The pure tax burden (taxes only) or in a broad sense (including social security cuts) will increase over the next fifteen years, regardless of the scenario adopted for the Portuguese economy (unfavorable, favorable or base case, i.e. with less tax burden) . more or equal migration and demographic rejuvenation of the country).
According to the Public Finance Council (CFP) study on “Budgetary Risks and Sustainability of Public Finances”, which covers the period from 2023 to 2037, this increase in the tax burden will generally be more painful or palpable than indicated in the figures. in recent years, because this will not be accompanied by an increase in employment.
On the contrary, even with more ‘productive investments’ every year and a positive migration impulse (more foreign people coming to live, work and pay taxes in Portugal), the aging of the population seems inexorable, dragging down employment. should start to collapse from 2027 and in the following decade.
Growth of the economy (gross domestic product or GDP) as a whole will suffer, developing at a weak pace of only 0.7% in the last five years of this CFP projection (2033-2037). It is less than half of the 2023-2027 average (1.8%).
Despite the trend towards budget deterioration, which is seen and felt negatively by many households and businesses, the increase in the level and weight of taxes on taxpayers living in Portugal seems to be a decisive help in keeping the public debt on a downward path hold. it enables governments of this near future to provide ‘primary balances’ [sem contar com a despesa em juros] positive and relatively high in these years,” the CFP states in the study.
This is the base case and it is highly desirable that this happens so that the country does not fall back into a debt crisis, says the entity led by Nazaré Costa Cabral.
A weakening economy
The new CFP scenarios indicate that the country will have very busy public finances and could very likely achieve a reduction in the debt ratio to almost 87% of GDP in 2037, which could create successive budget surpluses of a relevant size .
However, the economy will no longer create jobs, but the state will have to guarantee, according to the CFP, a course of ‘fiscal consolidation’, keeping expenditure under control and ensuring that the weight of revenues in taxes continues to grow.
“Portugal is in a relatively unfavorable position in the eurozone and has a debt burden that requires a consistent continuation of consolidation policies,” the Council said.
So “based on the macroeconomic scenarios developed by the CFP, the weight of tax and premium revenues should increase until the end of the projection horizon”, regardless of the scenario, from the most severe to the most optimistic.
“This growth, which should result from the increase in the weight of most of the components that make up tax revenues and premium income (direct and indirect taxes and social contributions), indicates a significant degree of resilience of this whole considered in the light of different macroeconomic and demographic scenarios”.
Looking only at the pure tax burden (taxes only), the Council states that “it appears that the weight of tax revenues in GDP would, in the base case, increase in all time intervals considered, with the prospect that its weight in the last five years [2033-2037]amounted to 25.9% of GDP (+1 percentage point or pp compared to the period 2020-2022)”.
The CFP says that “the forecast increase would translate into IRS revenue growth slightly above expected performance for the most relevant macroeconomic base (reward) due to the progressive nature of the tax.” And it reflects “the performance of the IRC, which should reflect growth in gross operating surplus.” [uma medida próxima do conceito de lucro] above expectations for nominal product in most years surveyed”.
In the field of indirect taxes, the CFP expects a “slight increase in their weight in the product”, mainly due to “the expected development of private consumption, which should grow faster than GDP after 2027.
“In terms of government spending, the burden of an aging population, especially pensions and health care, is expected to exert strong pressure on the budget balance,” he explains.
It is better not to let the debts increase
As mentioned, the CFP clearly emphasizes that Portugal must do everything to ensure a reduction in the debt burden and that the country will nevertheless not reach 2037, when the ratio will remain above 87%.
“A downward trajectory of the government debt ratio in the base case shows that conditions exist for the sustainability of Portuguese public finances so that political decision-makers continue to take the necessary measures to achieve a sufficient primary surplus,” the financial experts said .
“As the period following the end of the adjustment program in 2014 shows, the favorable financing conditions that prevailed, combined with fiscal discipline, created favorable dynamics for debt reduction.”
Therefore, this report concludes that “countries whose governments choose to pursue fiscal policies that repeatedly and persistently neglect achieving a primary balance sufficient to allow a reduction in the debt ratio may face significant risks, partly due to the potential feedback loop between high government debt and the risk premium, especially in the case of countries with already relatively high debt balances”.
“Despite the downward trend in debt levels, Portugal remains in fact in a vulnerable position due to the still high ratio of public to private debt levels, and is thus subject to the fact that, in the absence of a favorable situation and in the event of Idiosyncratic events significantly increase financing costs,” the same study warns.
The cost of NATO membership
And speaking of pressure and costs, the CFP reveals a new source of budgetary threat. It says that the Portuguese state may have to spend an additional two billion euros per year on the national defense budget until 2037 to converge on the target it agreed with the North Atlantic Treaty Organization (NATO or NATO, in English), of which Portugal is a member.
According to the Council, Portugal has spent on average the equivalent of 1.4% to 1.5% of GDP on the military sector in recent decades, a value well below 2% of GDP, a target with which the PSD government – CDS has committed to an agreement concluded in 2014.
More money for expenditure “not only because of the new geopolitical context (e.g. wars in Ukraine and the Middle East, cyber security issues), but above all because of the international commitments that Portugal has entered into in this area”, specifically the above-mentioned target of 2% of the gdp.
This could therefore lead to pressure on public expenditure, as the sustainable allocation of 2% of GDP to national defense would require an annual increase in this expenditure of around 0.6 percentage points (pp) of GDP. on average by approximately 2 billion euros per year,” the GVB concludes.
Source: DN
