled “defeat” for the government, the Governor of the Bank of Portugal stressed the “need for Portugal to continue the process of budgetary consolidation (the new word for ‘austerity’) in spite of the departure of the troika”.
Carlos Costa also defended the permanence of public sector workers’ pay cuts, suggesting there was “no way around the measures for budgetary adjustment”.
Behind the Constitutional Court’s ruling
The Constitutional Court’s decision vetoes the government’s plans to:
reduce all state worker salaries over 675 euros 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 of it in their pay packets for June.
CM explains how this would effect a civil servant earning 1550 euros per month.
“If everything goes back to the situation of 2010, this civil servant will receive an increase of almost 200 euros”, claims the paper.
“Even without retroactive effects, this situation seems unsustainable for the Government without an increase in taxes. 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 euros, 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 as power-makers pick at the bones of the Constitutional Court’s decision, the clock is ticking on the country’s crippling deficit.
Only last week, Socialist leader António José Seguro crowed “this government is at an end”, but this week, those in the know are calling on politicians to come together.
“It is time for parties to stop their political wars once and for all, and to start to government with wisdom”, considers Miguel Alexandre Ganhão.
