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 a financial transactions tax next year of up to 0.3 percent, going well beyond a tentative European proposal for a tax rate of just 0.1 percent, along with income tax hikes and cuts to pensions.

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

There are signs it may achieve that goal with lower yields but anti-austerity protests and concerns over an excessive tax burden and the economy's longer-term competitiveness risk undercutting those efforts.

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

In its draft budget, a copy of which was obtained by Reuters, the government requests parliament's permission to tax the "acquisition of securities at a rate that can reach a maximum of 0.3 percent" but does not provide further details.

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

Eleven euro zone countries agreed on Tuesday to push ahead with the tax initiative, which is opposed by several other EU nations but has been pushed hard by Germany. The European Commission proposes to tax stock and bond trades at 0.1 percent.

Struggling to meet the fiscal terms of its European Union/International Monetary Fund-backed bailout after a steep recession undercut tax revenues in 2012, Portugal's government will present the draft budget to parliament on Monday.

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

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

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

Passos Coelho said the tax hikes were painful, but absolutely necessary for Lisbon "to avoid having the troika here longer, to avoid a second bailout". But he said regular adjustments of the austerity programme with the lenders would not necessarily toughen the measures, as the new goals showed.

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


Planned income tax hikes have already provoked strong criticism from trade unions and politicians, triggering mass protests, with marches scheduled near parliament in Lisbon on Saturday and Monday.

The head of Portugal's banking association has meanwhile expressed concerns that the transactions tax would put the country's lenders at a disadvantage to rivals that are not subject to the charge.

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

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

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

Monthly pensions above 1,350 euros will face a 3.5 percent extraordinary contribution. Cuts of 10 to 15 percent are envisaged for pensions between 3,750 euros and 7,546 euros, and pensions above that limit will be slashed by 40 percent.

By cutting the number of income tax brackets from eight to five, Portugal effectively increases income tax rates, especially for high earners.

The lowest income tax rate will rise to 14.5 percent from 11.5 percent now, while the highest rate of 48 percent, up from 46.5 percent previously, will apply to annual incomes above 80,000 euros rather than 153,000 euros.

(Additional reporting by Andrei Khalip; Editing by Catherine Evans)


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