Portugal will hike personal income tax to meet deficit target

Portugal announced another battery of austerity measures on Wednesday, including a “sharp” rise in personal income tax in order to meet its deficit-reduction commitments taken on as part of the conditions for its 78-billion-euro bailout from the IMF and the European Union.

Finance Minister Vítor Gaspar said the average personal income tax rate is to be raised from 9.8 percent to 11.8 percent, while the number of tax brackets is to be cut to five from eight. An additional four-percent surcharge will further raise the effective rate to 13.2 percent.

The measures are due to replace the income that would have accrued from a controversial increase in workers’ social security contributions. The government abandoned that plan after massive streets protests. The social security plan was itself drawn up after the Supreme Court ruled that eliminating the Christmas bonus for state pensioners and public servants was illegal.

Gaspar said the tax changes would serve to address current “inequalities” and make the system “fairer.” “The burden will be greater for those in higher income brackets,” he said.

The measures are to be included in the 2013 draft state budget. The government is also planning new taxes on capital and luxury property this year, Gaspar said.

The European Commission has approved the new measures.

The government is aiming to limit its budget deficit to five percent of GDP this year. Brussels recently gave Lisbon another year to bring the shortfall back within the EU ceiling of three percent of GDP as the country slipped deeper into recession this year. The target for 2013 is 4.5 percent of GDP.

“The adjustment is costing us more than we had thought,” Gaspar said. “Only this effort will allow us to meet the new agreed limits [for the deficit].”

Gaspar said next year’s budget would also be restrictive on the spending side.

The administration also revised its GDP forecast for next year to a contraction of 1 percent. The previous estimate was for a fall of 0.9 percent. It maintained its estimate for a decline of three percent in output for this year. The forecast for the jobless rate was raised to 16.4 percent from 16.0 percent.