The 10 hurdles strangling Portugal’s economic growth and productivity

Text: Chris Graeme Photo: Fernando Bento (ICPT)

Low productivity is one of the main stumbling blocks to economic growth in Portugal according to Portugal’s Minister of Finances, Joaquim Miranda Sarmento.

During his 20-minute address to the International Club of Portugal (ICPT) at the Sheraton Lisboa Hotel & Spa on Monday – followed by a series of questions and answers from the floor – the minister said that low productivity had plagued various governments over the past 25 years in a country with a relatively weak economic performance when compared to other European countries on the same level of economic development; in other words the cohesion countries. ((Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia)

These countries, which were Portugal’s direct competitors for Foreign Direct Investment and the export of goods and services, were trying to catch up with the more developed countries like France, Germany, and the Netherlands.

And Portugal’s economic development, growth and productivity, although having distinct phases when looking back at the last 25 years had been “quite disappointing” and not that different from countries like Greece or Italy.

“This has happened because our main problem is low levels of productivity in terms of work, capital, technology, and management, and this has led to low levels of economic growth,” said the minister.

“When we look at Portugal’s GDP over the past few years, more particularly after the adjustment phase between 2010 and 2014 (the period of the Great Recession, the Banking Crisis, the Troika years, and Sovereign Debt Crisis), Portugal’s economy managed to recover from 2013, but only achieved the level it had in 2007 by the end of 2018 – simply recovering the significant fall in
GDP that Portugal suffered between 2007 and 2013,” he continued.

Then, Miranda Sarmento said that Portugal had been hit by the pandemic with growth at the end of 2022 reflecting the recovery from the pandemic.

When compared to 2000, in terms of GDP levels, it was 20%-25% in real terms above the level of 2000, but 25% over 25 years meant an average growth of just under 1% with Greece only having a worse economic performance than Portugal.

Portugal lagging behind EU cohesion countries

When looking at Portugal’s potential GDP in the medium to long term, Portugal’s productive potential was relatively low at 2% and this had resulted in fairly low growth in production.

Over the past 25 years the annual percentage of productivity growth had been around 0.8% compared to 1.2% in Germany.

“We know that when countries with less advanced economies are well managed, they tend to have higher productivity than more advanced economies (the so-called catch up effect), with the other cohesion countries over the past 25 years often enjoying growth of 2% and above”, said Miranda Sarmento.

“When we came into office one year ago our plan was to get Portugal’s economy growing more, and with this increased salaries, and more tax revenues but at lower tax rates, enabling public services and social security and services to be maintained and improved”, said Sarmento Miranda.

The minister said that looking at more recent figures from last year to date, the economy grew 1.9% – above all the estimates that had been made. (For 2025, the Portuguese economy is projected to grow by 2.2%.

This growth has been driven by factors like the implementation of the Recovery and Resilience Plan (RRP) and policy measures impacting household disposable income. Nevertheless, it was “clearly little” and should have grown to close to 3%.

The government had estimated in the State Budget for 2025 a growth of 2.1% for this year, although the Aliança Democrática (a coalition of centre-right political parties) foresees GDP growing 2.4% because of the macroeconomic situation outlined in its election manifesto.

However, he admitted that the month-on-month fall in growth in 1Q of 2025 after enjoying the highest rate of growth in the European Union (EU) in 4Q of 2024 should “come as no great surprise.”

“The Portuguese economy should grow close to 3% with a level of potential GDP also close to 3%”, he said.

The Portuguese economy grew 1.6% in like-for-like terms in the first three months of the year and contracted 0.5% compared to the previous quarter according to a back-of-the envelope estimate from Portugal’s National Statistics Institute (INE) published on Friday.

“In the first quarter of 2025, the preliminary numbers show that excluding the first quarters of 2020 and 2022, and the periods of the Covid-19 pandemic and subsequent lockdowns, the Portuguese economy “had never grown so much QoQ as it had in the last quarter of 2024 since Portugal joined the Euro Zone, and this, to a certain extent, is (now) stabilising within the medium and long-term perspective”.

Portugal’s 10 main hurdles

The Minister of the Economy said the government had identified 10 main constraints that had hampered Portugal’s growth in productivity and therefore growth in GDP.

It was in these 10 areas that were “strangling” the Portuguese economy that the government had been acting on, with some success.

The biggest was the lack of labour, particularly qualified labour in different sectors such as agriculture and construction but also hospitality and industry.

On this the government had acted on migration which had been “out of control” (It had risen from around 400,000 legalised by Portugal immigration office AIMA – a structure that did not have the minimum capacity or power to deal with the situation – to over 1 million in just a few years).

But Portugal needed labour for different sectors with different qualifications, and so the government began a process of striking agreements with the main business sector associations to hire people with job contracts and ensure they had housing and healthcare and social security provision. “We have initiated a significant change to address a very serious problem that the country had in terms of migration control,” said Joaquim Miranda Sarmento.

Within that area of labour, the government had made efforts to retain qualified young graduates, as well as as attracting qualified young people from overseas. “To give an idea, half of the young graduates that are doing business, finances and economy Masters courses at our universities are from overseas, and of this 50% a third are Germans. “However, we can’t retain these graduates for our labour market” (because of low salaries), the minister lamented.

To counter this, the government has introduced tax breaks for young people (IRS Jovem) and to retain young people the government had identified three measures: increase salaries (and this in the long term could only be achieved by increasing productivity).

The minister said that only the larger companies could pay higher salaries. The gross average added value of a micro company in Portugal is around €25,000, whereas it is €80,000 for a large company.

Second, Portugal needed to provide affordable housing, and on this the government was acting on the supply side by providing public housing, changing the land law (Lei dos Solos) which aims to increase the supply of building land at reasonable rates, and on the demand side providing exemptions and reductions in property tax (IMT and Stamp Duty) for young people buying their first home together with a public guarantee securing 100% of their mortgages.

Also by approving the IFICI or new reworked Non-Habitual Residents Regime and attendant tax benefits that cover employment and self-employment income from activities related to science and technology, research and development, entrepreneurship, start-ups, and sectors fundamental to the Portuguese economy.

The second hurdle was to do with contextual costs (the cost of doing business) and bureaucracy.

“We have taken measures to modernise the administration, not only in the construction sector, but for companies, and in January advanced with a significant tax simplification regime to modernise and simplify our tax system, as well as payments so that we can pay suppliers within 30 days”, said Joaquim Miranda Sarmento.

The third hurdle was economic and fiscal justice with the government planning to improve and accelerate administrative and fiscal courts which “today are a significant barrier to the capacity of companies to offset disputes with the tax authorities and deal with insolvencies and other litigations.

The fourth hurdle had to do with the labour market and social insurance. “We’re made an agreement with unions. We have an excessive rigidity and very high precariousness so we have to improve the labour market and provide security for those entering the market (also important for attracting young people) and create a single social benefit that brings together all of the social benefits to increase their efficiency and eliminate what today is a distortion in the labour market so that people that are receiving social benefits when they do start working do not suffer a loss of net income does not end up being less than the social benefits that they had been receiving.

“We have this plan for the next few years to create a single social benefit to have an incentive to people not in work to return to the labour market with this social support”.

The fifth hurdle was a low level of innovation and know-how. “Our universities in the area of management and finance, engineering and sciences are top institutions with five universities in the Financial Times European ranking, three of them with triple accreditation (ISEG, Nova and Católica) and only 1% of universities have this accreditation”, said the minister.

“What is missing is that some of these universities are ahead of the others (Aveiro, Minho or Leiria), so we need more integration between the universities and polytechnics with industry and companies so as to create better levels of innovation and know-how.”

The sixth hurdle was that Portuguese companies were small and can’t take advantage of economies of scale, with large companies more than three times more productive than small ones, so we need to increase the size and scale of our companies and capitalisation since Portuguese companies have had a high level of debt from 2010 to 2025. Portugal lacks large companies”.

Out of around 800 large companies with more than 250 employees (Portugal actually needs 1,500) these represented only 7.9% of the total, employing around 40% of the total workforce and responsible for 63 of turnover and nearly 60% of Gross Value Added.

Portugal’s companies also needed to increase their internationalisation (although today just under 50% of Portugal’s companies are export-orientated), nevertheless compared to other EU cohesion countries, Portugal was one of the countries that least exported their goods and services overseas.

The minister said that the government has taken various measures and had improved the way that Portugal’s development bank (Banco do Fomento) operated. “In fact for 10 years the bank was not working and we’ve managed to get it working and giving support to Portuguese companies.”

A €120Bn bureaucracy with 900,000 employees

The seventh hurdle was high public expenditure compared to other cohesion countries in the European Union in terms of public investment and expenditure.

“We have initiated a reform of our public administration, joining administrative services in the former Caixa Geral do Depósitos building (on Lisbon’s Avenida João XXI) whole merging various government general-secretariats into one general secretariat of the government while at the Ministry of Finances the government initiated a reform to the financial administration of the State with the Ministry of Finances now having two main areas: revenues and taxes which operate better; and public service and expenditure. “If Portugal had made the same investment on the expenditure side and the entities that control public expenditure, we wouldn’t have had the magnitude of budgetary problems that plagued us in the past.”

The Minister of Finance said that the State was also carrying out a deep-down reform of State administration – one that was made up of 5,000 entities, that ranges from the Santa Maria Hospital (with a budget of €1Bn per annum) to a parish council employing 80 people.

All these 5,000 entities employed around 900,000 working directly and indirectly for the State (in a country of just over 10 million people), including State-owned public companies, all with a level of expenditure of €120Bn.

“This leviathan is managed financially by patrimonial and human resource with regulations from the 1980s and technology from the 1990s.

The eight hurdle was low level of private and effective public investment. “AICEP (Portugal’s overseas investment and trade bureau) had done a significant job to attract large investment in large industrial projects (Start Campus and electric vehicles at Autoeuropa) while increasing public investment to accelerate the execution of Portugal’s Recovery and Resilience Plan (RRP) and Portugal 2030.

The ninth hurdle was high levels of public and private sector debt. “We have to maintain budgetary surpluses (0.7% in 2024 compared to 0.1% in 2019 and a forecast of 0.4% for 2025 and 0.1% in 2026), while in 2026 Portugal would have to very careful with its spending because if it executed all of the RRP (€3Bn or 1% of GDP in loans rather than revenues), Portugal would have to maintain surpluses if it wants to reduce public debt by 4-5% per annum to end the decade with a public debt below 80%.

The 10th hurdle was the tax system. “Portugal’s tax system is complex, unstable, high cost, high levels of litigation, and has high marginal tax rates and too many tax brackets (particularly for the middle classes) compared to many EU cohesion countries and when we look at IRC both in terms of nominal and marginal tax rates we have among the highest taxes in the Euro Zone”.

The government had lowered IRC tax by 1% and will endeavor to reduce the tax rate by a further 3% to 16% by 2029 or €500 million per annum to reach the end of the mandate with €2Bn wiped off the companies tax burden. It is currently 21%.

In the question and answers session, a former Minister of the Economy, Manuel Caldeira Cabral asked the Minister of Finances why Portugal’s GDP had fallen QoQ, to which Joaquim Miranda Sarmento said that the actual data would be known at the end of the month, but stressed that the zero growth in internal demand which, despite everything, was reasonable given the very high growth in 4Q of 2024.

Slowdown in construction and fall in private consumption

Joaquim Miranda Sarmento also pointed to a probable slowdown in investment in construction, forecast by the INE because of the consumption in cement which had grown over 20% in November and December.

He also explained a projected contraction in private consumption and growth in private investment that was less than had been expected, while explaining that a growth of imports, could have to do with “a knee-jerk reaction because of the expected effects of the US tariffs”.

Taking stock of the government’s first year in power, the minister stressed that the government’s goal was to “increase productivity and make the economy grow more as a result, encouraging greater wealth creation, higher wages, and more tax revenues to enable the government to cut taxes.

According to data from the INE, GDP in turnover posted a YoY variation of 1.6% in the first quarter of 2025 after a 2.8% growth in 4Q of 2024.

And compared to the fourth quarter of 2024, Portugal’s GDP fell 0.5% in volume after a growth of 1.4% in the previous quarter.

According to the news agency Lusa, economists predict a slowdown in the economy, but not a particularly sharp one for the first quarter of the year, suggesting a YoY growth in GDP of between 2.4% and 2.8% in the first quarter and between 0.1% and 0.6% QoQ.

 

Photo: Portugal’s Minister of Finances, Joaquim Miranda Sarmento (L) with the President of the ICPT, Manuel Ramalho (R).