Finance minister João Leão presenting the 2022 State Budget proposals on Tuesday Photo: MANUEL DE ALMEIDA/LUSA

Draft State Budget promises economic return to “pre-pandemic levels”

The Portuguese government delivered its draft State Budget for 2022 to Parliament on Monday, a day before presenting it officially to the nation. Providing a provisional blueprint for the year to come, the document promises to reduce taxes for the middle class and provide tax breaks for companies that match or increase the investments they have made in recent years. Public investment will also increase, and forecasts are for the economy to return to “pre-pandemic levels”.

If the government’s forecasts are correct, the economy will grow 4.8% in 2021 and 5.5% in 2022 after a significant 8.4% crash in 2020 due to the pandemic.

Public deficit is expected to narrow from 5.8% of the country’s GDP last year to 4.3% in 2021 and 3.2% in 2022.

Exports are due to increase 9.1% this year and 10.3% in 2022 after falling 18.6% in 2020, while imports are set to increase 9.4% this year and 8.2% next year.
Unemployment is also due to drop to 6.5% in 2022, the lowest mark since 2003.

In other words, the general outlook for Portugal’s future is looking bright after one of the darkest periods of its recent history.

But for this to become a reality, the government has included several measures in its draft budget to breathe new life into the national economy. However, the proposal will still be debated and is subject to approval by Parliament (see below).

For now, these are the general outlines of the proposed budget.

IRS income tax
Major changes are due to be applied to the country’s IRS income tax scheme. The number of income tax bands will be increased from seven to nine in 2022, the goal being to lessen the fiscal burden for middle-class families.

The current third and sixth tiers will be split into two separate bands.

The first of the two new tiers will include annual incomes between €10,732 and €15,216, which will be subject to 26.5% tax as opposed to 28.5%. The second new tier, encompassing annual incomes between €36,967 and €48,033, will now be subject to 43.5% instead of 45%.

The government says that these reductions alone will save Portuguese families around €150 million-worth of taxes in 2022.

Youth IRS
Further changes are planned for the State’s tax breaks for young adults (18 to 26, or up to 28 for those with a PhD). The regime is being extended from three to five years, providing youngsters with a 30% discount on their IRS income tax for their first two years of work. The discount is reduced to 20% for the third and fourth year, and finally 10% for the fifth and last.

Troika returnees
The government is also extending its ‘Regressar’ (Returning) programme for another three years, providing a 50% income tax break for Portuguese citizens who moved abroad during the ‘troika years’ and are looking to return to Portugal.

Private investment incentives
Meanwhile, in a bid to encourage private investment, the government will create a new support regime entitled Incentivo Fiscal à Recuperação (Fiscal Incentive for Recovery). It will be open to companies that match or increase their investments made in the last three years, which will be rewarded with tax cuts ranging between 10% and 25%, up to a maximum of €5 million. However, to benefit from this new regime, companies will be obliged not to carry out lay-offs or distribute dividends among shareholders for a three-year period.

Coming to an end is the controversial Pagamento Especial por Conta (PEC), a scheme which sees companies paying taxes to the State in advance based on their income from the previous year – no matter how much they are making that year. The measure has been criticised for years by opposition parties and business associations.
The new Fundo de Capitalização e Resiliência (Capitalisation and Resilience Fund), which was announced in July and will boast €1.3 billion to support companies affected by the pandemic, is also included in the draft budget.

Health sector
The government is also planning to invest “heavily” in the public sector.

The country’s admittedly fragile national health service (SNS) is due to receive a €700 million investment boost compared to 2021, bringing the total tally to over €13 billion in 2022.

State spending on health sector staff is due to increase to €5.2 billion, an extra €207 million compared to this year.
Also planned is the start of construction of four new hospitals until 2023 – Lisboa Oriental, Seixal, Sintra and Alentejo – as well as the continuation of necessary investments in the Hospital de Setúbal. As usual, no mention was made of the Algarve’s long-promised central hospital.

Wages
Also due to increase is the national minimum wage, with the goal being to reach the €750 target by 2023 compared to the current minimum wage of €665 (it increased by €30 this year).

Wages for public sector workers are also expected to rise 0.9%, with the government upping its investment in public sector salaries by 3.1% compared to this year.

Education
Investment in public education is also being beefed up with an additional €900 million, an 8.5% increase, to a total sum of 7.8 billion. Around 66% will go towards covering staff wages.

Pensions
The draft budget also includes an “extraordinary increase” of €10 per month for pensioners who receive up to €658, starting in August.

Property owners
Property owners will see few changes next year. Municipal property rates (IMI) will continue to be charged at 0.3% to 0.45% of the property’s value, with the percentage defined by each council.

The biggest change comes in the form of a deadline extension, as landlords will now have until February 15 to declare the rent they received during the past year – as opposed to the previous January 1 deadline.

Family support
The government has also committed to helping disadvantaged families. Starting in 2022, the government will provide poverty-stricken families with an annual subsidy of €840 per child until they turn 17. The subsidy will increase to €1,200 starting in 2023. Families with two or more children are also due to receive larger tax reductions. Starting in 2022, parents with a second child aged up to six will be entitled to a €750 IRS income tax deduction, a sum which will increase to €900 in 2023.

Transportation, culture and animal welfare
The government is also setting aside around €528 million for investments in the country’s national roads and railways, with a significant amount going to railways (€469 million).

Portugal’s culture sector will receive €644 million – although only €390 million will be made available to the sector as the remainder is channeled into State television and radio network RTP.

National airline TAP will receive nearly €2 billion this year and in 2022, which the government says will be “the last year” that it will ‘inject’ money into the airline.

Animal welfare was not forgotten. Around €10 million will be transferred to local councils and animal associations to promote animal well-being and sterilisation campaigns.

Government confident about budget approval
Finance Minister João Leão publicly presented the draft budget on Tuesday and said he was confident that it will be approved, although he later expressed the government’s openness to debate in an interview with RTP, just hours after left-wing parties PCP and BE, animal, nature and people’s party PAN and centre-right-wing party CDS-PP voiced their “displeasure” with the document. Social democrats PSD have not revealed their vote intention.

In other words, the budget that has been presented will almost likely not look exactly as it does now after it is scrutinised in Parliament and eventually approved.

What is a State Budget?
The State Budget is a document created by the government which presents its expected income and expenditure for the next calendar year as well as the measures that it intends to implement.

After being devised, the budget is presented to Parliament to be approved.

The voting process is divided into two categories: ‘generalidade’ (general) and ‘especialidade’ (specialty). In other words, Parliament initially votes to approve the general outline of the budget. It is then presented to the so-called ‘specialty commissions’ where each proposal is thoroughly scrutinised. After undergoing the proposed changes (if there are any), the budget is once again presented to Parliament where each article is voted on. Only after this process is completed is the final voting carried out.

After receiving the ‘green light’ from MPs, the document is presented to the President of the Republic to be promulgated.

The first proposal of the State Budget must be presented to Parliament by October 10 of each year. MPs have 45 days to discuss and approve the document, while December is set as the deadline for the President of the Republic to promulgate the so-called ‘Lei de Orçamento de Estado’ (State Budget Law).

By MICHAEL BRUXO
michael.bruxo@algarveresident.com