Cuts to income tax: experts back the measures but warn situation in Portugal may worsen
This Thursday, the Portuguese government will formally decide, in the Council of Ministers, to grant the bonus for pensioners and a cut in IRS income tax brackets for workers. Pensioners with pensions of up...
This Thursday, the Portuguese government will formally decide, in the Council of Ministers, to grant the bonus for pensioners and a cut in IRS income tax brackets for workers.
Pensioners with pensions of up to 1,611 euros will receive an extraordinary top-up in December, between 100 and 200 euros, totalling 400 million euros.
IRS will be reduced up to the sixth bracket, in an amount of up to 400 million euros. But because of the progressive scale, the higher brackets will also be affected. The measure will be applied from November.
In parliament, Prime Minister Luís Montenegro said the IRS cut is intended to "support the middle class".
"Families can't take any more"
The Portuguese government (the centre-right AD coalition) made these announcements last week, during a debate on a motion of no confidence, which was rejected. Before that, the prime minister defended the cabinet's social and economic policy, including measures in response to rising fuel prices.
The previous day, diesel in Portugal had reached its highest price ever and petrol its highest level since the invasion of Ukraine. This time, the rise was met with protests. In a go-slow march towards Galp's refinery in Sines, placards read "families can't take any more".
Economist João Rodrigues dos Santos regards these measures as legitimate, as a "give-back to those who need it most", but disagrees with the method.
"I consider these to be budgetary policy measures and that they should be more structural in nature, reflected in the State Budget," says the professor who coordinates the academic area of Economics and Management at the European University.
**"**The government surely has good intentions, but I think this may not be the best way to conduct budgetary policy. Public policy cannot depend every year on whether there is money in the coffers or not, can it?" he asks.
Rebate mechanism
And, in fact, there is money. Tax lawyer Tiago Caiado Guerreiro points out that, with prices rising, the state has collected more tax.
**"**The VAT take on fuel goes up as fuel prices rise. Why? The taxable base on which it is levied increases in size," says the tax expert, referring to the consumption tax.
**"**This is just one more reimbursement mechanism, in this case via IRS, with which I could not agree more," argues Tiago Caiado Guerreiro.
"And then the bonus for pensioners is a somewhat political measure, but it is not something that shocks me, given the low pensions that exist in Portugal," the tax lawyer concludes.
João Rodrigues dos Santos also agrees that the state has taken in more VAT revenue from the rise in fuel prices, an amount that, "according to the government, could come to around 700 million euros". But he also recalls the reduction in the Tax on Petroleum Products (ISP).
"It is true that this revenue should be neutralised through cutting ISP, precisely to prevent the state from benefiting fiscally from higher fuel prices," he explains.
Even so, the increase in VAT receipts covers other products beyond fuel.
"Ultimately, if the state collects more revenue because prices have gone up and families are paying more for the same goods and services, it seems legitimate to me that part of that extraordinary fiscal windfall can be returned to taxpayers."
High taxes and many brackets
Both experts agree that taxes are too high in Portugal.
"Anything that serves to lower taxes or put money into people's pockets, I usually agree with," says Tiago Caiado Guerreiro.
The tax lawyer argues that IRS "is extremely high in Portugal. In other words, people who work are heavily penalised by taxation".
João Rodrigues dos Santos, for his part, advocates a simplification of the IRS system.
"There could be fewer brackets, with less steep progressivity, because the current setup is absolutely stifling," he argues.
And cutting VAT?
The opposition has been advocating another path: VAT cuts. The Socialist Party (PS, centre-left) is calling for zero VAT on essential goods, and Chega (far right) also says it intends to put forward a proposal along these lines.
But Tiago Caiado Guerreiro warns that such a measure could be difficult to implement.
**"**Technically, cutting VAT is very difficult, because it would be reduced to a lower band, which would mean a loss of revenue that the government would not be able to manage. You cannot bring the rate down from 23% to 22% or 21%, as I saw suggested in some reports; that is not possible," says the tax lawyer, adding that in future this budgetary room for manoeuvre may not exist.
"I think that, given the international circumstances and the rise in the price of oil, economies in Europe and elsewhere in the world will probably start to slow. And the tax take will probably not stay on a permanently upward trajectory."
European Union countries set their VAT rates, but these have to be framed within the EU directive on the tax (source in Portuguese).
"A cut in VAT, for example from the maximum rate to the intermediate rate or even the minimum rate, would depend on authorisation from the European Union," explains João Rodrigues dos Santos, adding that one of the disadvantages of VAT is that it is a non-differentiated tax.
"VAT is a tax that affects everyone in the same way. Those who need more support and those who do not need support."
Nevertheless, this economics professor believes that such a measure could end up being "an inevitability", an exception in a scenario of rising fuel prices that "will necessarily spread to the rest of the economy".
"I would say that a generalised VAT reduction, above all on basic necessities, is not a measure I consider unreasonable. On the contrary, it may well be the most effective measure, because it is across the board and the vast majority of Portuguese people have very low wages," he explains.
"I think this will take years"
Right now, the international climate is not the most promising. Last Thursday, in Frankfurt, the European Central Bank (ECB) once again raised interest rates. At the time, ECB president Christine Lagarde warned of inflationary pressures due to the conflict in the Middle East.
The two experts, interviewed by Euronews, are equally pessimistic about the future.
"I do not know whether fuel prices will ever fall back to the levels they were at before the war, given all the instability that exists in the Middle East and other parts of the world," says Tiago Caiado Guerreiro, referring to the war in Ukraine and to blockages in the Straits of Hormuz and Bab el-Mandeb.
"We are in a period of great instability; I do not think this will be resolved quickly. And I never believed this war would end quickly, I think this will take years," he adds.
In fact, the crisis is dragging on. And not only is it dragging on, it is deepening," argues João Rodrigues dos Santos.
The European University professor thinks the government also has this scenario in mind.
"With a budget surplus of more than 2 billion euros, the fact is that this government has remained uncompromising in relation to its strategy. And, from my point of view, it has remained uncompromising because it has always understood that this crisis, which we have now been living through for more than six months, was here to stay."
The economy is growing, but wages are low
In parliament, the Portuguese prime minister said these measures "are only possible thanks to the economic performance of Portugal and the government's sound financial and budgetary management".
Luís Montenegro also described the growth of the Portuguese economy as having "the best economic performance in Europe and the biggest employment growth in Europe".This despite the fact that, according to Eurostat, it was not the country with the strongest growth in gross domestic product (GDP) in the second quarter, but rather the seventh, together with Cyprus (up 0.8%).
"I think we are in a good phase; we are among the six or seven best in the European Union and that usually does not happen, as you know, we are normally closer to the bottom," says Tiago Caiado Guerreiro, highlighting the contribution of some areas, such as tourism.
But the tax lawyer also says this is no reason for excessive optimism.
"We are indeed in a very reasonable period of growth, compared with the European economy, which is rather sluggish. It is one of the slowest-growing economies in the world. So there is no reason to get euphoric about it."
João Rodrigues dos Santos points to the low wages paid in Portugal, which means that tinkering with IRS will not solve families' income problems.
"We must not forget. In Portugal, 75% of those registered with social security have wages of up to 1,000 euros," the professor says.
