Portugal risks spooking investors with property tax

Bloomberg

Portuguese Prime Minister Antonio Costa is beginning to scare some investors. Almost a year into the role, Costa has succeeded in rolling back some austerity measures without alienating Portugal’s euro-area partners and creditors. Now, as his Socialist government prepares to raise indirect taxes and levies on property in its 2017 budget to help pay for higher pensions and state workers’ salaries, some business leaders are saying he may be going too far.
The budget proposal was approved at a cabinet meeting on Thursday and will be presented on Friday. “Returning money to public workers by increasing property taxes is one of those measures that will immediately scare away investors,” said Peter Villax, head of the Portuguese Family Business Association in Lisbon, which has about 300 members. “We need measures that stimulate growth, not half-baked policies that will bring in votes at the expense of much-needed investor confidence in Portugal.”
The Socialists lost elections held a year ago but still managed to form a minority government by getting backing in parliament from the Communists and Left Bloc, an unprecedented political arrangement in 40 years of Portuguese democracy. Costa’s ability to comply with European Union fiscal commitments and satisfy demands from the more radical parties has enabled the 55-year-old former Lisbon mayor to consolidate his position as premier. The Socialist party had 36 percent support in a poll published by Expresso on Sept. 16, four percentage points ahead of the opposition Social Democrats.
TAX BURDEN
“We have to have greater justice in the distribution of the tax burden,” Costa said on Sept. 22. “There are other sources of income, there are other forms of taxation that have to have greater weight so that we may have lower taxation on income from work.” This year the government reversed state salary cuts faster than the previous administration had proposed, while increasing some indirect taxes, including on fuel and tobacco. In 2017, Costa plans to remove an income tax surcharge that was imposed as part of a three-year bailout program that ended in 2014.
“Nobody believed Costa would last but somehow his government has managed to overcome all of the challenges to its survival,” said Pedro Adao e Silva, a political analyst. “It’s true that indicators on investment and growth are problematic, but that also has to do with the government’s obligation to fulfill agreements with the radical-left parties and the country’s EU commitments.” The Bank of
Portugal on Oct. 7 cut Portugal’s growth forecast to 1.1 percent this year from a June estimate for a 1.3 percent expansion.
The central bank expects investment will drop 1.8pc in 2016. Together with the drop in investment and the indebted economy’s slow growth, borrowing costs have increased. Portugal’s 10-year bond yield is at 3.4pc, about 1 percentage point higher than 12 months ago.
DBRS Ltd. is scheduled to review Portugal’s only non-junk debt rating on Oct. 21, a week after the budget proposal is presented. The country was retained at investment grade by the ratings company in April, securing eligibility of Portuguese government debt for the European Central Bank’s bond-purchase program.
Costa’s government has been in talks about the 2017 budget with the parties that support it in parliament. One way to compensate for the planned increase in pensions may come in the form of a property tax on real estate assets with a combined value of more than 500,000 euros ($552,000), Mariana Mortagua, a member of the Left Bloc party that supports the Socialists in power, said in September.