Portugal Approves Tax Increases, Other Deficit-Cutting Measures

LISBON (Dow Jones)--Portugal's parliament voted late Wednesday to approve a package of measures intended to slash the country's budget deficit.

The minority government of Prime Minister Jose Socrates passed the proposal with the support of the biggest opposition party, the Social Democrats, and with other opposition parties voting against it.

Portugal had a budget deficit equal to 9.4% of gross domestic product in 2009, and in April the government approved a plan to cut that to 8.3% of GDP this year and to 2.8% of GDP in 2013.

But as the Greek-centered financial crisis started to spread to other fiscally frail European Union countries like Spain and Portugal, the Portuguese government agreed to accelerate its deficit-cutting efforts.

It says the new measures will cut its deficit this year to 7.3% of GDP.

Value-added tax will rise 1 percentage point across all categories, to 6% for necessities, 13% for restaurants and 21% for most other goods and services.

Workers earning up to a certain level will pay a special 1% tax on their wages, and those earning more than that amount will pay 1.5%. Companies with profits of more than EUR2 million will pay an extra 2.5% tax on their profits.

Government ministers and other top state employees will have their salaries reduced by 5% starting this year. All the new measures will last until the end of 2011.

-By Jeffrey T. Lewis, contributing to Dow Jones Newswires; +34 91 395 8120; djmadrid@dowjones.com