Bloomberg News

Portugal Raises Taxes to Meet Rescue Plan Deficit Targets

August 31, 2011

(Updates with estimated tax revenue in second paragraph, Finance Minister’s comment in fourth.)

Aug. 31 (Bloomberg) -- Portugal will raise capital gains taxes and increase levies on corporate profit and high earners to reach the deficit-reduction goals in its 78 billion-euro ($112 billion) bailout as it braces for two years of economic contraction.

The government will impose a tax surcharge of 3 percent on companies for yearly profit exceeding 1.5 million euros and a bonus tax of 2.5 percent on the highest earners, raising almost 100 million euros annually, Finance Minister Vitor Gaspar said today in Lisbon as he presented the government’s four-year budget plan. It will also raise the levy on capital gains by 1 percentage point to 21 percent.

The moves will help trim the budget deficit from 5.9 percent of gross domestic product this year to the European Union ceiling of 3 percent in 2013, and 0.5 percent in 2015, Gaspar said. The government will reduce its deficit even as the economy is forecast to contract 2.2 percent this year and 1.8 percent next year, before expanding 1.2 percent in 2013, he said.

“In five years, the Portuguese economy will have almost eliminated its imbalances,” Gaspar said. “From 2013, the economy will start growing, creating jobs, and the unemployment rate will start its downward trajectory.”

Four-Year Plan

With debt and borrowing costs surging, Portugal this year followed Greece and Ireland in seeking an international bailout. The aid package calls for spending reductions for 2012 and 2013 amounting to 3.5 percent of GDP. Portugal also agreed to present by today a four-year budget plan, including economic and deficit forecasts and estimated spending costs.

The country plans two euros of spending cuts for every euro of revenue gains to cut its deficit. The government had already pledged to freeze public workers’ salaries through 2013 and cut pensions of more than 1,500 euros a month, while tax deductions will be limited and the value-added tax rates of some goods and services will be raised. Portugal also agreed to reduce workers’ severance payments, cut employers’ social-security contributions, phase out rent control, merge some of its municipalities and close some state institutes.

Faster Job Cuts

The central government aims to reduce the number of employees by 2 percent a year from 2012 to 2014, speeding up the initial forecast of a 1 percent reduction, Gaspar said today.

A team of European Union and International Monetary Fund inspectors said Aug. 12 that Portugal was “on track” to meet this year’s deficit goal.

The new budget plan predicts public debt of 100.8 percent of GDP this year, rising to a peak of 106.8 percent in 2013, before starting to decline.

Portugal’s economy emerged from a recession in the second quarter as the austerity measures the government implemented in return for the rescue didn’t have as deep an impact on growth as economists had forecast. GDP was unchanged in the second quarter from the first, when it fell 0.6 percent. GDP dropped 0.9 percent from a year earlier.

--Editors: Jim Silver, Kevin Costelloe

To contact the reporter on this story: Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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