Portuguese draft budget set to raise taxes despite austerity fatigue

(LISBON) - The Portuguese government was all set to push ahead on Monday with massive tax rises in a draft 2013 budget just two days after mass street protests against further austerity.

The new measures, a condition of debt-rescue funding, are known to target income tax, pensions, and unemployment and sickness benefits.

But last month the government had to backtrack on an initial package of austerity measures, and a poll last week suggested that 70 percent of the people oppose the government's policy.

In May 2011, the IMF and EU rescued Portugal from impending debt meltdown with a bailout worth 78 billion euros ($100 billion) conditional on budget and structural reforms.

The people have made clear in street protests their fatigue with austerity tied to the bailout which averted national bankruptcy.

In the last month, there have been many strikes and protests and on Saturday tens of thousands of people protested in the streets of Lisbon and in several other towns.

The list of the new measures to satisfy EU-IMF debt rescue conditions will go from a cabinet meeting to parliament later on Monday.

Militants who are hostile to the strategy of spending cuts and tax increases, known as "the Indignant ones", have called for supporters to gather en masse around parliament from 7.00 pm local time (1700 GMT) to protest.

Finance Minister Vitor Gaspar has already revealed the main thrust of the budget and what he termed an "enormous" increase in taxes, notably by means of reducing from eight to five the number of bands for income tax.

A surtax is to be introduced, and payments for pensions, unemployment and sickness benefit will be reduced.

The changes to the tax banks will have the effect of raising income tax on the lowest incomes from 11.5 percent to 14.0 percent.

Tax on the middle income band ranging from 20,000 to 40,000 euros ($25,870-$51,740) per year will rise from 35.5 percent to 37.0 percent.

The rate on incomes above 80,000 euros will rise from 46.5 percent to 48.0 percent. This nearly halves the level at which the top rate applied previously, from 153,000 euros.

The increases could worsen a recession in Portugal. Official data suggests that the economy could shrink by 3.0 percent this year with the unemployment rate being close to 16.0 percent.

But press reports suggest that the government might make some last minute changes to cut spending further as a way of reducing the tax increases.

The information provided so far has generated caustic comment.

It is "a fiscal atomic bomb", said Socialist Party Leader Antonio Jose Seguro. For the Communist Party, it amounts to a "massacre."

The main trade union CGTP said it was "an attack on the dignity of the people".

The daily newspaper Diario Economico declared it to be "an insult to the Portuguese people."

The so-called troika of creditors, the International Monetary Fund, European Union and European Central Bank, have agreed to ease the targets for reduction of the public deficit.

This must now be 5.0 percent of output this year and 4.5 percent in 2013. But this concession was conditional on extra measures.

Even Portuguese President Anibal Cavaco Silva, who comes from the Social Democrat Party of Prime Minister Pedro Passos Coelho, has expressed concern.

"In current circumstances, it is not right to require a public deficit target from a country undergoing a process of budget adjustment which it is respecting come what may," he said on his Facebook page.

The situation is particularly delicate because the Portuguese, who up to now seemed to accept the need for austerity, have radically changed their attitude.

Their hand could be strengthened by a new and controversial study by the International Monetary Fund on the so-called fiscal multiplier which appears to suggest that the degree of budget correction in several countries in western Europe is doing more damage to growth than generating benefits.

This is likely to provide fuel for those who oppose rapid reduction of deficits, as usually urged by the IMF.

But the findings are contested by some analysts.

They say that the IMF analysis covers the wrong selection of countries and so presents an unduly gloomy picture of growth which in any case may turn out to be stronger than the data shows so far.