UPDATE 1-Portugal plans higher transactions tax, pension cuts


* Pensions to be cut by 3.5 to 40 percent

* Tax increases to compensate for falling revenues

* Tax brackets change detailed, maximum rate 48 percent

(Updates with background) By Sergio Goncalves

LISBON, Oct 12 (Reuters) - Portugal's 2013 budget plans toimpose a financial transactions tax of up to 0.3 percent and tocut pensions next year, going well beyond a proposal from theEuropean Commission which floated a tax rate of just 0.1percent.

Eager to reassure international lenders - who areunderpinning its 78-billion euro bailout - recession-hitPortugal is trying to follow in Ireland's footsteps and to makea full return to global bond markets to fund itself.

There are signs it is close to achieving that goal withlower yields but anti-austerity protests and issues over theeconomy's longer-term competitiveness risk undercutting thoseefforts, while banks are warning that a transaction tax wouldput Lisbon at a disadvantage to rivals such as London.

Portugal's economy also remains in a sickly state and thisyear entered its deepest recession since the 1970s withunemployment at record highs of above 15 percent.

In the budget blueprint, a copy of which was obtained byReuters, the government requests parliament's permission to taxthe "acquisition of securities at a rate that can reach amaximum of 0.3 percent", but does not provide further details.

Struggling to meet the fiscal terms of the EuropeanUnion/International Monetary Fund-backed bailout after a steeprecession undercut tax revenues in 2012, the government willpresent the draft budget to parliament on Monday.

It will include previously-announced income tax hikes.

The countries' creditors agreed to relax Lisbon's budgetgoals last month but the government has indicated it will stillbe tough to even meet the new targets.

It now needs to cut the budget deficit to below 3 percent ofGDP in 2014, one year later than previously planned, and mustpost a deficit of 5 percent this year and 4.5 percent in 2013.


But planned income tax hikes have already provoked strongcriticism from trade unions and politicians, triggering massprotests. Protest marches are scheduled in Lisbon on Saturdayand Monday.

To meet next year's budget deficit goal of 4.5 percent ofGDP, the government is seeking to raise 4.9 billion euros, or 3percent of GDP, in additional austerity measures that complementprevious tax hikes and spending cuts.

The head of Portugal's banking association has alreadyexpressed concerns that the transactions tax would put thecountry's lenders at a disadvantage to rivals that are notsubject to the charge.

While economists expect Portugal's recession to deepen underthe weight of more austerity, investors have pushed thecountry's bond yields to their lowest levels in more than ayear, to around 8 percent. That is down from a peak of around 17percent in January, on the back of the ECB's bond buying plan.

Lisbon took advantage of the more favourable market lastweek by swapping 3.75 billion euros in bonds maturing next yearfor bonds due in 2015. It was the country's first bond operationsince it sought the bailout last year.

Eleven euro zone countries agreed on Tuesday to push aheadwith a financial transactions tax, an initiative that severalother EU nations oppose but which has been pushed hard byGermany. The European Commission's proposal is to tax stock andbond trades at 0.1 percent.

Aside from the previously-announced overall income tax hikes- which will be effected via a reduction in the number of taxbrackets, a 4 percent tax surcharge and some other increases -the government also plans to reduce pensions and cutunemployment and sickness benefits.

Monthly pensions above 1,350 euros will face a 3.5 percentextraordinary contribution. Pensions between 1,350 and 1,800euros will be cut by 10 percent, the next range of up to 3,750euros will suffer a 15 percent cut and the highest rate pensionsabove 7,546 euros will be slashed by 40 percent.

The government wants to cut unemployment benefits by 6percent and sickness leave subsidies by 5 percent.

By cutting the number of income tax brackets from eight tofive, Portugal effectively increases income tax rates,especially for high earners. The lowest income tax rate rises to14.5 percent from 11.5 percent now.

The highest rate of 48 percent, up from 46.5 percentpreviously, now applies to annual incomes above 80,000 eurosrather than 153,000 euros.

(Reporting By Sergio Goncalves; Writing by Andrei Khalip;Editing by Patrick Graham and Andrew Osborn)


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