UPDATE 3-Portugal to hike taxes, cut wages in austerity drive

* Portugal to boost income tax, taxes on large companies

* VAT hike, salary cuts for public managers, politicians

* Main opposition party vows support for measures

(Adds opposition party’s support, union statement)

By Sergio Goncalves

LISBON, May 13 (BestGrowthStock) – 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
European safety net meant to reassure rattled credit markets.

Portugal now plans to cut its 2011 fiscal gap by two
percentage points from its earlier target to 4.6 percent of GDP,
worth about 2 billion euros according to a source.

Prime Minister Jose Socrates said Portugal would impose
extraordinary income taxes of up to 1.5 percent, hike
value-added tax by 1 percentage point to 21 percent and raise a
2.5 percent tax on large companies’ profits.

The government will also cut the salaries of top-level
public sector workers and politicians by 5 percent in an effort
to cut the 2010 budget deficit to 7.3 percent of GDP, lower than
the 8.3 percent target, or 14 billion euros, budgeted for 2010.

The measures will be in force until the end of 2011. (For a
FACTBOX on measures, see: [ID:nLDE64C1KZ] )

“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.

Pedro Passos Coelho, the leader of the largest opposition
party, the centre-right Social Democrats (PSD) said his party
will support the strategy in parliament.

“What we are committing ourselves to is to stabilise the
economic situation and to give our vote so that the measures
that were approved today at the cabinet meeting are approved in
parliament,” he told reporters.

He added that it was important that the announced tax hikes
were temporary, but spending cuts will be permanent and said his
party would closely monitor the government’s execution of the
programme in the public sector.

The Socialists need the support of the opposition to pass
bills in parliament. Together, the two parties have more than
two-thirds of parliament seats. The Socialists can pass any bill
even with PSD’s abstention.

LESS VOLATILE

Portugal’s moves topped a dramatic week for the euro zone,
starting with a $1 trillion package announced by the European
Union and the International Monetary Fund to prop up weaker euro
zone states.

The Portuguese government has said it does not need to
resort to the lending mechanism.

On Wednesday, Spain announced 15 billion euros worth of
cuts, including a 5-percent wage cut for most public employees,
and a 15-percent cut for higher paid workers. [ID:nLDE64B0F9]

Diego Iscaro, an economist at IHS Global Insight in London,
said the measures “should help to restore markets’ confidence in
Portugal’s ability to deal with its deteriorating public
finances”, but added that higher taxes had a sting in the tail.

“The risk I see is that these austerity measures will weigh
on economic activity – which was seen as sluggish anyway – thus
making fiscal consolidation more difficult.”

Giada Giani, an economist at Citi, said in a research note
that “the overall fiscal effort is now quite large, although
still well below that of Greece or Ireland”.

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
euro bailout package from the European Union and the
International Monetary Fund earlier in May.

Unlike Greece, where the measures have been met with often
violent protests, analysts say Portugal is less prone to social
unrest and expect the measures to stir less trouble.

“There will be some social polarisation … But the levels
of social conflict in Portugal are relatively low,” said
political scientist Antonio Costa Pinto.

The UGT umbrella union, Portugal’s second-biggest, issued a
statement on Thursday saying the measures “worsen the social
situation, growth and employment”, but stopped short of vowing
any concrete protests.

Portuguese bond spreads were calm on Thursday at around 175
basis points over German bunds, but less than half last Friday’s
levels, which then hit euro lifetime record on market jitters
about peripheral euro zone countries’ creditworthiness.

Stock Market Research

(Additional reporting by Andrei Khalip, Shrikesh Laxmidas,
Filipa Lima, Patricia Rua; writing by Andrei Khalip and Jason
Webb; Editing by Toby Chopra)

UPDATE 3-Portugal to hike taxes, cut wages in austerity drive