Business World

Thursday 23 November 2017

Huge tax hikes set to be approved in Portugal

Axel Bugge

PORTUGAL’S parliament is expected to approve the biggest tax hikes in its modern democratic history today, paving the way for a court fight over a budget the government says it urgently needs to keep a €78bn bailout afloat.

Political tension has been increasing and anti-austerity demonstrations have become more common in recent weeks in Portugal, which despite being one of the countries worst hit by the euro zone crisis had so far escaped unrest seen elsewhere.

The government of Prime Minister Pedro Passos Coelho is searching for ways to meet budget goals under its bailout from the European Union and International Monetary Fund, without deepening the worst recession since the 1970s.

The 2013 budget's tax hikes on income, property and financial transactions are the government's third attempt to tackle the deficit since July. The constitutional court threw out a plan to cut civil servants' benefits, and a plan to hike social security payments was abandoned after street protests.

Political experts say the new budget is almost certain to be challenged in court, with unpredictable consequences.

"If the court finds something unconstitutional, it could still be something relatively easy to fix, or alternatively it could shoot down the budget and cause a political crisis," said Pedro Magalhaes, political scientist at the Social Sciences Institute of the Lisbon University.

"It's hard to predict the outcome: it wouldn't be the constitutional court if it were predictable."

The budget predicts a third year of recession, with unemployment forecast to rise further into record territory next year, to 16.4 percent from around 15 percent.

Coelho told parliament yesterday the 2013 budget was intended to create the conditions for Portugal to "turn the page on one of the most difficult periods of our history".

He should easily find enough support in parliament to enact his budget, but has faced tougher resistance from judges. In July, the constitutional court ruled against a government measure stripping civil servants of their holiday and Christmas bonuses, on the grounds it unfairly impacted them.

The government then attempted to raise the social security contributions of all workers. That sparked mass protests, and it reversed course.

The 2013 budget, relying instead on large increases in income tax - of up to two months' salaries in some cases - is the culmination of those previous policy failures.

It stretched the cohesion of the coalition government, as the small rightist CDS party made clear it would prefer spending cuts to reach budget goals, but the CDS backed down and has promised to support it in parliament on Wednesday.

After that, a constitutional court challenge could come at any time. Portugal's judges' union has promised to challenge the budget, on the grounds it goes against tax equality enshrined in the constitution. The opposition Socialists have also said they would challenge it, and the president could submit it to the court himself in the process of signing off on it.

"If the budget reaches the court, the decision could be a political one," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.

"That is worrying. If the court rejects any measure, it will not help getting out of the crisis. The government would be more fragile," he said. It was becoming ever more difficult to enact austerity plans, because "many Portuguese are beginning to think this route is not paying off," he added.

With the government's popularity already at record lows, a general strike planned for Nov. 14 and some economists warning Portugal could enter a recessive cycle like Greece, additional doubt over austerity measures would hurt confidence further.

The economy is forecast to contract at least 3 percent this year and 1 percent in 2013 - and many economists think even those forecasts are far too optimistic.

The concerns prompted the IMF to warn last week that the risks to Portugal's bailout have "increased markedly". Portuguese bonds have also reacted, beginning to reverse sharp declines in yields since the beginning of year.

Pedro de Vasconcelos, constitutional expert at the University of Minho law school, said a likely next step would be for President Anibal Cavaco Silva to send the budget to the court himself, rather than wait for a challenge.

"The most logical thing would be for the president to send it to the constitutional court. It's the most prudent solution as the risk of paralysing the budget is smaller than if checks are requested by someone else later on," he said. "For the president it's a form of saying I wash my hands of this."


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