Portugal’s budget prudent with tax reductions for low to middle income earners

Portugal’s Finance Minister Fernando Medina handed the State Budget for 2024 to the Portuguese parliament yesterday with a raft of give-aways that are prudent but aim to help low income and middle classes families. Essential Business provides a nutshell analysis on the main points of the budget.

However, it comes as the tax burden on those beyond the lower five tax brackets face a record high tax burden of 37.2% this year and even higher in 2024 to 38%.
To August 2023 Portugal’s tax revenues stood at 339.2Bn while social security contributions stood at €18.9Bn.
Overall Portugal is expecting a small budget surplus of 0.2% in 2204 despite a slowdown in economic growth. This year, the government expects a surplus of 0.8%, Portugal’s second surplus in 50 years after 0.1% under Mário Centeno in 2019. Nevertheless, while modest, Portugal had a deficit of 0.4% of GDP.
It means the public debt ratio next year will be 98.9% of GDP – down from this years 103%, which would be the first time it has dropped since 2009.
In the prudent budget, the government said it would proceed with a “progressive and considered assessment of emergency support measures” for a population that is struggling with high inflation and interest rates, and stressed a “commitment to responsible public accounts”.
The government argues that, especially amid an adverse external environment, it must pursue budgetary prudence and keep reducing the still high public debt, on which Portugal nearly defaulted on in 2011 and would have had it not been rescued by a €78Bn international bailout.
“Portugal can address the challenges it faces in the short and medium term” with this budget, Medina said. Inflation in Portugal is expected to slow to 3.3% next year from this year’s 5.3%.
Around 2.7 million pensioners will get more money with a 4.6% increase or €2.2Bn this year and 2.9% in 2024 at a rate that is higher than inflation.
The minimum subsistence bracket will rise to €11,480 in 2024 which means no income tax will be eligible. This was after it was already announced that the minimum salary would rise to €820 next year.
IRS tax brackets have been updated by 3% in line with inflation for next year set at 2.9%. It means that people earning up to €2,232 gross per month with see their taxes go down. Costing the government €1.3Bn taxes will fall by between 1.25% and 3.5% for the first five lowest tax brackets benefitting salaries up to €2,322 per month gross. The main benefit will be for those on the 3rd tax bracket earning between €1,123 and €1.500 per month which will help 6,000 tax payers.
Minimum wage increase of 3% for civil service workers with proposed salary increases of between 6.8% for basic salaries and 3% for higher salaries. This means that the basic salary will be €821.8 and salaries up to salary level 24, which corresponds to a salary of €1,754.41, will increase by around €52.
For the first year of tax returns, young people will have the right to a 100% discount on their IRS income tax costing the government €200 million in 2024.
IRS applied to independent workers on green receipts who derive most of their income from one or few clients (50%) who currently pay 25% of their income in taxes may eventually see a more beneficial reformulation next year, but with no immediate impacts on what they pay for the time being.
Taxes on alcoholic drinks (beer and spirits) will increase 10% in 2024 that will net the government an additional €40 million.
A packet of cigarettes or pouch tobacco will cost 15-30 cents more from 2024 bringing in €4.6Bn in revenues compared to €34Bn this year.
The increase in union contributions, currently at 50% will be increased to 100%.
Free travel passes for students up to age 23.
Zero VAT on food baskets of 46 types of food through 2023 and 2024.
VAT rate on non-alcoholic drinks in catering such as fruit juice, nectars and fizzy waters will be 13%
VAT exemption on fertilisers and soil improvers, flour, cereals and seeds for feeding livestock.
Autonomous taxation down on vehicles from 10% to 8.5%. Autonomous taxes are levied on an extensive set of corporate expenses, irrespective of corporate profitability. Fiscal revenue from the autonomous taxation of expenses comprises about 12 % of corporate income tax receipts, which illustrates its relevance for the tax authorities and the corporate world.
End of NHR tax breaks from 2024 under that specific regime.
Rental increases on property capped by a maximum increase of 6.94% in 2024.
Housing transfer tax incentives – Exemption from personal income tax and social contributions on income in kind relating to the provision (by way of rental or subletting) of housing to employees by their employer. The measure does not cover financial subsidies for the payment of rent and will be limited to the exemption amounts provided for the Affordable Rent Support Programme. Tax and contribution exemptions are also provided for amounts mobilised under the Labour Compensation Fund (FCT) for workers’ housing solutions.

Photo: Lusa – JOSÉ SENA GOULÃO