Portugal's Parliament on Tuesday approved unprecedented tax increases despite a broad public outcry and concerns that the latest austerity package will prolong the bailed-out country's recession.
The center-right coalition government used its overall parliamentary majority to pass its 2013 budget. All opposition parties voted against the deficit-reduction measures which will cost most workers the equivalent of at least a month's income next year.
Trade unions and business leaders complain the spending plan doesn't do enough to revive an economy that's headed into a third straight year of recession. Hundreds of people protested against the budget outside the parliament building in Lisbon.
Portugal, like other eurozone countries Greece and Ireland, needed a hefty financial rescue to spare it from bankruptcy. It took a €78 billion ($101 billion) bailout 18 months ago and in return promised to reduce its heavy debt and implement economic reforms.
Portugal's bailout creditors — the other members of the group of 17 European Union countries that use the euro, the European Central Bank and the International Monetary Fund — are keen to avoid Portugal becoming another trouble spot like Greece and have praised the government's strategy.
The government says its hands are tied. The three-year bailout deal locks Portugal into cutting its deficit, otherwise its creditors won't send it money. Portugal has so far received €61 billion of the bailout funds.
Finance Minister Vitor Gaspar, who has described the tax hike as "enormous," told lawmakers the budget is "another determined step toward recovery." It will help restore investor confidence in Portugal, allowing it to return to international credit markets as planned in September 2013, he said.
The government is aiming to increase income tax revenue by 30 percent next year while enacting spending cuts worth €2.7 billion. The goal is to reduce the budget deficit to 4.5 percent next year, down from a targeted 5 percent this year.
The government predicts an economic contraction of 1 percent in 2013, though the Paris-based Organization for Economic Cooperation and Development estimated Tuesday it will be 1.8 percent. The government forecasts that the jobless rate, currently at 15.7 percent, will climb to a record 16.4 percent next year.
The country's main opposition parties, the second-largest trade union confederation and private sector association initially gave their blessing to the bailout agreement. But that consensus has evaporated amid rising unemployment and hardship, leaving the coalition government isolated.
Antonio Jose Seguro, leader of the main opposition Socialist Party, said the government is leading Portugal to ruin and should ask its creditors for more time to pay its debts as well as lower interest rates. "More austerity doesn't solve our problems, it worsens them," he said.
He said almost 6,000 companies filed for bankruptcy in the first nine months of this year — a 31 percent increase on the same period in 2011 — as austerity choked consumption.
Outside Parliament, protesters jeered and whistled and chanted "Thieves!" Portugal has witnessed two general strikes this year and almost daily street protests, though there has been little violence.
The tax increases are especially hard on Portugal's middle class. Due to the changes, someone earning €41,000 a year, for example, will pay 45 percent income tax from Jan. 1 compared with 35.5 percent now.
Most workers fall into the €7,000-€20,000 annual income bracket. Those people will pay 28.5 percent income tax, up from 24.5 percent.
Previously, the top rate of tax of 46.5 percent was for workers or married couples who together earned over €153,300 a year. That top rate will be lowered to cover single or joint earnings above €80,000, which will be taxed at a rate of 48 percent. That income will also be subject to a special "social solidarity" tax of 2.5 percent. Also, there will be a 3.5 percent surcharge tax on everyone's earnings in 2013.