Draconian Tax Hikes in Portugal

There is a good old American saying: if you’re in a hole, quit digging. That is a good lesson for everyday life, for work and for what to do when you end up in an argument with your indolent brother-in-law. Unfortunately, the people who need to listen the most are the ones who don’t seem to be paying attention at all.

Our politicians.

Look at Europe, for example. In country after country, elected officials – and in some cases officials appointed by the EU – repeat fiscal policies that already have a proven track record of making a bad situation worse. It is not difficult to predict that 2013 is going to be no better for Europe than 2012 was.

Portugal is the latest EU member state to faithfully join the austerity ranks. That is bad, because Portugal has absolutely no room for more macroeconomic failure. Few countries in Europe can beat  Portugal in terms of bad economic growth: from 2004 to 2008 the Portuguese economy grew by 1.24 percent per year, on average; from 2009 through 2012, and including forecasts for 2013, the average annual growth rate is -1.24 percent.

Essentially, the Portuguese economy has been at a total standstill for an entire decade. Their economy needs a major shot in the arm, but that is not what the Portuguese government has in mind. On the contrary. Euractiv reports:

Portuguese President Aníbal Cavaco Silva said in his new year speech that he will send his country’s controversial 2013 budget to the Constitutional Court. The move could put at risk a €78 billion bailout deal from the eurozone and IMF. “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,” the President said.

That sounds like a good idea, right? Many Americans cheer at this point, wishing president Obama would do the same. Except, of course, he does not have a budget to send to anyone, because his fellow Democrats in the Senate has refused to pass a budget since Obama took office.

But American bickering aside, the point here is not that the Portuguese president submitted the nation’s budget for constitutional compliance review. The point is that the budget does some serious damage to Portugal’s economy. Euractiv again:

In his speech Cavaco Silva, who has served as Prime Minister twice and is the first elected centre-right President of Portugal since the 1974 Carnation Revolution, also said the country was in a vicious circle of austerity and recession.

So why, then…

Cavaco Silva signed the 2013 budget into law earlier on 31 December, which includes the biggest tax hikes in living memory, according to Reuters. … According to the BBC, for most Portuguese workers the tax rises that came into effect on 1 January are equivalent to more than a month’s wages.

I warned already in September that more austerity in Portugal could bring the nation’s social unrest to a very dangerous boiling point. This kind of tax increase, which more than anything is akin to macroeconomic suicide, will certainly not put a damper on strikes and other forms of public protests.

Speaking of the BBC, here is what they had to say about the Portuguese budget:

The standard income tax rate is rising from 24.5% to 28.5%. The savings are Portugal’s toughest in living memory, aimed at meeting the terms of a 78bn-euro (£64bn) bailout. … Earlier Portugal’s Finance Minister, Vitor Gaspar, admitted the tax rises were “enormous”, but were “another determined step toward recovery”.

Sure. Take away one month’s worth of money from the average family, then make the toughest spending cuts “in living memory” and now expect the economy to recover.

Given what Greece has gone through since 2009 you would expect at least some kind of “on second thought” reasoning, especially since, says BBC,

There have been big street protests against the cuts and on 14 November there was a general strike by angry workers hit by economic hardship.

A macroeconomic meltdown is the least of Portugal’s problems. The very democratic system of government is in jeopardy. As I reported back in September, 41 percent of the voters in Portugal supported one of three hard-line socialist parties. One of those parties still worships Lenin.

The road from austerity to tyranny is much shorter than our political leaders will ever understand.

Until, of course, it is too late.