Portugal’s 2015 Budget is set to defy Brussels as it aims for a deficit of 2.7% of GDP rather than the 2.5% agreed with the country’s lenders.
With a general election on the horizon and approaching fast, Pedro Passos Coelho (pictured) can state that he is sticking to a range of harsh austerity measures yet will allow enough money, or the promise of enough money, to slip into voters’ pay packets to attract votes.
The government in fact is reducing austerity measures for pensioners, a key segment of the voting population, and is to relax pay cuts for civil servants in a move that will attract the greatest number for the least possible expenditure.
The long awaited reform of income tax (IRS) will benefit families with children or elderly dependents, but in fact will have no impact on the overall budget as any loss of revenue resulting from IRS reforms will be compensated for by the convenient start of a ‘green tax’ in 2015.
The 3.5% income tax surcharge stays in place in a move that few predicted..
The latest ruse is an income tax refund payable in 2016 which is dependent on tax revenues in 2015.
Whatever the government raises in 2015 from VAT and income tax in excess of the 2015 budgeted figure will be returned to taxpayers.
So if the revenue from these two taxes exceeds the €27,700 million target, the surplus will be delivered back to taxpayers.
The trick is that the target for these two taxes has been increased by 6.4%.
The 2015 Budget still outlines more austerity to the tune of €1,249 million (0.7% of GDP) without which the deficit next year would be 3.4%.
On the expenditure side, one new feature is the introduction of a cap on benefits, which Finance Minister Maria Luis Albuquerque said will be equivalent to the "earned income of someone with lower qualifications."
Finance Minister Maria Luís Albuquerque did not say whether this means that the limit is same figure as the new national minimum wage.
Albuquerque preferred to emphasize that, "for the first time since joining the Euro, Portugal will record a deficit below 3%."
There is more good news for companies as the corporate tax rate is to drop to 21% which, according to the minister, is a move that has the support of the Socialist Party.
Albuquerque stated that the 2015 Budget "Does not undermine our hard-won credibility," but admits that "it was not possible immediately to alleviate the tax burden" for the Portuguese.
"This is a year of new achievements," stressed the minister as "in 2015 the deficit will be below 3%, the ratio of public debt will be 123.7% of GDP with GDP rising 1.5% due to increased internal and external demand, and the unemployment rate should drop to 13.4%, maintaining a downward trend."
Maria Luís Albuquerque was questioned by journalists about the fact that there is a widely held belief, borne out by the figures, that the taxpayer is being skinned while the government’s part of the bargain, reduced central expenditure, is just not happening with the same rigour as is focused on the taxpayer.
"It's half and half," said the minister, adding that the government has made repeated efforts to reduce expenditure to reduce the burden on the public, "But there is a component of spending that has enormous rigidity," referring to the contracts 'that keeps the state machine functioning" and referring also to the government’s failure to cut its own spending while watching with glee as record levels of taxes roil in from the public.
Albuquerque said that, more important than the deficit target rising to 2.7% is the fact the deficit is below 3% “'for the first time since Portugal joined the Euro.” She then blamed the Constitutional Court’s meddling and interference for any slippage in the figure, adding that the Troika will understand.
"The 2015 Budget is realistic and is not designed around the elections," said Pedro Passos Coelho, perhaps almost believing his own statement while criticising anyone who cares to have a different opinion.
"Obviously, this is a realistic budget and a budget that is not done while thinking of the elections. I know there are politicians who think that elections are won by lowering taxes and increasing wages," said the PM in his speech at the closing of a conference in Cascais.
A distressing part of next year's austerity is education where spending will be hard hit yet again, this time by a further €700 million representing an 11.3% cut with pre-school the only section receiving more funds, up 5%.
