By Sergio Goncalves and David Latona
LISBON (Reuters) -Portugal’s centre-right minority government rolled out its first budget bill on Thursday, projecting a slight pick-up in growth and a small surplus despite the inclusion of tax cuts for young people and businesses, and wage hikes in the public sector.
Failure to pass the budget could lead to the collapse of the government, which took over in April, potentially leading to a third snap election in as many years.
The bill that Finance Minister Joaquim Miranda Sarmento sent to parliament included some concessions to the opposition, such as a smaller reduction in the general corporate tax rate to 20% from 21% now, to try to head off a political impasse.
“This is a budget that seeks to lower taxes for families, youth and companies … while promoting economic performance and betting on investment. It’s a cautious macroeconomic scenario. The Portuguese economy has enormous potential,” Sarmento told a news conference.
Aiming to stop the emigration of young people, those under 35 and earning up to 28,000 euros ($30,862) per year will be given a 100% tax exemption in the first year of work, gradually reducing the benefit to 25% between years eight and 10.
Filipe Garcia, head of Informacao de Mercados Financeiros consultants, said that the measure’s cost was close to 0.2% of GDP – half the government’s initial forecast – “which is good news because its effectiveness is highly debatable, so the less it weighs on the budget, the better”.
Income tax rates range from 13% to 48% now.
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.
Private consumption, which the Bank of Portugal expects to make up closer to half of GDP rather than the about two-thirds it has traditionally represented, is seen growing 2% next year after 1.8% in 2024.
GROWTH, SURPLUS
The bill sees the economy growing by 2.1% in 2025, which is more that double the euro area’s projected 0.8%, and forecasts a budget surplus of 0.3% of gross domestic product.
“It’s important that the country maintains balanced accounts with surpluses of around 0.2%, 0.3% in the coming years to reduce public debt,” Sarmento said.
He projected a debt-to-GDP ratio of 93.3%.
Tax revenue is expected to only slip to 24.7% of GDP in 2025, while total expenditure would rise to 45.2%.
With the help of EU funds, investment is expected to grow by 3.5% next year, up 0.3% after a 3.2% increase this year.
The government sees exports – which account for more than 50% of GDP – growing 3.5% in 2025 after 2.5% this year, despite the signs of Germany’s economic activity entering negative territory.
The EU absorbs around 65% of Portuguese exports of goods and services and Portugal is already feeling the negative impacts of a slowdown in some of its main EU trading partners, despite tourism being at record highs.
In the course of negotiations with the main opposition Socialist Party (PS) over the past few weeks, the government scrapped its initial proposal of a 15% cap on income tax for all young people and replaced it with the progressive scheme similar to what the Socialists wanted.
Although the talks ended without a deal, Prime Minister Luis Montenegro has said it is his “deep conviction” that the budget would pass, avoiding a potential crisis.
The PS only needs to abstain to allow its passage, something its leader Pedro Nuno Santos would not rule out on Wednesday.
(Reporting by Sergio Goncalves, David Latona and Patricia Vicente Rua; writing by Andrei Khalip; editing by David Evans, Alexandra Hudson)
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