A Whole VAT Of Trouble

There’s an upcoming General Election in prospect. One of the battlegrounds is over VAT. And two blokes supposedly speaking for the same party are apparently saying two different things. Welcome to the Portuguese election campaign, and the PSD, the party that is hoping to win power.

There are, at present, three VAT rates in Portugal: the lowest, at 6%, covers basic foodstuffs like bread, with the highest, at 23%, catching beer, port and spirits, as well as a whole raft of other products which have been “moved up” recently (something I covered at the time).

Then there is the middle 13% VAT rate. This covers coffee and wine, as well as canned meat and fish, and margarine. It also covers cafes and restaurants: your bill, whether you eat at upmarket restaurant or neighbourhood cantinha, attracts the middle VAT rate.

Now, that middle rate has become the source of disagreement within the PSD. The party’s election co-ordinator, Eduardo Catroga, has suggested that there is potential in removing the middle VAT rate for raising more revenue – hundreds of millions of it. However, his party leader Pedro Passos Coelho went on TV yesterday and distanced himself from the idea.

This may have been a result of being pressured by acting PM José Sócrates, whose minority PS administration finally collapsed over a lack of support for further austerity measures. The refusal to back Sócrates over tax increases was followed by his PSD opponents telling that they could plug the funding gap by raising the VAT rate.

Now it appears that a further increase in the rate of VAT is off the table, but in its place has to come something to fill the revenue hole. The ensuing debate shows that arguments over tax are as universal as slips in party discipline.