October 12, 2012 / 10:43 AM / in 8 years

Portugal plans higher transactions tax, pension cuts

LISBON (Reuters) - Portugal’s 2013 budget plans to impose a financial transactions tax of up to 0.3 percent and to cut pensions next year, going well beyond a proposal from the European Commission which floated a tax rate of just 0.1 percent.

Eager to reassure international lenders - who are underpinning its 78-billion euro bailout - recession-hit Portugal is trying to follow in Ireland’s footsteps and to make a full return to global bond markets to fund itself.

There are signs it is close to achieving that goal with lower yields but anti-austerity protests and issues over the economy’s longer-term competitiveness risk undercutting those efforts, while banks are warning that a transaction tax would put Lisbon at a disadvantage to rivals such as London.

Portugal’s economy also remains in a sickly state and this year entered its deepest recession since the 1970s with unemployment at record highs of above 15 percent.

In the budget blueprint, a copy of which was obtained by Reuters, the government requests parliament’s permission to tax the “acquisition of securities at a rate that can reach a maximum of 0.3 percent”, but does not provide further details.

Struggling to meet the fiscal terms of the European Union/International Monetary Fund-backed bailout after a steep recession undercut tax revenues in 2012, the government will present the draft budget to parliament on Monday.

It will include previously-announced income tax hikes.

The countries’ creditors agreed to relax Lisbon’s budget goals last month but the government has indicated it will still be tough to even meet the new targets.

It now needs to cut the budget deficit to below 3 percent of GDP in 2014, one year later than previously planned, and must post a deficit of 5 percent this year and 4.5 percent in 2013.


But planned income tax hikes have already provoked strong criticism from trade unions and politicians, triggering mass protests. Protest marches are scheduled in Lisbon on Saturday and Monday.

To meet next year’s budget deficit goal of 4.5 percent of GDP, the government is seeking to raise 4.9 billion euros, or 3 percent of GDP, in additional austerity measures that complement previous tax hikes and spending cuts.

The head of Portugal’s banking association has already expressed concerns that the transactions tax would put the country’s lenders at a disadvantage to rivals that are not subject to the charge.

While economists expect Portugal’s recession to deepen under the weight of more austerity, investors have pushed the country’s bond yields to their lowest levels in more than a year, to around 8 percent. That is down from a peak of around 17 percent in January, on the back of the ECB’s bond buying plan.

Lisbon took advantage of the more favorable market last week by swapping 3.75 billion euros in bonds maturing next year for bonds due in 2015. It was the country’s first bond operation since it sought the bailout last year.

Eleven euro zone countries agreed on Tuesday to push ahead with a financial transactions tax, an initiative that several other EU nations oppose but which has been pushed hard by Germany. The European Commission’s proposal is to tax stock and bond trades at 0.1 percent.

Aside from the previously-announced overall income tax hikes - which will be effected via a reduction in the number of tax brackets, a 4 percent tax surcharge and some other increases - the government also plans to reduce pensions and cut unemployment and sickness benefits.

Monthly pensions above 1,350 euros will face a 3.5 percent extraordinary contribution. Pensions between 1,350 and 1,800 euros will be cut by 10 percent, the next range of up to 3,750 euros will suffer a 15 percent cut and the highest rate pensions above 7,546 euros will be slashed by 40 percent.

The government wants to cut unemployment benefits by 6 percent and sickness leave subsidies by 5 percent.

By cutting the number of income tax brackets from eight to five, Portugal effectively increases income tax rates, especially for high earners. The lowest income tax rate rises to 14.5 percent from 11.5 percent now.

The highest rate of 48 percent, up from 46.5 percent previously, now applies to annual incomes above 80,000 euros rather than 153,000 euros.

Reporting By Sergio Goncalves; Writing by Andrei Khalip; Editing by Patrick Graham and Andrew Osborn

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