Constitutional Court to rule on controversial budget
Published: 7 February 2013
On 27 November 2012, the Portuguese parliament gave final approval to the state budget proposed by the centre-right government of the Social Democratic Party (PSD [1]) and the People’s Party (CDS-PP [2]). The budget would mean the biggest tax increases in Portugal in modern history.[1] http://www.psd.pt/[2] http://www.cds.pt/
A general strike and massive demonstrations have greeted the Portuguese budget for 2013, which proposes the biggest tax increases in modern history. Protesters say it unfairly targets low income earners and pensioners, and imposes further wage cuts on public sector employees. Doubts have also been raised about whether some of the proposed measures are unconstitutional. Portugal’s President Cavaco Silva has sent the budget to the Constitutional Court for verification.
Background
On 27 November 2012, the Portuguese parliament gave final approval to the state budget proposed by the centre-right government of the Social Democratic Party (PSD) and the People’s Party (CDS-PP). The budget would mean the biggest tax increases in Portugal in modern history.
The government justified the changes by highlighting the need to comply with the targets of the €78 billion bailout agreement with the European Commission, the European Central Bank and the International Monetary Fund (IMF). These targets include reducing the budget deficit to 4.5% of gross domestic product (GDP) in 2013, from an expected deficit of 5% of GDP in 2012. The 2013 budget includes €4.3 billion in tax increases on income, capital gains and property, and €1 billion of spending cuts in addition to those imposed by the 2012 budget.
All of the opposition parties, including the Socialist Party (PS), voted against the 2013 budget. They argued that the spending plan would further damage an economy that was heading into a third year of recession. Although tax revenues fell short of predictions in 2012 due to the recession, the government insisted that sharp tax increases in 2013 would guarantee sufficient income to meet budget goals.
Strong protests from opposition parties and trade unions led to a general strike being called on 14 November 2012. The strike was led by the General Confederation of Portuguese Workers (CGTP) and backed by 14 trade unions and four federations affiliated to General Workers’ Union (UGT). Massive demonstrations called by CGTP and other social movement organisations also took place.
Questions were also asked about whether a number of measures included in the budget proposal might be unconstitutional. The CGTP was first to voice this concern and was backed by the opposition parties and some constitutional experts.
However, the government used its parliamentary majority to pass the proposal.
Key issues
The 2013 State Budget proposes the introduction of major tax changes. It redefines the personal income tax rate bands, reducing them from seven to five bands (see table). It introduces an additional 3.5% levy on 2013 earnings in all categories of personal income. The combination of these two measures will increase direct personal income taxes by, on average, more than 30%. It will nearly double taxes for low-income earners who would be in new, higher tax band.
In addition, it proposes cuts to personal tax exemptions and deductions and the introduction of a surcharge on pension income, known as the ‘extraordinary solidarity tax’. It amounts to between 3.5% and 10% on pensions above €1,350 a month.
| 2012 | 2013 | ||
|---|---|---|---|
| Annual income | Income tax rate | Annual income | Income tax rate |
| Below €4,898 | 11.5% | Below €7,000 | 14.5% |
| €4,898–€7,410 | 14% | ||
| €7,410–€18,375 | 24.,5% | €7,000–€20,000 | 28.5% |
| €18,375–€42,259 | 35.5% | €20,000–€40,000 | 37% |
| €42,259–€61,244 | 38% | €40,000 – €80,000 | 45% |
| €61,244–€66,045 | 41.5% | ||
| €66,045–€153,300 | 43.5% | Above €80,000 | 48% |
| Above €153,300 | 46.5% | ||
Source: Diário Económico, October 2012
The 2013 State Budget estimates that about 85% (€2.83 billion) of the total tax revenue (€3.32 billion) it is expected to raise would come from personal income tax. Unions have protested that asking workers and pensioners to fund such an enormous increase in the 2013 tax burden will aggravate already serious inequalities.
The budget proposes a big reduction in the income of pensioners and workers in the public sector. It continues the significant cuts of between 3.5% and 10% in pensions above €1,350 per month, maintains the wage and pension freeze – with the exception of minimum pensions– and abolishes the holiday bonus of a month’s salary for public workers. Public sector pensioners will receive only 10% of the bonus. The budget also seeks 50,000 public sector job cuts.
Constitutional Court to assess the budget
Following the approval of the 2013 budget by the parliament, groups began to question whether it was constitutional. Among them was the Union Association of Portuguese Judges (ASJP). The ASJP called on Portugal’s President, Cavaco Silva, to use his veto to block the budget until it could be verified as lawful by the Constitutional Court.
President Silva chose instead to approve the 2013 budget, signing it into law on 31 December 2012.
However, he also asked the Constitutional Court to rule on whether the massive tax increases were fairly distributed and legal. This was seen as a setback for the centre-right government, which had argued that tax increases were the only way to reduce the national debt and comply with the tough terms of the international bailout.
President Silva announced in his New Year’s Day address to the nation:
On my initiative, the Constitutional Court will be called on to decide on the conformity of the 2013 state budget with the constitution of the republic.
He argued that the budget would affect some people more than others, ‘raising justified doubts over the distribution of the sacrifices’, but also called for an end to the ‘recessionary spiral’ the country is undergoing.
The president has asked for verification of constitutionality of three measures included in the 2013 budget:
the tax surcharge of between 3.5% and 10% on pensions above €1,350 a month;
cuts of between 3.5% and 10% in public sector pensions above €1,350 per month;
the elimination of the holiday bonus for public sector workers and pensioners.
The elimination of public sector workers’ holiday bonus goes against a ruling made by the Constitutional Court in July 2012. Then the Court said that the government’s decision to cut public sector workers’ traditional extra two months of salary (Christmas bonus and the holiday allowance) between 2012 and 2014 was unconstitutional. While the Constitutional Court ruled that it would make an exception for suspension of the 2012 payments, it demanded that they should be resumed in 2013 and beyond.
Following the president’s decision, more requests for the verification of state budget law have been sent to the Constitutional Court, including one from PS Leader Antonio José Seguro requesting the verification of constitutionality and legality of the items questioned by the president.
The three far-left parties – the Portuguese Communist Party (PCP), Left Bloc (BE) and the Green Party (PEV) – also delivered their own request for verification to the Constitutional Court. Among the measures they question are:
the reduction of personal income tax bands from seven to five;
the tax surcharge of 3.5% on 2013 earnings in all categories of personal income;
the reduction of unemployment benefit;
the reduction of sickness benefit;
the reduction of overtime payment.
In particular, they question the tax surcharge of 3.5%, which the budget proposes should be imposed on everyone, regardless of income. They argue this goes against the constitutional principle that taxes should be progressive.
The PS and the three far-left parties also believe that the 2013 budget sets up a profound inequality of taxation between labour and capital.
Although there is no specific deadline for the Constitutional Court to decide on the matter, most analysts believe it will try to reach a conclusion sooner rather than later, given that it is under pressure from four separate requests for revision, including the one from the President of the Republic.
Maria da Paz Campos Lima, Dinâmia
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