New austerity measures after Constitutional Court rejects government plans

An austerity package in Portugal, announced on 3 May 2013, includes cuts of €3 billion and will mostly affect civil servants and pensioners. These two groups had benefited from the decision of the Constitutional Court on 5 April 2013 to reject four measures included in the state budget. The package will affect 30,000 civil servants, causing redundancies, wage and pension cuts, longer hours and higher contributions to their health insurance. Their retirement age will also rise.

Background

On 5 April 2013, the Portuguese Constitutional Court ruled that four austerity measures in the 2013 state budget (PT1301019I) were unlawful and in breach of the country’s constitution. The ruling meant the government would lose about €1.4 billion of predicted revenue. The measures in question targeted public sector and academic employees, by suspending holiday allowances.

The court ruled that the measures were in breach of the principle of equality laid down in Article 13 of the Portugal’s Constitution, insofar as workers in both the public and private sectors have the right to such an allowance. The court rejected the cuts aimed specifically at civil servants, whom it said were being singled out for punishment and therefore discriminated against. The court also declared the extension of these cuts to pensioners to be unconstitutional. In addition, based on the principle of proportionality, the court declared that introducing a levy of 5% on sickness allowance and 6% on unemployment benefit also infringed the constitution.

Public spending to be reduced

The measures rejected by the court represented savings of between €1 billion and €1.4 billion – more than 20% – of the government’s €5 billion austerity package of spending cuts and tax increases. This made it difficult to reduce the public sector deficit to 5.5% of gross domestic product, to keep Portugal eligible for funds under its €78 billion bailout from the European Union (EU) and the International Monetary Fund (IMF). After the court’s decision, Prime Minister Pedro Passos Coelho guaranteed not to abandon austerity, vowing to reduce public spending by around €1.2 billion this year. The European Commission told the government not to depart from the bailout terms, and said that carrying out new measures to comply with the envisaged programme of saving €4.8 billion in three years was a precondition for further help.

A month after the court ruling – and shortly after the massive demonstrations against austerity which took place on 25 April and 1 May – the Prime Minister announced a new package of austerity measures, on 3 May 2013, which included unprecedented changes to the terms and conditions given to civil servants and pensioners and envisaged further cuts in Portugal’s fragile welfare state.

Public sector, pensioners and welfare state targeted

The new austerity package announced by the Prime Minister sets out that civil servants and pensioners will suffer cuts of more than €3 billion until 2015, that is, two-thirds of the austerity cuts envisaged, which amount to €4.8 billion of savings in state spending. The new wave of austerity will primarily affect civil servants and pensioners; the same groups that had benefited from the decision of the Constitutional Court. Civil servants will be affected by redundancies, longer working hours, less annual leave, wage complement cuts and bigger contributions to the health system (ADSE). In both the private and the public sectors the retirement age will increase, pensioners will receive less from 2014 onwards, and existing pensioners will pay an additional tax.

This austerity package is divided into three main areas, each contributing similarly (one third each) in terms of budget savings: pensioners with a cut of €1.46 billion, civil servants with a cut of €1.6 billion and cuts in the state of €1.72 billion.

Measures targeting civil servants

Working time increases to 40 hours a week

The government justifies the increase for civil servants from 35 to 40 working hours a week by citing the need for convergence between the public and the private sector. However, this measure will mean that public sector employees will work more hours than workers in the private sector because regulations in the former define 40 hours as a maximum, and in various subsectors, in line with collective agreements, employees work fewer hours. This is also the case for banks, where the weekly working time is, in fact, 35 hours. The government expects to obtain €372 million of savings with the new 40-hour working week.

Total of 30,000 jobs will be cut

Some 30,000 of Portugal’s 580,000 public sector jobs will be eliminated, through termination of employment contracts by mutual agreement, with compensation. This targets public employees younger than 59. Compensation varies with age, with a limit of 1.5 months’ wages for each year of service. Civil servants who accept redundancies on these terms will have just three months to declare formally their intention, that is, between 1 September and 31 November 2013. Furthermore, according to the government proposal, those who accept redundancy will not be allowed to work again for the state or to render services to any other public service, be it of the central, regional or local administration, company or any public institute. The government expects that the adjustment of the size of the public administration and the new rules regarding the special mobility system will generate savings of €1.658 billion by 2015.

Special mobility system

Employees in the special mobility pool, (those who are surplus, and on half-pay as a result of reorganisations within the public sector) and who have had their wages cut several times, cannot stay in the system more than 18 months. In this period they gain the equivalent of 66.7% of their remuneration in the first six months, 33.4% in the following six months and 33.4% in the final six months. Their wage cannot be less than the minimum wage but it cannot exceed three times the minimum wage (the equivalent of €1,455, gross), says the proposal.

Wages and supplements

By adjusting public sector wages and bonuses, the government hopes to cut €445 million in spending by 2015, of which €378 million comes from the creation of a single structure scale of salaries, and €67 million from the creation of a single structure of supplementary bonus, replacing the diverse range of schemes which, at present, are related to the performance of specific functions and, in the case of some professionals, such as doctors and diplomats, represents a significant part of their salary. Both initiatives, according to the government, aim at putting the wages of public sector employees on a par with wages in the general economy.

Health contributions

The contribution of civil servants to their health insurance (with ADSE and other schemes) will increase by 0.75 percentage points this year and 0.25 percentage points in 2014.

Annual leave

The entitlement to annual leave will be reduced from 25 to 22 days.

Measures targeting pensioners

According to the government the measures affecting pensioners will generate savings worth €1.45 billion by 2015.

Convergence between public and private sectors

It is proposed that the convergence of the rules determining pensions granted by the public sector pension fund with the rules for social security (responsible for private sector pensions). The cut in expenditure, amounting to €740 million, is expected to be obtained as early as 2014. The government has not clarified, so far, whether the convergence of pension calculation rules applies only to future pensioners or if will also have implications for pensions currently being paid. The magnitude of savings envisaged indicates that the measure will, most likely, have retroactive effects.

Retirement age

The increase in the retirement age should render €282 million, while making the pension system sustainable should generate savings of €436 million. The legal age at which people can take their retirement pension continues to be 65 years. However, if they want to avoid the changes in the sustainability factor (which indexes a pension’s value to the evolution of life expectancy), and which from 2014 will be recalculated, and compounded, pensioners will need to work longer. Only those retiring from 66 years will not suffer penalties.

New tax

It was announced that a new tax on pensioners, which replaces the controversial extraordinary solidarity tax (PT1301019I), will focus on all pensioners who earn above a certain amount. According to the government this additional tax will contribute to the sustainability of pensions and be indexed to economic growth.

Education and social security

The remaining expenditure-cutting measures, which do not focus directly on civil servants and pensioners, represent a saving of €1.72 billion. Cuts are expected in the budgets of the Ministries of Education (€325 million) and of Social Security (€299 million).

Commentary

The revised austerity package can be considered as an unprecedented attack on public sector employees and pensioners, generating further unemployment in the public sector and a reduction of pensions in the private and public sector, which will have negative consequences on the income of these groups and which will shrink further internal demand and increase the recession. This will be aggravated by large tax hikes in Portugal, set out in the 2013 state budget. The argument for convergence between the public and the private sector means a ‘race to the bottom’ by reducing employees’ and pensioners’ conditions and rights in the public sector instead of improving their conditions and rights in the private sector. Furthermore, this follows two years of tough austerity measures that led the country to grapple with its worst recession since the 1970s; a record 17.7% unemployment rate was reported in the first quarter 2013, up from 16.9% in 2012. In the coming days, political parties, social partners and trade unions in the public sector will have to respond to this unprecedented and dramatic challenge.

Maria da Paz Campos Lima, Dinâmia

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Komentuoti