LISBON, Portugal (AP) -- Portugal's coalition government said Monday it is preparing new income tax increases as the bailed-out country struggles to meet its debt-reduction targets at a time of deep recession.
Prime Minister Pedro Passos Coelho said he is ready to scrap an earlier — and deeply unpopular — proposal to raise workers' social security contributions next year while cutting corporate taxes. Many people deemed that unfair.
That proposal triggered massive street protests, split the coalition government and enraged business leaders and trade unions, shattering the broad consensus around austerity measures enacted in return for last year's €78 billion ($101 billion) bailout from Portugal's euro partners and the International Monetary Fund.
The uproar threatened to knock Portugal's economic recovery program off track and add to Europe's difficulties as it strives to surmount the continent's financial crisis.
Passos Coelho took the rare step of leading a government negotiating team that met Monday with the leaders of national business and trade union confederations to find alternative policies.
He said the center-right government is willing to backtrack on social security hikes next year but has to find new revenue elsewhere in order to restore the debt-laden country's fiscal health.
"The only way to do that is through taxes," he told reporters after three hours of talks. "Income tax will be the main way of achieving it."
He also indicated that taxes on assets and capital gains will also rise and that fuller details will be announced in the coming days.
Initial reaction from the confederations was unenthusiastic. The unions and business leaders urged the government to make savings on public spending instead of increasing the tax burden. Luis Reis, head of the Confederation of Portuguese Service Companies, said raising taxes was "unreasonable" and would cut household spending and further depress consumption.
The climbdown represents a setback for Passos Coelho's government, which has won plaudits from international creditors for getting on with the business of austerity.
The government had intended to increase workers' social security contributions to 18 percent of their monthly salary from 11 percent — a cut equivalent to a net monthly wage. At the same time it proposed cutting companies' welfare contributions to 18 percent from 23.75 percent, saying it would encourage hiring in a country where unemployment is at a record 15.7 percent.
Workers complained the government was taking money out of their pockets and giving it to employers.
The government is gambling that across-the-board tax hikes, covering the public and private sectors, will be more palatable.
The government predicts Portugal's economy will contract 3 percent this year and 1 percent in 2013.
Last month, Portugal's creditors agreed to ease the country's budget targets, raising the deficit goal this year from its original target of 4.5 percent to 5 percent of the country's €171 billion economy.