Review of the constitutionality of norms contained in the State Budget Law for 2013.
State based on the rule of law;
Economic and financial crisis;
Financial Assistance Programme;
Principle of equality;
Suspension of the extra holiday month of salary;
Public Administration staff;
Public sector retirees;
Private sector retirees;
Cuts in remuneration paid out of public funds;
Extraordinary Solidarity Contribution;
Amendments to the Personal Income Tax Code (CIRS);
RULING No. 187/13
5 of april of 2013
The Constitutional Court was asked to review the constitutionality of various norms contained in the State Budget Law for 2013:
1. The Constitutional Court declared the suspension of the additional holiday month of salary or equivalent for Public Administration staff (which also applied to the same types of amount payable under teaching and research contracts) to be unconstitutional with generally binding force, because it was in violation of the principle of equality that requires the just distribution of public costs. The Court did not exclude the possibility that, in exceptional economic/financial circumstances and in order to quickly reduce the public deficit, the legislator could lower the income of Public Administration staff, even if such a measure were to lead to unequal treatment compared to persons who earn income in the private economic sector. However, when not matched by equivalent sacrifices on the part of virtually all the other citizens earning income from other sources, the cumulative, ongoing effects of the sacrifices imposed on people who earn income in the public sector represent a difference of treatment for which the goal of reducing the public deficit does not provide adequate grounds. This does instead constitute a breach of the principle of proportional equality, based on the idea that an inequality derived from a difference between situations must be judged from the point of view of whether it is proportional or not, and cannot go too far.
A different treatment for public-sector staff cannot continue to be justified by the idea that pay-reduction measures are more effective than other possible cost-containment alternatives. Nor can the special employment bond that ties such workers to the public interest serve as grounds for continuing to require them to make sacrifices in the form of a unilateral reduction in their salaries. Penalising a given category of people, in a way that is made worse by the combined effect of this reduction in pay and the generalised increase in the fiscal burden, undermines both the principle of equality with regard to public costs and the principle of fiscal justice.
2. Partial suspension of the holiday month for pensioners
The Court considered that the suspension of the holiday month of pensions for public and private-sector retirees should also be declared unconstitutional with generally binding force, for substantially the same reasons as those given in relation to the salaries of Public Administration workers.
The right to a private or public-sector pension is situated on the same level as the right to a salary. If there is a difference, it is in the sense that pensioners possess a legal position which warrants added protection in terms of the principle that trust must be protected. In their case, we are dealing with rights that have already been constituted, and not future rights. At the moment when a person’s professional working life ends and he/she is entitled to start receiving the pension benefit, the pensioner no longer enjoys mechanisms that enable him/her to protect him/herself and to adapt his/her own behaviour to his/her new circumstances. This produces a situation in which there must be increased trust in the stability of the legal order and the maintenance of the rules that serve to define the content of the right to a pension.
The Court recognised the seriousness of the current economic/financial situation and the need to attain the public-deficit goals included in the specific economic policy conditions laid down in the memoranda of understanding between the Portuguese government, the European Union and the International Monetary Fund. However, it was of the view that the different treatment imposed on people who receive pay and pensions that come from public funds, in the form of the suspension of the holiday month, went beyond the limits established by the prohibition on excess where proportional equality is concerned, and that in the case of pensioners the situation of inequality in relation to public costs was even worse.
The imposition of the so-called extraordinary solidarity contribution, which sought to make the reduction in pensions equivalent to that in the monthly pay of public-sector staff, already means that pensioners are experiencing the same fall in disposable income as the latter. The suspension of the holiday month has also further aggravated an already unequal situation, not only in relation to other pensioners whose holiday month was not suspended, but also compared to people with other forms of income, who were only faced with the generalised increase in the fiscal burden applicable to all taxpayers.
3. Contribution payable on unemployment and sickness benefits
The Court declared the norm that provided for a contribution payable on unemployment and sickness benefits to be unconstitutional with generally binding force, because it violated the principle of proportionality.
The Constitution says that workers have a right to material assistance when they involuntarily find themselves in an unemployment situation, and also requires the legislator to provide for forms of material assistance for workers who are ill, in both cases within the context of a social security system. This objective must thus be achieved via the legal regimes that ensure social protection in cases of unemployment and sickness.
It is true that the Constitution does not establish a right to a concrete amount of material assistance, even in the event of unemployment. The scope of the protection provided by a worker’s right to material assistance in situations of unemployment or illness does not mean that it is impossible to reduce the amounts of those benefits, unless the reduction is so great that it de-characterises them by making the welfare function they perform – that of replacing earned remuneration – unviable.
In the cases of both the unemployment benefit and the sickness benefit, the new contribution was accompanied by other measures that increased the amount of the payments to which involuntarily unemployed or ill workers are entitled in certain specific situations (the unemployment benefit is now higher when both spouses are unemployed and have dependent children; and the calculation of the reference remuneration used to determine the sickness benefit has been changed to consider total remuneration from the beginning of the reference period until the day before that on which the beneficiary became unfit for work, thereby taking into account any reductions in income over the course of the reference period).
The ability to fulfil the constitutional programme under which citizens are protected when they are ill or unemployed is dependent on financial and material factors, and it is the legislator’s job to make the content of the corresponding social right operable by defining the list of situations in which protection is required.
The fact that the measure before the Court was exceptional and transitory, with the reductions in the sickness and unemployment benefits imposed solely for the current budget year, could lead to the conclusion that the norm was constitutional.
However, the Court’s view was that the absence of any safeguard clause meant that in practice it was not impossible for the cash amounts involved to be reduced to a point at which, in some cases, the benefit might fall below the minimum level already established in legislation. Such a solution would violate the principle of proportionality by affecting the beneficiaries in the most vulnerable situations, in that it encompasses social benefits whose function is to replace earned pay a worker has been deprived of and whose amount is supposed to be at least equal to the minimum material assistance already guaranteed by law. The fact is that the Constitutional Court has gradually been recognising the existence of a guarantee of a right to a minimum level of subsistence – a right which it has founded on a combination of the principle of the dignity of the human person and the right to social security in situations of need, as measured against the standard of the national minimum wage (SMN) or the guaranteed minimum salary (RMG).
4. Reduction in remunerations paid out of public funds
The Court did not declare the continued reduction in remunerations paid out of public funds to be unconstitutional.
This is the third consecutive year in which this reduction in the remunerations paid within the scope of the legal public employment relationship has been in effect, and in this respect the 2013 Budget Law simply maintained the norms and reductions set out in its predecessors. The Court recalled its previous jurisprudence, in which it said that the rule under which salaries cannot be reduced is not an absolute one, but rather an infra-constitutional rule. The only absolute prohibition is that neither a public nor a private employer can arbitrarily reduce pay, unless a legal norm allows it to do so. The Court thus rejected the argument that there is a right under which salaries are irreducible – a right that was said to exist in labour legislation, but to have been given the nature of a fundamental right under the open clause in the Constitution which says that fundamental rights do not have to be expressly contained in the Constitution itself, but can also be established in infra-constitutional laws or derived from international-law rules that apply in Portugal.
The Court upheld its previous position (Ruling no. 396/2011) on the argument that the reductions in the pay of public-sector workers are in breach of the principle of equality because they only target people who work for the state and other public-law legal persons, and do not apply to workers who are paid for providing subordinate labour in the private or cooperative sectors, independent workers, or anyone else who earns income from other sources. It concluded that there are legitimate grounds for this differentiation, both because no evidence was presented to refute the position that only pay cuts are capable of guaranteeing a sure and immediate reduction in the weight of public spending, and because where this objective is concerned, people who are paid out of public funds are not in the same position as other citizens. For these reasons the Court felt that the additional sacrifice demanded of this category of persons for a transitory period of time does not constitute an unjustifiably unequal form of treatment.
5. Payment of overtime
The Court decided not to declare the unconstitutionality of a norm that provides for a reduction in overtime payments to public-sector staff.
As we have already said, the Court does not recognise the existence of a constitutional guarantee that salaries cannot be reduced. It said that this guarantee is infra-constitutional, and that the reduction in overtime payments does not breach either the principle of trust, or the principle of equality.
Unlike the extra holiday and Christmas-month payments, additional pay for doing overtime does not possess the habitual or regular nature that typically characterises remuneratory payments in the technical-legal sense.
Inasmuch as overtime pay is variable and unpredictable, because it depends on managerial decisions that fall exclusively within the employer’s sphere of authority, this measure is not in violation of the constitutional principle of trust. The Court considered that the reasons why the measures involving the reduction and suspension of elements of people’s pay packets are not unconstitutional to be even more valid here, and that this reduction in overtime payments does not cause damage that can be criticised on constitutional grounds, notwithstanding the fact that the expectation of immutability is actually more consistent and lastingly formed in this particular situation.
6. Extraordinary solidarity contribution (CES) payable on pensions
Nor did the Court find that the norm which subjects pensions to an extraordinary solidarity contribution to be unconstitutional, considering instead that this measure is appropriate and proportional and does not include elements that would constitute a confiscation.
The CES was designed to work in conjunction with other measures to respond to the economic and financial crisis. The combination of a decrease in the revenues of the social security system, a major rise in unemployment and the ensuing increase in expenditure on the provision of support for the unemployed in particular and situations of poverty in general, falling salaries and thus falling social security contributions, and new migratory trends, is all requiring the state to subsidise the social security system. It also means that, within the overall framework of the basic choices available to the political authorities, there is an urgent need to strengthen that system’s financing at the cost of its beneficiaries.
The Court acknowledged that, having reached the end of their professional working lives and secured the right to the payment of a pension calculated on the basis of the social security contributions deducted from their incomes during their working careers, retirees are legitimately entitled to expect continuity in the legislative framework and the maintenance of their legal positions. They cannot be required to have made alternative plans for a possible change in public policy that is capable of having negative effects in their legal sphere.
However, in the present case the Court was of the opinion that a para-fiscal contribution to be made by the universe of pensioners is a measure that is appropriate to the goals pursued by the legislator. It also felt that the measure fulfils the principle of need, in that the Court was not aware of any alternatives which, while remaining coherent with the system of which such measures form a part, would simultaneously cause less damage to the holders of the legal positions at stake and serve the public interest to the same extent.
Nor did the Court find the norm to be disproportionate or excessive, bearing in mind its exceptional and transitory nature and the effort the legislator made to ensure that the sacrifice demanded of private individuals is proportional to their income levels.
7. Changes in the Personal Income Tax Code (CIRS)
The Court rejected the suggestion that the norms in the State Budget Law for 2013 concerning a reduction in the number of taxable income brackets, an amendment to the additional solidarity rate, limitations on tax-deductible items, and the creation of Personal Income Tax (IRS) surtax, are unconstitutional.
On the subject of the reduction in the number of tax brackets and the increase in the normal and average rates applicable to each one, the Court held that the system is still sensitive to differences in levels of income. The initial amount of income that is free of tax continues to be proportionally higher for lower incomes, and the degree of progression from one bracket to the next is substantial. Although the changes do represent a certain reduction in this degree of progressivity, the Court did not consider it to be enough to be unconstitutional.
Under the IRS heading, the petitioners also questioned the constitutionality of the reductions in, or elimination of, tax-deductible items (in this case, deductible from the actual amount of tax payable, as opposed to reductions in the taxable income, which would thus only influence the calculation of the latter).
The Court held that the decision as to whether these measures are compatible with the principle of the capacity to pay taxes, which is itself derived from the principle of equality, is included within the scope of the legislator’s freedom to shape ordinary legislation.
On the question of whether the IRS surtax is capable of breaching the principles of the unitary and progressive nature of income taxes, the Court felt that when the system is taken as a whole, the norm maintains enough progressivity to avoid criticism in constitutional terms.
The Court also found that the exceptional and transitory nature of the measures – designed as they are to offer a response to extraordinary public finance needs – means that they are not in violation of the rule that taxes on personal income must be unitary.
8. Difference between the fiscal treatment of income from work and pensions and the taxation of income from capital
The Court declined to pronounce itself on the question of whether the Constitution – and specifically the principle of equality in the distribution of public costs and the principle of fiscal justice – is compatible with the legislator’s decision to set rates of tax on income from work and pensions that can exceed 50%, while subjecting capital incomes to a single rate of 28%.
The Court was of the view that such a comparison is not viable. Firstly, because such rates apply to forms of income that are not calculated in the same way; and secondly, because the nature of the rates and the ways in which they operate are different, and it is thus not possible to make a comparison based on their nominal amount. What is more, the rates in question correspond to mechanisms that function on the basis of different logics (progressive vs. proportional), and thus concretely distribute the fiscal burden in different manners: the general rates are based on the concept of personal taxation – i.e. the idea that it is people who are taxed on their income; whereas “liberatory” withholding taxes or autonomous taxes represent the direct taxation of a specific item or amount.