Portugal's Budget Bill Overview

By Sergio Goncalves and David Latona

LISBON (Reuters) – Portugal's centre-right minority government introduced its first budget bill on Thursday, which forecasts modest growth and a small surplus despite tax cuts for youth and businesses, as well as public sector wage increases.

Potential Government Collapse

Failure to pass this budget could result in the government's collapse, which assumed office in April, possibly triggering a third snap election in two years.

Key Proposals in the Bill

Finance Minister Joaquim Miranda Sarmento presented the budget to parliament including concessions to the opposition:
– Corporate Tax Rate: Decrease from 21% to 20%.
– Young Workers Tax Exemption: 100% tax exemption for those under 35 earning up to 28,000 euros in their first year, gradually reducing to 25% over the subsequent years.

Filipe Garcia of Informacao de Mercados Financeiros noted the measure's cost at approximately 0.2% of GDP, which is better than the government's initial expectations, given its uncertain impact.

Economic Predictions

Current income tax rates range from 13% to 48%. According to the Emigration Observatory, approximately 850,000 individuals aged 15-39 have emigrated due to unfavorable working conditions and low salaries.

Private consumption is projected to grow 2% next year, down from 1.8% in 2024. The budget projects a 2.1% economic growth rate in 2025, more than double the euro area's forecast of 0.8%, alongside a surplus of 0.3% of GDP. Sarmento emphasized the importance of maintaining balanced accounts to reduce public debt, forecasting a debt-to-GDP ratio of 93.3%.

Revenue and Expenditure

Tax revenue is expected to dip to 24.7% of GDP while total expenditure is set to rise to 45.2%. With EU support, investment is predicted to increase by 3.5% next year.

Export Expectations

Exports, constituting over 50% of GDP, are projected to grow by 3.5% in 2025 after 2.5% growth this year, despite downturns in Germany’s economy.

The EU accounts for 65% of Portugal’s goods and services exports, and although tourism is thriving, effects of slowdowns from key EU trading partners are already felt.

During budget negotiations with the opposition Socialist Party, the government abandoned its proposal for a 15% income tax cap for young people in favor of a progressive scheme, similar to the Socialists' proposal. Although talks ended without a consensus, Prime Minister Luis Montenegro remains optimistic about the budget passing, as the PS only needs to abstain from opposing it.