It should be remembered that the IMF/EU bailouts that Greece, Ireland and Portugal received were not gifts. The loans attracted significant interest payments – for instance, Ireland was initially asked to pay 6%, but this has subsequently been reduced to less than 4%. Additionally, the loans were to be paid in tranches which would only be disbursed if progress was being made on economic reforms and austerity moves which were designed return the current account deficit to below the 3% mark.
Portugal has just announced its budget plans for next year and they are the toughest series of cuts and tax rises in the nation’s recent history. Income tax is set to rise from 9.8% (a level which many nations would think very low) to13.2% next year. Tax brackets will be reduced from the current 8 bands to five under the new budget. The draft budget was announced by Portugal’s finance minister, Vitor Gaspar who satated that the plan was the only way for his country to meet its obligations under the bailout accord which granted the nation €78 billion in support when the cost of commercial borrowing became prohibitive.
Spending Reductions Explained
On the spending reduction side of the plan, €2.7 billion is to be saved by laying off about 2% of the nation’s 600 000 public sector employees (0.6 million people work in the public sector out of a total population of 10.6 million citizens). Mr Gaspar believes that the plans will allow Portugal to reduce its deficit to 4.5% of GDP next year and will put it on track to reduce it below the Eurozone target of 3%.
The measures will be very unpopular. 15% of the Portuguese workforce is idle and analysts expect that the total will hit 16.4% next year. Social security contributions were planned to rise from 11 to 18% next year, but the move was shelved in the face of strong public protests.