The draft budget for 2013 is one of the harshest in the country's recent history and will take away the equivalent of a month's wages from many workers.
The government says the measures are needed to cut the national debt as Portugal strives to restore its financial health. More than a decade of meager growth compelled Portugal to ask for a (EURO)78 billion ($101 billion) rescue last year to avert bankruptcy.
But critics say the latest batch of austerity measures will choke the economy, which is forecast to contract for a third straight year in 2013, and push higher the unemployment rate which already stands at a record 15.9 percent.
As in other heavily indebted European countries, public hostility to cutbacks is running high as hard-hit workers balk at falling living standards. The coalition government, too, is showing signs of strain amid mounting criticism as leading figures in the governing parties have expressed deep reservations about the strategy.
Announcing "very significant" tax hikes, Finance Minister Vitor Gaspar said Portugal had no choice because it is locked into a three-year debt reduction program by its international creditors in return for the bailout.
"We have no room for maneuver," Gaspar told a news conference. Portugal "has to stay the course," he said.
With the government struggling to balance its books due to a slowdown in consumption and consequent drop in tax revenue, the bailout lenders—the International Monetary Fund, European Central Bank and European Union—recently eased Portugal's budget deficit target for this year to 5 percent from 4.5 percent of the country's (EURO)171 billion ($221.8 billion) economy. The 4.5 percent goal was pushed back to next year. In 2010 the deficit was 10.1 percent.
Gaspar said he also intended to enact spending cuts worth (EURO)2.7 billion next year, partly by laying off 2 percent of the country's 600,000 public employees.
The tax increases are particularly hard on Portugal's middle class. Due to the changes, someone earning (EURO)41,000 ($53,000) a year, for example, will pay 45 percent income tax from Jan. 1 compared with 35.5 percent now.
Most workers fall into the (EURO)7,000-(EURO)20,000 annual income bracket. Those people will pay 28.5 percent income tax, up from 24.5 percent now.
Previously, the top rate of tax of 46.5 percent was for workers or married couples who together earned over (EURO)153,300 a year. That top rate will be lowered to cover single or joint earnings above (EURO)80,000, which will be taxed at a rate of 48 percent. That income will also be subject to a special "social solidarity" tax of 2.5 percent.
Also, there will be a one-off 4 percent surcharge tax on everyone's earnings in 2013.
Capital gains tax will rise to 28 percent from 25 percent. Companies making annual profits over (EURO)7.5 million will pay an extra tax of 5 percent on top of their 25 percent corporate tax.
The budget foresees an economic contraction of 1 percent next year, with the jobless rate rising to 16.4 percent.
The center-right coalition government has an overall majority in Parliament and can force through the austerity package. However, the broad political and social consensus around the terms of last May's bailout—which committed Portugal to spending cuts and economic reforms—has unraveled.
The leader of the main opposition Socialist Party, Antonio Jose Seguro, said the measures were "a fiscal atomic bomb" that will wreck the economy.
Trade unions also reacted angrily.
The General Confederation of Portuguese Workers, the largest union group with some 600,000 members, has already announced a general strike against austerity on Nov. 14.
Street demonstrations in recent months have been huge, attracting tens of thousands of people, but none of the protests has been violent so far.