Portugal adopted sweeping tax hikes on Wednesday to meet budget goals set as conditions for its international bailout, hoping to stem falling revenues due to a recession that is set to push unemployment to further record highs. Earlier in the day Portugal also returned to bond markets for the first time since it sought the 78 billion euro ($101 billion) bailout last year, swapping short for longer-dated debt to buy time to fix its public finances.
The country's worst recession since the 1970s could deepen if the tax hikes further undermine consumer confidence. There is also a danger that raising taxes could spark more opposition to austerity measures that have already included salary cuts and spending cuts.
"We are confronting a critical moment," Finance Minister Vitor Gaspar told journalists as he detailed the tax rises, which the government came up with after it abandoned a previous tax plan in the face of mass protests. "It is fundamental that we maintain our current path to overcome our difficulties," said the minister.
Gaspar outlined tax rises across the board for 2013, including income and property taxes, plus a new tax on financial transactions. The average income tax rate will rise to 11.8 percent from 9.8 percent currently and an additional 4 percent tax surcharge will be levied on incomes in 2013.
The government said the measures, which will also include spending cuts, will amount to 3 percent of gross domestic product next year, and raised its estimate for unemployment to 16.4 percent from its current record level of 15 percent. "These are tough measures, probably worse for the public sector than the private, and protests will probably go on, but I don't think there will be any backing off by the government this time," said Antonio Costa Pinto, political scientist at the University of Lisbon. Gaspar maintained the government's forecast of a 3 percent slump in gross domestic product this year and a decline of 1 percent in 2013.
Investors welcomed the country's first venture into the bond market since last year's bailout, easing Portugal's debt repayments next year. The IGCP debt agency sold 3.76 billion euros ($4.86 billion) of October 2015 bonds, exchanging them for debt maturing in September 2013.