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Bailed-out Portugal hikes more taxes to cut debt

Associated Press Modified: October 3, 2012 at 12:15 pm •  Published: October 3, 2012

LISBON, Portugal (AP) — Portugal is tightening its belt another notch, with the government announcing Wednesday steep income tax hikes to reduce the bailed-out country's debt load despite mounting discontent over austerity measures.

Finance Minister Vitor Gaspar said an "enormous increase in taxes" next year was aimed at meeting the 2013 deficit target of 4.5 percent, even as the country remains mired in deep recession.

Gaspar said the government is cutting the number of income tax brackets in 2013 to five from eight, thereby making some workers pay higher taxes. At the moment, the bottom rate of income tax is 11.5 percent for annual incomes up to €4,898 while the top levy is 49 percent on incomes earned over €153,300.

It will also levy a tax surcharge of 4 percent on annual earnings. Top earners will pay an additional 2.5 percent income tax next year.

He said the government also intends to raise taxes on capital gains, assets, financial transactions, tobacco and luxury goods.

The measure is a gamble for the government. Recent streets protests against austerity — including previous tax hikes and pay cuts — have brought tens of thousands of people into the streets, as in other European countries struggling to contain the continent's financial crisis through spending cuts. The protests have so far been non-violent.

The policies have also placed strain on the center-right coalition government, with the junior Popular Party expressing reservations about the benefits of austerity.

Portugal has so far passed regular financial inspections by creditors who lent it €78 billion ($100.65 billion) last year and have demanded cuts. They are handing over the rescue loan in batches as long as Portugal complies with those conditions.

While Portugal has won praise for the broad acceptance of the need for austerity, the consensus is showing signs of fraying. Gaspar urged Portugal not to throw away the progress it has made so far.

"The climate of uncertainty which has taken shape is in contrast to last year's progress ... which allowed us to win back the confidence of our international partners," Gaspar said.

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