LISBON, Portugal – Portugal is tightening its belt another notch, with the government announcing Wednesday steep income tax hikes to reduce the bailed-out country's debt load despite mounting discontent over austerity measures.
Finance Minister Vitor Gaspar said an "enormous increase in taxes" next year was aimed at meeting the 2013 deficit target of 4.5 percent, even as the country remains mired in deep recession.
Gaspar said the government is cutting the number of income tax brackets in 2013 to five from eight, thereby making some workers pay higher taxes. At the moment, the bottom rate of income tax is 11.5 percent for annual incomes up to €4,898 while the top levy is 49 percent on incomes earned over €153,300.
It will also levy a tax surcharge of 4 percent on annual earnings. Top earners will pay an additional 2.5 percent income tax next year.
He said the government also intends to raise taxes on capital gains, assets, financial transactions, tobacco and luxury goods.
The measure is a gamble for the government. Recent streets protests against austerity — including previous tax hikes and pay cuts — have brought tens of thousands of people into the streets, as in other European countries struggling to contain the continent's financial crisis through spending cuts. The protests have so far been non-violent.
The policies have also placed strain on the center-right coalition government, with the junior Popular Party expressing reservations about the benefits of austerity.
Portugal has so far passed regular financial inspections by creditors who lent it €78 billion ($100.65 billion) last year and have demanded cuts. They are handing over the rescue loan in batches as long as Portugal complies with those conditions.
While Portugal has won praise for the broad acceptance of the need for austerity, the consensus is showing signs of fraying. Gaspar urged Portugal not to throw away the progress it has made so far.
"The climate of uncertainty which has taken shape is in contrast to last year's progress ... which allowed us to win back the confidence of our international partners," Gaspar said.
"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.