Protests force government to shelve hike in social security contributions

Portugal’s Government has abandoned its latest initiative to reduce the budget deficit after protests from unions, employers and the opposition. Its plan, announced on 7 September 2012, was to reduce social security contributions made by employers by 6% and raise workers’ contributions by 7%. The Government had hoped the moved would reduce jobless figures by encouraging firms to take on staff, but widespread protests forced it to shelve the plan.

Background

The financial crisis in Portugal has led to a series of austerity measures.

In May 2011, Portugal agreed the Memorandum of Economic and Financial Policies (MEFP, 406Kb PDF) with the European Commission (EC), the European Central Bank (ECB) and the IMF. These three institutions are commonly known as the Troika (PT1107039I).

Under the terms of the Memorandum, Portugal’s leaders agreed that ‘fiscal devaluation’ must be implemented to boost competitiveness. This would involve a major reduction in employers’ social security contributions. In the first review of the Memorandum, in September 2011, it was stated that...

…the 2012 budget will include a major fiscally neutral cut in the employers’ rate of social contributions.

Plans to reform social security contributions

In accordance with the review, the Portuguese government planned a major reduction in employers’ contributions to the Single Social Tax (TSU). However, trade union confederations in particular protested strongly that this would damage the sustainability of the social security system.

The response of the centre-right coalition government of the Social Democratic Party (PSD) and the People’s Party (CDS-PP) was to shelve the plan, announcing other measures to replace the proposed reduction in TSU contributions. These included the suspension for three years, from 2012, of holiday and Christmas bonuses for public sector employees and for pensioners earning more than €1,000 a month.

Once again, trade unions protested strongly and their objections were among the reasons for a general strike held in November 2011(PT1110019I), although this failed to persuade the government to alter the 2012 budget proposals.

However, in July 2012, the Constitutional Court ruled that the cuts in holiday and Christmas allowances for public sector employees and pensioners were unconstitutional, declaring that the singling out of public sector workers violated the principle of equality enshrined in Article 13 of the constitution. The court ruled that the bonus suspension ‘was not justifiable by reasons of effectiveness in pursuing the goal of reducing the public deficit’, and that payment of bonuses should be resumed in 2013 and beyond.

Major changes proposed

The ruling of the Constitutional Court put the government’s deficit reduction plan into disarray and it seemed that, as a result, the 4.5% reduction target agreed with the Troika for 2012 and set out in the Memorandum could not be achieved.

It was also anticipated that there would be a higher than expected drop in tax revenues because of the severity of the economic slowdown in Portugal. Revised forecasts suggested that this would force a 3% contraction of gross domestic product in 2012, the result of a combination of a record 15.7% unemployment rate, shrinking domestic demand and high Value Added Tax (VAT).

On the eve of the Troika’s follow-up visit to Portugal, the question was how flexible they would be about the deficit targets for 2012 and 2013. It was decided new austerity measures were needed to plug the gap for 2013.

On 7 September 2012, Prime Minister Pedro Passos Coelho announced further changes to the social security contributions system. The Government would reduce employers’ social security contributions by 6% and raise employee contributions by 7% in both the private and public sectors. This would cover the shortfall in the deficit recovery measures, and also hopefully encourage companies to take on workers and cut unemployment. There was, however, to be no consultation with trade unions and employer confederations.

This proposal came shortly before the Troika agreed to give Portugal an extra year to meet the previously defined deficit targets. On 11 September 2012, Minister of Finance Vitor Gaspar announced that Portugal’s budget government deficit goal for 2012 had been raised from its original target of 4.5% to 5% of the country’s GDP.

The new TSU rates for 2013 announced by the Government meant:

• TSU deductions on a worker’s gross wage increasing from 11% to 18%;

• deductions by employers based on the worker wage decreasing from 23.75% to 18%.

The increase in workers’ contributions, not part of the original 2011 TSU changes proposed in 2011, would have reduced wages by the equivalent of roughly a month’s salary in 2013. It was estimated that the increase would give Portugal the fifth highest tax rate in Europe.

Opposition forces the government to back off

Two trade union confederations, the General Confederation of Portuguese Workers (CGTP-IN) and the General Workers’ Union (UGT), opposed the measure on the grounds that it represented an unfair transfer of money from workers to their employers. They said the plan would mean a further reduction in workers’ income which was already very low. Unions also claimed the move could increase unemployment rates, reduce consumer demand for goods in Portugal, and hit the poorest in the country.

The CGTP proposed a general strike, and the UGT agreed that the possibility should be discussed.

The UGT said the proposed measure would undermine the commitments put forward in the social pact signed in January 2012 (PT1201049I) which had made revision of the Labour Code possible (PT1205019I).

The opposition of the employers’ confederations was more unexpected. They pointed out that the decrease in employers’ contributions could not be replace by lowering workers’ income and would have the knock-on effect of reducing domestic demand, which was already in decline and having a negative effect on recovery. They were also concerned the changes would cause unnecessary industrial unrest.

On 13 September, António José Seguro, leader of the Socialist Party, announced that his party would vote against the government budget proposal for 2013. He threatened to present a motion of censure in parliament unless the government shelved the increased workers’ contributions.

Criticism also came from the Minister for Foreign Affairs, Paulo Portas. He is a member of the CDS-PP, the junior party in the coalition government. There was even opposition from some members of Prime Minister Coelho’s own Social Democratic Party, including some ex-ministers.

On 15 September 2012, tens of thousands of people – including an estimated 500,000 in the capital Lisbon – held a series of marches across the country in the largest public protests seen in Portugal since its acceptance of the Troika’s economic bailout in May 2011. Trade union confederations leaders said there would be more protests unless the government backed down. The CGTP was already preparing a national protest demonstration in Lisbon for the 29 September 2012.

The political crisis came to the attention of the President of the Portuguese Republic and of EU institutions. On 21 September 2012, the State Council, advisory body to the President of the Republic, was informed that the government was available to study alternatives to change the TSU measure, in the framework of social dialogue

Commentary

The proposed changes to the social security system has united unions, employers and opposition parties in demanding its revision, and opened internal tensions in the governing coalition parties.

Withdrawal of the changes has only introduced a new challenge for the government, leaving it with the task of drawing up alternative austerity policies.

Maria da Paz Campos Lima, Dinâmia