Lisbon: Portugal will raise taxes and cut wages of top public servants, it said on Thursday, following on the heels of similar austerity moves in Spain and a $1 trillion (around Rs45 trillion) European safety net meant to reassure rattled credit markets.
Prime Minister Jose Socrates said Portugal would impose extraordinary income-taxes of up to 1.5%, hike value-added tax by 1 percentage point to 21% and raise a 2.5% tax on large companies and banks’ profits.
The government will also cut the salaries of top-level public sector workers and politicians by 5% in an effort to cut the budget deficit this year to 7.3% of gross domestic product (GDP), lower than the 8.3% it announced in March.
“I ask all my compatriots for us to make this effort to defend the country, to defend the euro and Europe,” Socrates, a Socialist, told a news briefing following a cabinet meeting to approve the measures, which were agreed with the opposition PSD party in order to secure support for the moves in parliament.
Portugal’s moves topped a dramatic week for the euro zone, starting with a $1 trillion package announced by the European Union (EU) and the International Monetary Fund (IMF) to prop up weaker euro zone states. On Wednesday, Spain announced €15 billion worth of cuts, including a 5% wage cut for most public employees, and a 15% cut for higher-paid workers.
Portugal now aims to cut its 2011 fiscal gap goal by 2 percentage points from its earlier target to 4.6% of GDP thanks to the latest austerity moves, worth about €2 billion according to a source.
“The overall fiscal effort is now quite large, although still well below that of Greece or Ireland,” said Giada Giani, economist at Citi. But she added: “Additional fiscal consolidation is likely to become necessary in the next few years and we reckon the country risk premium is likely to remain elevated.”
Debt-stricken Greece has also had to implement severe additional austerity measures after resorting to a €110 billion bailout package from the EU and IMF earlier in May.
The euro sank under $1.26 on Thursday, nearing a 14-month low as investors sought the safe-haven US currency amid fresh fears of a sovereign default in the euro zone.
At about 13.30 GMT, the euro tumbled to $1.2540, from $1.2615 in New York late on Wednesday.
“It is difficult to put together an argument that would favour buying euros at present,” said Jane Foley, research director at trading site Forex.com. “There are significant flaws in the fiscal coherence of EMU (European Monetary Union) and this implies scope for further event risk that would pressure the euro. At the same time, Greece’s problems have heightened investor awareness of sovereign default risk. This is creating demand for safe haven assets which may prompt a period of broad-based dollar strength,” she added.
The shared euro zone unit has been dogged by concerns about the ability of euro zone nations such as Greece, Portugal and Spain to impose tough austerity measures to curb sky-high deficits.
AFP contributed to this story.