Bailed-out Portugal hikes more taxes to cut debt

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

"We stand today at a critical juncture. It is vital we don't lose our way or become muddled," he said.

However, the main opposition Socialist Party, which backed the initial bailout agreement, said the government had failed in its efforts to restore the country's financial health and said it was making "a strategic mistake" with the new tax hikes.

The country's largest trade union confederation, the General Confederation of Portuguese Workers, which has some 600,000 members, was due to announce later Tuesday a general strike next month.

Gaspar said the measures are needed because the country is "at a moment of financial crisis and social emergency."

He said the economy is expected to endure another year of recession in 2013 — the fourth in five years — while unemployment rises to 16.4 percent. Unemployment currently stands at a record 15.9 percent.

Gaspar said the government is also taking additional measures to reduce the budget deficit to 5 percent of the country's €170 billion gross domestic product this year. The bailout lenders had already eased that target from 4.5 percent.

Gaspar said the deficit will be 6 percent this year unless the government halts planned investments, cuts social security spending and brings forward to this year planned increases in taxes on capital gains and assets.

The problem is that austerity has brought a drop in tax revenue as internal demand falls while welfare payments drain the Treasury. Internal demand was down 6.2 percent last year and is forecast to drop 7.2 percent this year.

Critics have accused the government of forcing civil servants and the less well-off to pay an unfair amount toward restoring the country's fiscal health.

In response, Gaspar said the lowest tax bracket won't change. The government is also backing down from a plan to cut the vacation and Christmas bonuses of civil servants and pensioners next year. It will take only one of those bonuses.