@FT: Portuguese parties battle over labour costs

By Peter Wise in Lisbon

A fiscal “devaluation” included in Portugal’s €78bn bail-out package to cut labour costs has become one of the most disputed issues in the country’s election campaign.

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he centre-right Social Democrats (PSD), the main opposition party, have embraced the measure to make companies more competitive by cutting social security contributions as part of their manifesto for the June 5 vote.

But the Socialists of José Sócrates, the caretaker prime minister, question how the reduction, and subsequent shortfall in public revenues, will be financed, estimating that it would need a three percentage point increase in the main value added tax rate to 26 per cent.

Although both parties have voiced support for the rescue package agreed last week with the European Union and the International Monetary Fund, the election row has exposed differences over how the three-year programme should be implemented.

The bail-out package envisages cutting corporate social security contributions by the equivalent of 3 to 4 per cent of gross domestic product over the next four years.

“This is a potential game changer,” said Poul [correct] Thomsen, head of the IMF negotiating team. “It replicates a currency devaluation by significantly reducing the labour costs of enterprises in one go.”

The level of reduction was “very, very dramatic”, he told the Financial Times last week.

According to the rescue agreement, the measure is to be financed in a “fiscally neutral” way through public spending cuts and tax increases to be “calibrated and developed in detail” over the next three months.

Eduardo Catroga, expected to become finance minister if the PSD wins the election, said on Monday the party proposed to lower employers’ contributions four percentage points in four years to below 19 per cent of workers’ wages.

Some goods and services would be moved to higher VAT rates to fund the measure, he said, but there would be no change in the basic rate.

The cut was targeted mainly at export companies in an effort to lift growth and create jobs, he added. Less competitive telecommunications, energy and other utility companies would be required to pass on the benefit in lower prices.

Francis Assis, a Socialist leader, warned that the PSD proposal would have a negative social and economic impact if VAT rates were increased. He did not say how his party would finance the make up the shortfall.

Pedro Passos Coelho, the PSD leader, said his party’s election programme went much further than the EU-IMF agreement in terms of public spending cuts and economic reforms.

Proposals not part of the rescue package include steps to privatise one of Portugal’s two state television channels, reduce the number of MPs from 230 to 181 and impose “peremptory limits” on the length of criminal investigations.

Copyright

The Financial Times Limited 2011.