Portugal raises tax and cuts public-sector pay

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The Independent Online

Portugal unveiled plans yesterday to raise taxes and reduce the wages of senior civil servants, following similar moves in Spain.

Portugal said it hoped to cut its 2011 fiscal deficit by about €2bn, or two percentage points from its earlier target, to 4.6 per cent of gross domestic product (GDP). The Prime Minister, Jose Socrates, also annouced plans for extraordinary income taxes of up to 1.5 per cent, a 1 percentage point increase in value-added tax, to 21 per cent, and a 2.5 per cent levy on the profits of large companies.

The Socialist government will also cut the salaries of top-level public-sector workers and politicians by 5 per cent in an effort to cut the 2010 budget deficit to 7.3 per cent of GDP. The original target for 2010 was 8.3 per cent, or €14bn. The measures, which will be in force until the end of 2011, were backed by the opposition PSD party, whose support the Socialists need to pass Bills in parliament.

Economists said the moves should help to restore market confidence over Portugal's debt, but warned that they could weigh on economic activity.