Portugal to hike taxes after dropping universal wage-cut plan

After a meeting on Monday with labor union and business leaders Portuguese Prime Minister Pedro Passos Coelho announced the government had definitively abandoned plans to increase workers’ social security contributions, a move that sparked massive street protests.

Passos Coelho also agreed to return part of two extra monthly payments to public workers and retirees that his government had stopping paying a year ago. The Constitutional Court had declared the latter move illegal, hence the need to introduce new austerity measures to cover the two billion euros in savings that stopping the extra payments would have brought in.

The Portuguese leader said on Monday that his government would now introduce new tax increases to replace the lost revenues from the social security hike, but added that there would be no further increase in the value-added sales tax.

Passos Coelho said the social security increase, which generated the biggest street protests in Portugal since the revolution of April 1974, had “not been understood” by the people. He added that Monday’s meeting had failed to produce a consensus on how to proceed next.

Business leaders were also against the hike in workers' social security contributions — which was to be accompanied by a cut in company contributions — because the fall in wages they implied would have hurt consumer spending.

A European Commission spokesman said Brussels would wait for the Portuguese government to come up with additional measures to ensure the deficit-reduction program agreed in exchange for a bailout from the European Union and the IMF was met.