Warning against tax cuts

The Governor of the Bank of Portugal has advised Pedro Santana Lopes’ new centre-right government against going ahead with plans to cut IRS (income tax). The warning comes after new Finance Minister António Bagão Felix had said that the reduction of income tax was “a priority”.

“Right now, given the need to rein in the public deficit, I don’t see any room for lower taxes of any nature,” Vitor Constâncio told reporters after a speech in Lisbon. Bagão Felix, Manuela Ferreira Leite’s replacement in the new administration, quickly qualified his remarks in the light of the Governor’s comments. He admitted that “economic rigour is not only a current necessity – it is a permanent demand”, saying: “The Portuguese people have to understand that we cannot have increased public spending and a reduction in taxes at the same time.” Felix stressed that the forthcoming state budget will be “stimulating, just and responsible”.

New Prime Minister Pedro Santana Lopes has vowed to follow the economic programme set by his predecessor Durão Barroso since 2002, but has also stressed he intends to pay close attention to the problems of the poor.

In the past, Portugal has struggled to meet the terms of the EU’s Stability and Growth Pact, which requires nations that adopt the euro currency to keep their public deficits under three per cent of gross domestic product. Portugal was the first eurozone member to breach the terms of the pact, running a deficit of 4.4 per cent in 2002. But the government was subsequently able to meet the terms of the pact through a combination of austerity measures and the sale of public assets.