Biggest tax hike in democratic history proposed in parliament but latest plan to help cut budget hinges on constitutional court
Portugal's parliament is expected to approve the biggest tax hikes in its modern democratic history on Wednesday, paving the way for a court fight over a budget that the government says it urgently needs to keep a €78bn (£63bn) bailout afloat.
Political tension has been increasing and anti-austerity demonstrations have become more common in recent weeks in Portugal, which despite being one of the countries worst hit by the eurozone crisis had so far escaped the political unrest seen elsewhere.
Prime Minister Pedro Passos Coelho's government is searching for ways to meet budget goals under its bailout terms from the European Union and International Monetary Fund, without deepening its worst recession since the 1970s.
The 2013 budget's tax hikes on income, property and financial transactions are the government's third attempt to tackle the deficit since July. The constitutional court threw out a plan to cut civil servants' benefits, and a plan to hike social security payments was abandoned after street protests.
Political experts say the new budget is almost certain to be challenged in court, with unpredictable consequences.
"If the court finds something unconstitutional, it could still be something relatively easy to fix, or alternatively it could shoot down the budget and cause a political crisis," said Pedro Magalhaes, political scientist at the Social Sciences Institute of the Lisbon University.
"It's hard to predict the outcome: it wouldn't be the constitutional court if it were predictable."
The budget predicts a third year of recession, with unemployment forecast to rise further into record territory next year, from around 15% to 16.4%.
Coelho told parliament on Tuesday that the 2013 budget was intended to create the conditions for Portugal to "turn the page on one of the most difficult periods of our history".
He should find enough support in parliament to enact his budget but has faced tougher resistance from judges. In July, the constitutional court ruled against a measure stripping civil servants of their holiday and Christmas bonuses, on the grounds it unfairly impacted them.
The government then tried to raise the social security contributions of all workers, prompting mass protests. The government then reversed course.
The 2013 budget, relying instead on large rises in income tax – of up to two months' salaries in some cases – is the culmination of those previous policy failures.
It stretched the cohesion of the coalition government, as the small rightist CDS party made clear it would prefer spending cuts to reach budget goals, but the CDS backed down and has promised to support it in parliament on Wednesday.
A constitutional court challenge could come at any time. Portugal's judges' union has promised to challenge the budget, on the grounds it goes against tax equality, which is enshrined in the constitution. The opposition Socialists have also vowed to challenge it. The president could submit it to the court himself in the process of signing off on it.
With the government's popularity already at record lows, a general strike planned for 14 November and some economists warning that Portugal could enter a recessive cycle like Greece, additional doubt over austerity measures would hurt confidence further.
The economy is forecast to contract at least 3% this year and 1% in 2013, with many economists thinking even those forecasts far too optimistic.
The concerns prompted the IMF to warn last week that the risks to Portugal's bailout have "increased markedly". Portuguese bonds have also reacted, beginning to reverse sharp declines in yields since the beginning of year.
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