Portugal ponders biting 2013 austerity budget

Bailed-out Portugal’s parliament meets Tuesday to give final approval to a 2013 budget imposing savage austerity cuts that have unleashed mass protests.

The centre-right government says the tight-fisted plan is vital to Portugal’s recovery and it has a majority in parliament to ensure its passage into law, after a successful first reading a month ago.

The budget foresees a broad rise in income tax to 14.5 percent for the most vulnerable and 48 percent for the most wealthy.

The number of tax brackets are reduced from eight to five, and each of them has been raised by 3.5 percentage points.

At the same time, unemployment benefits are sliced by five percent and sickness payments by six percent.

The budget of unprecedented austerity is aimed at saving 5.3 billion euros ($6.9 billion), of which 80 percent comes from higher taxes.

It has sparked stern criticism and multiple street protests including one on November 14 that degenerated into clashes between baton-wielding police and stone-throwing demonstrators, an unusual sight in this country.

Portugal’s main union, the General Federation of Portuguese Workers, has called a rally outside parliament as lawmakers launch a final debate before a vote in the early afternoon.

Citizen movements have called on people to support the protest, which is being backed by teachers, retirees, farmers and also dockers who have been on strike for several weeks.

The main opposition Socialist Party plans to vote against the budget, confirming its decision to break with an austerity plan that it now considers “exaggerated”.

The Socialists were in power in May 2011 when the European Union and International Monetary Fund, at its request, extended a 78-billion-euro sovereign rescue to Portugal.

While recognising the enormous sacrifices by his compatriots, Prime Minister Pedro Passos Coelho says austerity policies are the only path to economic recovery.

With its draconian budget, the government expects to trim the annual budget deficit to the equivalent of 4.5 percent of gross domestic product next year from a target of 5.0 percent in 2012.

The budget-trimming efforts come as the economy is expected to shrink three percent in 2012, and as the jobless rate already nears 16 percent.

Slumping in the polls, Passos Coelho said on the eve of the parliamentary vote that he has “no problem facing up to unpopularity”.

“The government must know how to go against the current,” the premier said, adding that he would rather “guarantee the future of Portugal than receive applause”.

But the Portuguese leader has more challenges ahead.

Extreme-left and socialist parties, which denounced the budget as “inhumane”, are fighting to bring the budget to the Constitutional Court in the hope it may be tweaked, as happened already in July to the premier’s plan to cut employer contributions while raising people’s social security contributions.

He is nevertheless less disposed to compromise on the budget after winning significant international support.

On a visit two weeks ago, German Chancellor Angela Merkel, seen as a symbol of budgetary rigour, encouraged him along the path.

One week later, the troika of creditors — the IMF, EU and European Central Bank — unlocked a sixth instalment from the bailout, satisfied that Lisbon is abiding by their strict conditions.

Though some economists are beginning to criticise the austerity as excessive, Passos Coelho says he is convinced of their efficacy.

He plans to save another four billion euros in the next years through a “reform of the state” to be presented to the troika in February 2013. The opposition says the plan aims to wipe out the government’s welfare role.