Lisbon is moving ahead with a package of tax relief and pension support, but economists warn that the measures may only offer temporary respite as global conditions deteriorate.
On Thursday, the Portuguese Council of Ministers is expected to formally approve a one-off bonus for pensioners and a reduction in the personal income tax (IRS) brackets for workers. Pensioners receiving up to €1,611 per month will get an extra €100 to €200 in December, costing the state around €400 million. The IRS cut, which will apply from November, will reduce rates up to the sixth bracket, also costing roughly €400 million. Because of the progressive scale, higher earners will also see some benefit.
Prime Minister Luís Montenegro, who leads the centre-right Democratic Alliance (AD) coalition, framed the IRS reduction as support for the middle class. Speaking in parliament during a debate on a motion of no confidence—which was rejected—he defended the government's social and economic policy, including responses to rising fuel prices.
The announcements came just days after diesel prices in Portugal hit an all-time high and petrol reached its most expensive level since the start of the war in Ukraine. The spike triggered protests, including a go-slow march towards Galp's refinery in Sines, where demonstrators carried placards reading "families can't take any more."
Experts weigh in
Economist João Rodrigues dos Santos, who coordinates the Economics and Management academic area at the European University, called the measures legitimate as a "give-back to those who need it most," but questioned the approach.
"I consider these to be budgetary policy measures and that they should be more structural in nature, reflected in the State Budget," he said. "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?"
Tax lawyer Tiago Caiado Guerreiro noted that the state has been collecting more tax as prices rise. "The VAT take on fuel goes up as fuel prices rise. Why? The taxable base on which it is levied increases in size," he said, referring to the consumption tax. He described the IRS cut as "just one more reimbursement mechanism, in this case via IRS, with which I could not agree more."
On the pension bonus, Caiado Guerreiro said it was "a somewhat political measure, but it is not something that shocks me, given the low pensions that exist in Portugal."
Rodrigues dos Santos acknowledged that the state has gained extra VAT revenue from higher fuel prices—an amount the government estimates at around €700 million—but he also recalled 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 explained. Still, he argued that returning part of the windfall to taxpayers is legitimate, since families are paying more for the same goods and services.
Both experts agree that taxes in Portugal are too high. Caiado Guerreiro said IRS "is extremely high in Portugal. In other words, people who work are heavily penalised by taxation." Rodrigues dos Santos called for a simplification of the system: "There could be fewer brackets, with less steep progressivity, because the current setup is absolutely stifling."
VAT cuts: a difficult path
The opposition has proposed an alternative: cutting VAT. The Socialist Party (PS) is calling for zero VAT on essential goods, and the far-right Chega party says it will put forward a similar proposal. But Caiado Guerreiro warned that such a move would be technically difficult.
"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," he said. He added that future budgetary room 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."
Rodrigues dos Santos pointed out that EU member states set their VAT rates within the framework of the EU directive on the tax. "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," he said. He also noted that VAT 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, he believes a VAT cut could become "an inevitability" in a scenario of rising fuel prices that "will necessarily" squeeze household budgets further. The debate comes as Portugal's economy shows mixed signals—employment growth leads the EU, but GDP claims have been questioned. Meanwhile, record fuel prices have already triggered road protests, and the government's ability to sustain relief will depend on global trends.
