Government unveils State Budget 2025

Portugal’s State Budget for 2025 has been delivered to parliament with the government caving in to the PS opposition to some extent on a tax cut for young people to 35 and on IRC corporation tax.

The budget rests on three pillars with three political goals: push Portugal on the road to recovery, kickstart the economy, and fix the State.

However, the budget brings no changes that are needed to restructure the public sector, and tax cuts are far more modest and fall well short of the massive across-the board reductions initially pledged by the ruling Democratic Alliance coalition of parties (Aliança Democrática) in its election manifesto.   

In the new budget document the Youth Tax has been slashed to €525 million for next year while IRC tax has only been cut by 1% from 21% to 20% which will only bring positive benefits in 2026.

According to the Emigration Observatory, around 850,000 of people aged between 15 and 39 – or 30% – have left the country at some point and are currently living abroad due to poor working conditions and low wages. The youth tax policy was a bid to try and stem the continued flow of young talent overseas

Nevertheless, the government has not increased any taxes in this budget with the Minister of Finances, Joaquim Miranda Sarmento saying: “I don’t ever remember a budget that cut some taxes without raising others.”

That said, Portugal’s tax burden overall will still represents a whopping 37.5% of GDP in 2025, but   has been reduced by 3% on 2024 estimates.

“It is a budget that is good for the country, for the people, and seeks to solve problems”, he added.

A budget that would, he said, support government measures, encourage growth without sacrificing public services.

“The country is not currently in a position, either from the point of view of public services or the tax burden or the execution of the Recovery and Resilience Plan, to have very high surpluses,” he said.

However, the government’s surplus is expected to be 0.4% in 2024 and 0.3% in 2025 with a reduction in public debt to 95.9% this year and 93.3% next.

There are a number of measures focused in reducing the tax burden such as updating IRS tax brackets by 4.6% and reducing IRS on supplementary work.

There is an increase in the minimum salary to €870 in 2025 with a target for €1,020 in 2028.

There is also a reduction in tax for SMEs to 12.5% over three years to 2028.

Moreover, there is a cut in taxes on capital gains and dividends to help encourage company recapitalisation.

Overall, the government estimates that the main measures in the budget will have a negative impact of €2.6Bn on the budget balance sheet because of an increase in expenditure of €1.7Bn and a loss in revenues of €973 million. Even so, a modest surplus of around €500 million had been calculated in September this year.

The PS socialists are set against a policy of slashing corporation taxes with political and economic pundits speculating that it would abstain in the parliamentary vote.

That would mean that the bill would pass, even if all the other parties were to vote against it, warding off the spectre of another general election.

However, this budget is set against a backdrop of stubbornly high public debt despite it being expected to fall to 93.3% of GDP in 2025 and such high debt could limit investment capacity in strategic areas.

The government and the Portuguese economy will also continue to be heavily reliant on the Recovery and Resilience Plan – much of it still needing to be executed – and without it government revenues would have fallen considerably, which only reveals the real fragility of Portugal’s public finances.

The parliamentary vote on the budget will take place on 31 October.

Photo: Portuguese Minister of State and Finance Joaquim Miranda Sarmento (R) leaves after a press conference about the 2025 state budget at the Finance Ministry in Lisbon, Portugal, 10 October 2024. EPA/ANTONIO PEDRO SANTOS