by Paul Beckwith
Hoping to stem falling revenues due to a recession that is set to push unemployment to further record highs, and to meet budget targets set as conditions for its international bailout, Portugal announced its adoption of sweeping tax hikes on Wednesday October 3.
Earlier in the day, Portugal also returned to bond markets for the first time since it sought the €78 billion bailout last year, swapping short for longer-dated debt to buy time to fix its public finances.
If the tax hikes further undermine consumer confidence, the country’s worst recession since the 1970s could deepen. There is also a danger that rising taxes could spark more opposition to austerity measures that have already included salary cuts and spending cuts.
“We are confronting a critical moment,” Finance Minister Vítor Gaspar told journalists as he detailed the tax rises, which the government came up with after it abandoned a previous tax plan in the face of mass protests.
“It is fundamental that we maintain our current path to overcome our difficulties,” said the Minister.
Gaspar outlined tax rises across the board for 2013, including income and property taxes, plus a new tax on financial transactions.
The number of tax brackets will be reduced from eight to five reflecting an increase of the average income tax rate by 2% from 9.8 % to 11.8 %. Government will impose an additional income tax of 4% on all workers in 2013. This will increase the average effective tax rate to 13.2 %, which represents a tax increase of over 30%.
The government said the measures, which will also include spending cuts, will amount to 3 % of gross domestic product next year, and raised its estimate for unemployment to 16.4 % from its current record level of 15%.
Vítor Gaspar said that workers with higher income will pay more and those with lower income will pay less income tax. In fact, the lower tax bracket of 11.5% will remain the same, but the higher tax bracket will increase from 46.5% to 54.5%. Those who earn more money will have to pay an additional solidarity tax of 2.5%.
Companies with a higher profit than €7.5 million will pay more IRC. Capital gains, luxury items, cigarettes and financial transactions will also be taxed more heavily.
“These are tough measures, probably worse for the public sector than the private, and protests will probably go on, but I don’t think there will be any backing off by the Government this time,” said António Costa Pinto, Political Scientist at the University of Lisbon.
Gaspar maintained the government’s forecast of a 3% in gross domestic product this year and a decline of 1% in 2013.
Investors welcomed the country’s first venture into the bond market since last year’s bailout, easing Portugal’s debt repayments next year.
The IGCP debt agency sold €3.76 billion ($4.86-billion U.S.) of October 2015 bonds, exchanging them for debt maturing in September 2013.
“The size of the swap is very decent, and I guess it goes some way in reflecting that there are investors out there who have confidence in Portugal’s and the eurozone’s outlook,” said Orlando Green, debt strategist at Credit Agricole in London.
The swap to extend the debt maturity follows similar operations by fellow bailout recipient Ireland.
The head of the IGCP debt agency, João Moreira Rato, said: “This marks a first step for Portugal to regain access to medium– and long-term debt markets.”
Under Portugal’s bailout, the country was expected only to return to finance itself in bond markets in the second half of 2013. Buying up the September 2013 bond now, before it matures, will help the country’s financing needs next year. The amount it swapped represented 39% of the outstanding amount of the September maturity – the first not fully covered by the bailout.
Still, Portugal faces growing economic challenges as the previous political consensus behind the austerity programme was dented last month by the country’s largest protest since the bailout, following a government plan to raise social security taxes. The government abandoned the plan after the protests and announced Wednesday’s tax hikes as an alternative.
The European Commission has already approved the new measures, it said on October 1. Strikes against cost-cutting have risen in recent weeks, with both railway and metro workers staging periodic walkouts. Portugal’s largest union, the CGTP, has announced a general strike for November 14, after it held a large protest march.
“The recent political and social tension didn’t have an impact, nor am I certain it had any relevance for this operation,” said Filipe Silva, debt manager at Banco Carregosa in Porto.
While still high, Portugal’s bond yields have fallen sharply this year, helped by the European Central Bank’s plans to help hold down the borrowing costs of countries that have signed up to budget overhauls. Benchmark yields have fallen to around 9% from highs near 17% in January. Ten-year yields were virtually unchanged on Wednesday at 8.76%
But bond investors appeared not to be overly worried about growing social strife. Although with the increased tax on financial transactions and capital gains, it will be important to seek independent financial advice with regard to your investments.
The appointed representatives of Blacktower Financial Management (International) Limited are not tax advisers. Before making any financial decisions relating to tax, you are strongly advised to seek professional advice from a qualified international tax consultant. Blacktower can introduce you to such a specialist should you require. 289 355 685
Blacktower Group with offices in the United Kingdom, Gibraltar, Portugal, Spain, France & Italy Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B Blacktower Financial Management Ltd is authorised and regulated in the UK by the Financial Services Authority.
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Paul Beckwith is an International Financial Advisor working with Blacktower Financial Management (International) Limited
