LISBON (MNI) – Portugal’s Finance Minister Vitor Gaspar said
Wednesday that the government would raise a range of taxes to ensure
that it continues to meet the budget targets of its E78 billion bailout
program.

Gaspar, speaking at a press conference here, said the average
income tax rate would rise to 11.8% from 9.8% and that an extraordinary
4% tax surcharge would be applied to 2013 incomes. A range of other
levies will also be added, including a 2.5% “solidarity” tax for high
earners. Including the surcharge, the average income tax rate will climb
to 13.2% next year, Gaspar said.

Although he described the tax surcharge as “temporary,” Gaspar
added: “I must point out that tax will be reduced at a rate that is
linked to how we can reduce public spending.” He admitted that tax hikes
would have a negative effect on consumer spending, but said a failure to
control deficits would lead to an “uncontrolled rupture” of the economy.

Portugal’s government expects the economy to contract by 3% this
year and 1% next year – its third year of recession. Gaspar said the
forecast for the unemployment rate in 2013 had been revised upward to
16.4% from the previous projection of 16%.

Portugal’s international creditors recently agreed to give it more
time to meet its deficit targets, recognizing that a deeper than
expected recession was cutting into tax revenue. The deficit target for
2012 was revised to 5% from 4.5%, while the goal for 2013 was increased
to 4.5% from 3%.

Still, Gaspar said that the budget adjustment was proving to be
more difficult than expected and that additional austerity measures
amounting to 3% of GDP would be implemented for 2013.

He said, however, that Portugal’s efforts to regain market
confidence were bearing fruit as evidenced by its bond exchange on
Wednesday, in which it bought back bonds maturing in 2013 and sold new
debt maturing in 2015. He said the transaction was done at a yield of
5.12%.

“The most important news is that today Portugal returned to the
debt market,” Gaspar told the press conference. He said Portugal would
issue additional medium-term debt to national and international
investors but did not provide details.

He said that today’s transaction demonstrated that Portugal “is
financing itself at sustainable rates that do not compromise the
future.”

–Paris newsroom, +331-42-71-55-40; paris@mni-news.com

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