Finance minister promises tax bonanza

Socialist parties are usually known for taxing taxpayers to the hilt, but not in the case of Portugal’s governing PS socialist party which has pledged to make a major tax giveaway; perhaps the largest in more than a decade.

The tax burden being organised by Finances minister, Fernando Medina will be the second largest reduction in taxes ever according to Portugal’s Stability Programme 2023-2027 document which was winged to Brussels and the Portuguese Parliament on Monday.
The record was set in 2009 during the José Sócrates government when the Finances minister at the time was Fernando Teixeira. It was achieved during a difficult economic and financial context – after the US housing crisis and collapse of Lehman Brothers – and when Portugal’s economy was in recession (it fell 3% that year), despite inflation being negative. (Deflation)
At that time unemployment was running at 9% of the working population and heading for a record 10%. The tax giveaway then was seen very much as a way of stimulating the lacklustre Portuguese economy which had tanked and was trawling along the bottom of Europe’s league tables alongside Ireland, Greece and Italy. It was also meant to provide a boost to struggling Portuguese companies.
It came too little, too late and by 2011 the costs of Portugal’s borrowing on the international lending markets saw sovereign bonds having to offer an unsustainable 7% to lenders. The money ran out, the loans dried up, and Portugal had to call in the IMF and ECB to provide a €78Bn bailout.
Things are different now. Inflation is high and interest rates are also high to deal with it, with a threat of global recession, a scenario that Fernando Medina rules out.
“The risks of recession in 2023 have subsided taking into account the available indicators and the economy got off to a better start in 2023 than had been expected, likely to increase 0.6% in real terms in the first quarter compared to the last quarter of 2022,” said Fernando Medina on Friday in the Portuguese Parliament.
The minister said he was convinced that this year’s growth would be surprisingly positive (+1.9%) thanks to “a greater growth in exports” and “less growth in imports” and said that the tourism sector was expected to contribute towards the positive figures.
“The economy behaved better in the last quarter of 2022 than expected”, a time when quarterly growth (QoQ) was 0.3%, according to the INE.
But in 2022 inflation also meant that companies were able to increase their turnover and improve their margins, as was confirmed by the Bank of Portugal, the European Commission and the International Monetary Fund.
Both Portugal’s tax and social security entities also benefitted with more revenues since more companies turnover meant more profits and more jobs in 2022.
“Tax revenues on IRC grew 59.6% in 2022 after having fallen 6.5% in 2021. The nominal increase in IRC in 2022 was €2.8Bn, more than overtaking pre-pandemic levels, reflecting a more favourable performance in the Portuguese economy” last year states the INE.
In 2022 VAT represented 61.5% of revenues (58.4% in 2021) or 22.6Bn (+€3.3Bn on 2021), corresponding to an increase of 18.1% (increased 13.7% in 2021).
This current crisis of inflation and high interest rates is so different from the crisis in 2008-2014 in Portugal that tax revenues hit a record in 2022 that was the equivalent of 38.2% of GDP.
However, Medina now suggests a tax revenue target of 37.2% of GDP for 2023 in the new Stability Programme for 2023-2027.
The idea is to get the tax burden down to a rate of one decimal point fraction per year to 36.8% of GDP in 2027.
With high employment at a historic maximum and inflation coming down ( the target is 5.1% by the end of 2023), and mortgage interest rates at 3.8%, the Government thinks it has the conditions to leave the crisis behind it and, at the same time, give back some of the gains made by the State through taxes as a result of higher inflation.
Medina plans to reduce the IRS tax rate on employees, starting this year and continuing next, by around €2,000 million a year to 2027.
He said that through this measure the Government intends to achieve a “greater balance” between employees’ incomes and the taxes they have to pay.
This already has taken into account the €410 million in VAT at 0% on basic foodstuffs and lost to the government because of the cost of living crisis. The Finance minister also has room to slash taxes because of “healthy and balanced growth” close to 2% per year for the next five years which will mean that the public deficit will disappear in 2026 and the accumulated debt will fall below 100% of Portugal’s GDP with the next two years. Time will tell if Fernando Medina can pull that rabbit out of the hat!

Photo: Rodrigo Antunes, Lusa.