UPDATE 2-Portugal plans higher transactions tax, pension cuts


* Pensions to be cut by 3.5 to 40 percent -budget blueprint

* Tax increases to compensate for falling revenues

* Tax brackets change detailed, maximum rate 48 percent

(Adds prime minister's quotes)

By Sergio Goncalves

LISBON, Oct 12 (Reuters) - Portugal aims to impose afinancial transactions tax next year of up to 0.3 percent, goingwell beyond a tentative European proposal for a tax rate of just0.1 percent, along with income tax hikes and cuts to pensions.

Eager to reassure the "troika" of international lenders whoare underpinning its 78 billion euro bailout, recession-hitPortugal is trying to follow in Ireland's footsteps and make afull return to global bond markets next year to fund itself.

There are signs it may achieve that goal with lower yieldsbut anti-austerity protests and concerns over an excessive taxburden and the economy's longer-term competitiveness riskundercutting those efforts.

Portugal's economy remains in a sickly state and this yearentered its deepest recession since the 1970s with unemploymentat record highs of above 15 percent.

In its draft budget, 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.

"The tax means obliging the financial area to contribute toour challenge of financing growth," Prime Minister Pedro PassosCoelho told parliament. The budget contains "a clear intentionto legislate" on the tax, but does not impose the levy, he said.

Eleven euro zone countries agreed on Tuesday to push aheadwith the tax initiative, which is opposed by several other EUnations but has been pushed hard by Germany. The EuropeanCommission proposes to tax stock and bond trades at 0.1 percent.

Struggling to meet the fiscal terms of its EuropeanUnion/International Monetary Fund-backed bailout after a steeprecession undercut tax revenues in 2012, Portugal's governmentwill present the draft budget to parliament on Monday.

The countries' creditors agreed to relax Lisbon's budgetgoals last month but the government has indicated it will betough even to 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.

To meet next year's goal, the government is seeking to raise4.9 billion euros, or 3 percent of GDP, in additional austeritymeasures that complement previous tax hikes and spending cuts.

Passos Coelho said the tax hikes were painful, butabsolutely necessary for Lisbon "to avoid having the troika herelonger, to avoid a second bailout". But he said regularadjustments of the austerity programme with the lenders wouldnot necessarily toughen the measures, as the new goals showed.

"We can go on adjusting the measures to reality. We'vealready had our targets eased," he said.


Planned income tax hikes have already provoked strongcriticism from trade unions and politicians, triggering massprotests, with marches scheduled near parliament in Lisbon onSaturday and Monday.

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

Although economists expect Portugal's recession to deepenunder the weight of more austerity, its bond yields have fallento their lowest levels in over a year after the ECB outlined itsnew bond-buying plan last month. Ten-year debt yields around 8percent, off a peak of around 17 percent in January.

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 marketoperation since it sought the bailout last year.

Aside from the previously-announced overall income taxhikes, a 4 percent tax surcharge and some other increases, thegovernment also plans to reduce pensions and cut unemploymentand sickness benefits.

Monthly pensions above 1,350 euros will face a 3.5 percentextraordinary contribution. Cuts of 10 to 15 percent areenvisaged for pensions between 3,750 euros and 7,546 euros, andpensions above that limit will be slashed by 40 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 will rise to 14.5 percent from11.5 percent now, while the highest rate of 48 percent, up from46.5 percent previously, will apply to annual incomes above80,000 euros rather than 153,000 euros.

(Additional reporting by Andrei Khalip; Editing by CatherineEvans)


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