Portugal’s government will formally decide on Thursday to grant a pensioner bonus and cut IRS income tax brackets for workers, while families keep paying through the nose for fuel and the state keeps counting the cash. Pensioners on pensions of up to 1,611 euros are set to receive an extraordinary top-up in December of between 100 and 200 euros, totalling 400 million euros. The IRS will be reduced up to the sixth bracket, in an amount of up to 400 million euros, and the measure will be applied from November.
The timing is hard to miss. The previous day, diesel in Portugal reached its highest price ever and petrol hit its highest level since the invasion of Ukraine, and 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." That is the country the cabinet is managing: rising prices, squeezed wages, and a government that answers with selective relief after the damage is already done.
The State Takes, Then Gives Back
In parliament, Prime Minister Luís Montenegro said the IRS cut is intended to "support the middle class." The government, the centre-right AD coalition, announced the measures last week during a debate on a motion of no confidence, which was rejected. Before that, Montenegro defended the cabinet’s social and economic policy, including measures in response to rising fuel prices. The choreography is familiar. First the pressure builds, then the cabinet presents a refund as if it were generosity rather than a partial return of what was taken.
Tax lawyer Tiago Caiado Guerreiro said the state has collected more tax as prices have risen. He said, "The VAT take on fuel goes up as fuel prices rise. Why? The taxable base on which it is levied increases in size." He called the IRS cut "just one more reimbursement mechanism" and said, "I could not agree more." He also said the pensioner bonus was "a somewhat political measure" but not shocking given the low pensions in Portugal.
João Rodrigues dos Santos agreed the state has taken in more VAT revenue from higher fuel prices, an amount that, according to the government, could come to around 700 million euros. He also recalled the reduction in the Tax on Petroleum Products, saying the revenue should be neutralised through cutting ISP so the state does not benefit fiscally from higher fuel prices. He said extra VAT receipts also cover other products beyond fuel, and that if the state collects more revenue because prices have gone up and families are paying more for the same goods and services, part of that extraordinary fiscal windfall can be returned to taxpayers.
Brussels Sets the Limits
The whole debate runs through the EU’s machinery as well. EU countries set their VAT rates within the EU directive on VAT, and Rodrigues dos Santos said a cut in VAT would depend on authorisation from the European Union. So even the most basic question of what gets taxed, and how hard, sits inside a continental framework built to police fiscal choices from above.
The opposition has advocated VAT cuts. The Socialist Party, which is centre-left, is calling for zero VAT on essential goods, and Chega, the far right, also says it intends to put forward a proposal along these lines. Caiado Guerreiro warned that cutting VAT would be difficult because it would reduce revenue and the government would not be able to manage it. He said, "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." He added that a cut from 23% to 22% or 21% would not be possible, and said future budgetary room for manoeuvre may not exist.
He said, "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." That’s the fiscal gospel of the age: revenue first, people second.
Low Wages, High Prices, Tight Budgets
Both experts said taxes are too high in Portugal. Caiado Guerreiro said IRS is "extremely high in Portugal" and that people who work are heavily penalised by taxation. Rodrigues dos Santos called for simplification of the IRS system, saying there could be fewer brackets with less steep progressivity because the current setup is "absolutely stifling." He nevertheless said a generalised VAT reduction on basic necessities could become an inevitability and might be the most effective measure because most Portuguese people have very low wages. He said, "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."
The article said the international climate is not promising. Last Thursday in Frankfurt, the European Central Bank once again raised interest rates, and ECB president Christine Lagarde warned of inflationary pressures due to the conflict in the Middle East. Caiado Guerreiro said he does not know whether fuel prices will ever fall back to prewar levels, citing instability in the Middle East and other parts of the world, the war in Ukraine, and blockages in the Straits of Hormuz and Bab el-Mandeb. He said, "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."
Rodrigues dos Santos said, "In fact, the crisis is dragging on. And not only is it dragging on, it is deepening." He said the government has a budget surplus of more than 2 billion euros and has remained uncompromising because it has understood that the crisis, which has been going on for more than six months, was here to stay.
Montenegro said the measures are only possible thanks to Portugal’s economic performance and the government’s sound financial and budgetary management. He also described the growth of the Portuguese economy as having "the best economic performance in Europe and the biggest employment growth in Europe," although Eurostat data showed Portugal was not the strongest GDP grower in the second quarter, but seventh, together with Cyprus, at 0.8%.
Caiado Guerreiro said Portugal is in a good phase and among the six or seven best in the European Union, helped by sectors such as tourism, but said there is no reason to get euphoric because Europe’s economy is sluggish. Rodrigues dos Santos pointed to low wages in Portugal, saying tinkering with IRS will not solve families’ income problems. He said, "We must not forget. In Portugal, 75% of those registered with social security have wages of up to 1,000 euros."