IMF reviews low growth of the Portuguese economy and warns about IRS Jovem: “raises equity problems”
The International Monetary Fund (IMF) revised downwards the national economic growth forecast for this year, from 2% to 1.9%compared to the last projection in July. The entity predicts, in the report prepared under Article IV for Portugal presented this afternoon in Lisbon, that GDP (gross domestic product) will grow by 2.3% next year and 2% in 2026.
“Growth is expected to slow but remain robust in 2024, supported by exports, strong private consumption, driven by a resilient labor market and public investment under the PRR. Growth is expected to accelerate slightly in 2025 , as financial conditions gradually improve. In the medium term, an aging population, relatively low investment and moderate productivity will weigh on growth“, can be read in the report.
As for inflation (in this case the harmonized consumer price index, HIPC, which takes into account tourist spending and serves for European comparison), the IMF expects it to stand at 2.5% this year, at 2.1% last year. next year and remain stable at 2% in the following years. The unemployment rate is expected to fall to 6.5% this year, 6.4% next year and 6.3% in 2026, according to the same projections.
At a political level, the institution led by Kristalina Georgieva emphasizes that the parliamentary minority of the center-right AD coalition “can hamper policymaking and increase uncertainty” leading to increased risks to inflation, “particularly if wage growth continues to outpace productivity growth.” But he guarantees that “the resilience of the job market and the dynamics of tourism are also mitigating the risks”.
After the largest surplus in democracy achieved last year, the IMF predicts that the balance will remain positive, but is expected to shrink in the medium term.
Tax system review needed
In the 86-page document on the Portuguese economy, the IMF recommends a review of the tax system to simplify it and “significantly” reduce exemptions.
In this sense, he looks with doubts at the effectiveness of IRS Jovem: “Preferential age-based tax rates are costly and raise equity issues, while their effectiveness in reducing emigration is uncertain. The reintroduction of attractive tax rates for foreign professionals could attract more qualified workers, but it will further distort the tax system and could worsen housing affordability problems.”
IRS revenue as a percentage of GDP is lower than the euro area average, due to low wages, because the average rate is only “slightly lower” thanks to the progressive tax framework, can be read in the same document.
With regard to changes to the IRC, it is recommended that, “instead of reducing the base rate, priority should be given to reducing progressive and local rates [derramas municipais]which would help to bring the average CIT rate in line with the euro area average, while encouraging business growth”. The Government aims to reduce the general IRC rate from 21% to 15% by 2027.
Both measures will be negotiated with opposition parties with a view to approving the State Budget (OE) for next year, which will have to be delivered to the Assembly of the Republic on October 10th.
“In the medium term, as concerns about housing affordability subside, a property tax increase could be considered to increase revenues to bring them closer to the OECD average”, says the IMF, adding in the fiscal plan that “o carbon tax adjustment mechanism, suspended in September 2023, should return“.
Real estate bubble away
Another focus of this IMF analysis of national accounts was the Portuguese real estate crisis, noting that, for now, “the risks of a correction in the real estate market appear contained” and that “policies to increase housing supply would help alleviate pressures”. However, taking into account studies by the European Commission, it states that there is an overvaluation of house prices of between 15 and 30%.
Looking at the crisis in Portugal, it elaborates on two of the causes: the great demand for high-cost properties due to gold visa“probably reflecting the long period of low interest rates”, and the conversion of houses into short-term tourist accommodation. Two reasons why house prices in Portugal have risen 111% since 2015, well above the European average (42%), he highlights and which, together with the scarcity of supply, have led to half of the families had stopped being able to buy a house of average value.
Regarding the extent of the public guarantee given by the Government to young people under 35 years of age, who are looking for their first home to live in, the institution highlights that it will make it easier to obtain credit, but like all age-based measures, it is prone to problems of generational injustice.
The document was presented this afternoon in Lisbon by Jean-Francois Dauphin, IMF director for Portugal.
