Portugal plans to raise the social security rate paid by workers while curbing the charge on companies as the government tries to narrow its budget deficit and fight surging unemployment.
“The national financial emergency the country plunged into in 2011 has not ended yet,” Portuguese Prime Minister Pedro Passos Coelho said last night in a televised speech. The social security rate paid by public and private-sector employees will increase by 7 percentage points to 18 percent next year, while the rate companies pay will drop to 18 percent to encourage hiring, he said.
Passos Coelho is battling rising joblessness and a deepening recession as he cuts spending and raises taxes to meet the terms of a 78 billion-euro ($100 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal in April 2011 followed Greece and Ireland in requesting a bailout.
The Finance Ministry on July 6 said it would study measures for the 2013 budget to make up for the impact of a Constitutional Court decision that blocked cuts to state workers’ pay in 2013 and 2014. The court allowed the government to withhold the summer and Christmas salary payments to state workers this year, with projected savings of 2 billion euros, more than 1 percent of gross domestic product.
To accommodate the court’s decision, Passos Coelho said last night that only one of those salary payments to state workers will be cut in 2013. The government still plans to cut both Christmas and summer salary payments for pensioners.
Portugal targets a budget deficit of 4.5 percent of GDP for this year and 3 percent for 2013. The IMF on July 17 said the 2012 budget deficit goal remains within reach, “although risks to its attainment have clearly increased in recent months.” It said the target could be adjusted.
Tax revenue has been lower than the government forecast this year and the adjustment needed to reach this year’s deficit target is more difficult, an official at the Finance Ministry who asked not to be identified said on Aug. 23. Passos Coelho last night didn’t speak on new measures for 2012.
Economic growth has averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers. The government predicts the economy will shrink 3 percent this year before expanding 0.2 percent in 2013, and forecasts the unemployment rate will rise to 15.9 percent in 2013 from 15.5 percent this year.
The measures “will again strongly hit consumers and families, which are already at the limit of their capacity to support more drastic reductions in their disposable income,” the Portuguese Association of Distribution Companies said in an e-mailed statement after Passos Coelho spoke.
Work on the fifth quarterly review of Portugal’s aid program is being completed, Passos Coelho said. Officials from the IMF, European Commission and European Central Bank started the review on Aug. 28, focusing on topics including the 2012 and 2013 budget plans, as well as the planned return to bond markets in 2013.
Portugal plans to issue medium-term notes with maturities of one to five years that are designed for specific creditors, the IMF said on July 17. Portugal is “sounding out” the market as it prepares to resume sales of medium-term notes, Joao Moreira Rato, chairman of the country’s debt agency, said in an interview in July.
Portugal’s 10-year government bond yield dropped to 8.09 percent yesterday, an 18-month low, after ECB President Mario Draghi Sept. 6 announced a bond-purchase program. Bond purchases may be considered for euro-area countries currently under bailout programs, such as Greece, Portugal and Ireland, when they regain bond-market access, Draghi said.
“The most recent developments of ECB policy make our adjustment process easier and bring closer our aim of returning to financing in normal market conditions,” Passos Coelho said. “But it is a serious error to think that they replace the effort of reforming our economy and consolidating our public accounts. Those are our tasks.”
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