Portugal introduces tax hikes despite outcry

LISBON, Portugal (AP) -- Portugal's government has published new tax tables that further cut the income of workers and pensioners — the bailed-out country's latest austerity measures which critics say are deepening hardship and dooming hopes for an economic recovery.

The higher income tax rates, first announced in November, were published late Monday in the Government Gazette, which brings measures into law. The government is aiming to increase income tax revenue by 30 percent this year to help reduce the budget deficit to 4.5 percent of GDP from an expected 5 percent last year.

The new tax rates come on top of previous increases in the sales taxes as well as pay cuts for government workers, reductions in welfare entitlements and higher ticket prices on public transport.

The latest measures also include a 3.5 percent surcharge tax on everyone's earnings. Tax-deductible items such as mortgages and health care are also cut.

The tax increases are particularly hard on Portugal's middle class. A married couple with two children and a joint monthly salary of €5,000 ($6,670), for example, will lose almost €300 a month. Someone earning €41,000 a year will pay 45 percent income tax compared with 35.5 percent previously.

In 2010, the deficit reached 10.1 percent of GDP, spooking investors who stopped lending Portugal money amid wider concerns about the fiscal health of some eurozone countries. The lack of financing compelled Portugal to request a €78 billion financial rescue in May 2011.

Finance Minister Vitor Gaspar has described the tax increase as "enormous" but says it is unavoidable if Portugal is to meet the debt targets stipulated in the bailout agreement.

The austerity measures are widely blamed for driving the jobless rate to a record 16.3 percent and choking the economy, which is predicted to endure its third straight year of recession in 2013.

The Bank of Portugal estimated Tuesday the economy will contract by 1.9 percent this year — almost double the government's forecast of 1 percent. The central bank said austerity measures "will contribute to a significant drop in income and internal demand." It said in a statement it expected the economy to have shrunk by 3 percent last year, but saw growth of 1.3 percent in 2014 due to a predicted improvement in the world economy.

Trade unions, business leaders and opposition parties have criticized the new taxes, saying they will reduce people's spending power and compound the recession. Strikes and protests followed the government's announcement last November of the new tax rates.

The Lisbon subway, which carries some 450,000 passengers every weekday, shut down during the morning rush hour Tuesday as staff walked off the job to protest austerity measures.

The new tax rates "are absolutely unbearable for families, companies and the economy, which will inevitably feel the consequences," Antonio Costa, the editor of financial newspaper Diario Economico, wrote Tuesday.

Despite being politically isolated, the center-right coalition government is pressing ahead with plans for more cuts. It aims to slash €4 billion from state spending over the next two years. That plan will inevitably bring cuts in public health care, state education and welfare entitlements.