Government will remain unswayed by impact of austerity drive on ruling party, PM says

After the ruling Social Democrats (PSD) suffered a heavy loss in a regional election over the weekend and with protests set to take place around the parliament building as the government unveils “enormous” tax hikes later Monday, Prime Minister Pedro Passos Coelho pledged to stick to his austerity drive despite the impact on his party’s political fortunes.

The Socialists won 49 percent of the votes and 31 out of 57 seats in the regional assembly of the Azores in Sunday’s ballot. Passos Coelho’s PSD garnered 33 percent of the votes and 20 seats.

“Despite the bad times that party is suffering on a national level, regional elections in no way will undermine the national strategy,” Passos Coelho said ahead of the budget announcement.

Finance Minister Vítor Gaspar is due to unveil the draft state budget for next year in parliament starting from 6pm local time (7pm CET). He has already flagged some of the government’s spending and revenue plans, which will contain massive tax hikes to meet the country’s deficit-reduction commitments assumed as part of its 78-billion-euro bailout from the IMF and the European Union. The government aims to rein the shortfall to 4.5 percent of GDP next year.

The Portuguese economy is already mired in its worst recession since the 1970s, with output expected to contract some three percent this year and one percent next year when average unemployment is set to rise to 16.4 percent.

In response to calls for the CGTP labor union, thousands of people on Saturday gathered outside the Assembly of the Republic parliament building in Lisbon under the slogan: “March against Unemployment.” The CGTP has called for a national strike on November 14 and a protest march for October 31 when parliament is due to vote on the budget.

The tax hikes are to replace revenues that would have accrued from the increase in social security contributions by workers, a plan the Passos Coelho government abandoned in the face of fierce street protests. Tax pressure is also to be increased by cuts in the number of brackets in the progressive personal income tax system.

According to aspects of the budget that have been leaked to the press, the tax hikes will have an impact across the board. A single person earning 10,000 euros previously exempt from income tax will now pay 75 euros next year, while a family with two children earning 40,000 euros a year, will pay 1,970 euros more.

A number of tax benefits are also being eliminated, while those on unemployment benefits will pay a levy of six percent on what they receive. The average price of a packet of cigarettes is also set to rise to five euros from 3.5 euros.

Even members of Passos Coelho’s own party have been critical of the proposed budget. Former PSD finance minister and member of the Council of State, economist Bagão Félix, on Friday described the planned tax hikes as a form of “fiscal napalm that is going to raze everything […]. The idea that it gives to the country is that it’s not worthwhile investing in the future.”