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Sunday 23 September 2012

The Portugal Revolt

While the fallout from austerity measures in Greece rumbles on, nobody seems to have been watching events in Portugal, where there have been tax rises – notably in VAT, with all three rates increased and many items moved into higher tax bands – and spending cuts imposed by the coalition Government headed by the PSD and Prime Minister Pedro Passos Coelho.

This all changed at the end of last week, as over a million people – that’s around 10% of the country’s population – protested over proposed changes to TSU, or the Single Social Tax. The nearest equivalent to TSU in the UK is National Insurance (NI), and TSU is often referred to this way by expats. At this point, a brief look at the income tax regime in Portugal is perhaps in order.

Average annual income is no more than €11,000, with the monthly minimum wage set by law at €485. Income tax is 11.5% up to €4,898, then 14% on the next tranche of income up to €7,410, and then 24.5% from there to €18,375 (higher rates apply to income above that, from 35.5% to a maximum of 46.5%). TSU is levied at 11% at present, with employers’ contributions set at a rather higher 23.75%.

The UK NI figures are 12% for employees, and 13.8% for employers. So far, so procedural. The proposal that precipitated the protests was to reduce the employers’ TSU contribution to 18%, while increasing the employees’ amount to that same 18%. This would have been an instant 7% tax hike, and on a workforce already being squeezed by higher taxes elsewhere. It would also have been easier to fire workers.

Small wonder there was unrest. And that unrest was ultimately successful, with a long session of the State Council (roughly equivalent to the Cabinet in UK Parliamentary parlance) late on Friday evening deciding to back down on the proposal. Thus the focus moved from confrontation to damage limitation, among rumours of coalition instability.

Why the measure was even thought reasonable in the first place is mystifying: ordinary Portuguese folk have already seen the cost of living rising significantly, with bus, tram, train and ferry journeys all costing more, on top of the VAT hikes. It was estimated that the TSU increase would have effectively been a one month per annum salary cut. It was clearly the last straw.

Whether the consensus on austerity can hold is now the big question in Portuguese politics, and may become the question elsewhere on the southern periphery of the EU. One to watch.

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