By Chris Graeme chris.graeme@theresidentgroup.com
Portugal’s Austerity Package, designed to bring public spending back into line with European Union Stability and Growth Pact (SGP) limits, came into force yesterday (July 1) and include an increase in the VAT tax of one per cent.
Put simply, Finance Minister Fernando Teixeira dos Santos is committed to slashing the budget deficit by 6.5 per cent, from 9.3 per cent of GDP now to 2.8 per cent by 2013.
Broken down, this means that the aim is to bring the budget deficit down to 6.3 per cent by the end of this year and 4.6 per cent by 2011.
As part of that plan, the Government unveiled a tough package of public spending cuts and moderate tax rises, which, the minister believes, will increase revenue without harming Portugal’s fragile economic recovery.
An increase in the rate of VAT – or IVA as it is known in Portugal – by one per cent across the board forms part of the plan and has been described by the opposition as an “unfair” move that will affect all, but especially the poorest in the country.
The one per cent rise in VAT from 20 per cent to 21 per cent on all non-essential items is accompanied by the same percentage increase on all essential goods including foodstuffs, medicine, books and children’s clothes from five per cent to six per cent. Taken as a whole, the new VAT regimen, which came into force this week, means that essential goods are taxed at six per cent, catering and restaurants at 13 per cent and all other goods at 21 per cent.
Prime Minister José Sócrates told the Portuguese Parliament at the start of June that he believed that cuts in tax benefits already announced for the SGP together with new IRS income tax and IVA changes would be “sufficient to meet defined budget objectives”.
The increases in VAT were immediately reflected in day-to-day purchases, beginning with public transport costs which went up by 1.2 per cent.
The same happened throughout the country’s supermarkets, even though Lidl, Intermarché and E. Leclerc promised that they would not reflect the statutory increase by putting up their prices. Pingo Doce, Modelo and Continente supermarkets have also stated that they will maintain the same pricing policy for a range of products and not pass on the VAT hike to customers even though they have to shoulder the increase.
But for non-perishable items, the story will be different. The multinational Swedish retail outlet Ikea and the French multimedia chain Fnac both say the final price of goods will reflect the VAT increase.
Natural gas prices also shot up by 3.2 per cent while Galp had already increased the cost of a litre of diesel by one cent to 1.199 euros and petrol to 1.419 euros. The cost of fuel had however already registered various price increases since the start of the year.
But those on salaries have already been feeling the pinch since the measures were announced, since IRS income tax changes are already in effect.
For example, a couple with two children didn’t use to pay IRS if they earned less than 628 euros per month; now, this exemption has been lowered to 587 euros. For those earning 675 euros, the tax at source was one per cent. Now it is two per cent.
According to the Government, the increase in tax at source has two main aims. Firstly, the State will immediately benefit from increased receipts; secondly, the impact of tax increases will be cushioned for tax payers since it will be done on a monthly basis.
According to data published by the Ministry of Finances in May, the tax increases will contribute to reducing the budget deficit this year to within Government targets by 60 per cent.
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