Government introduces new measures despite warnings of returning to deficit
Predictions from the Bank of Portugal, the European Commission, and the Council of Public Finances (CFP) regarding a potential return to deficit have not stopped the government from advancing further measures with negative budgetary impacts.
Despite warnings from multiple institutions that Portugal may face a public deficit this year or next, the government has decided to challenge these pessimistic forecasts by introducing two new measures with significant negative budgetary impacts that have not yet been included in projections.
The measures were announced by the Prime Minister during the State of the Nation debate on Thursday and approved at Friday’s cabinet meeting. They include a one-time top-up payment of between €100 and €200 in September for all pensioners receiving monthly pensions below €1,567.50, and reducing the Corporate Income Tax (IRC) rate from 20% to 19% next year, aiming to bring it down to 17% before the end of the current term.
These two measures are expected to significantly impact the state budget. According to official figures from the Ministry of Labor and Social Security, the pension supplement will increase public spending by €399 million.
As for the IRC tax cut, Finance Minister João Leão estimates that this 1 percentage point reduction will reduce tax revenue by €300 million annually, with the effects becoming visible from 2026 onwards and continuing through 2027 and 2028.
These figures may further highlight the divergence between the government and other institutions regarding the assessment of Portugal’s current public finances.
The government remains committed to its target of achieving a 0.3% budget surplus of GDP this year and 0.1% next year. However, the Bank of Portugal, the European Commission, and the CFP project that the 2025 budget will be nearly balanced (between -0.1% and 0.1%), and a deficit of 0.6% to 1.3% of GDP will occur in 2026.
More importantly, these three institutions did not factor in the recently announced measures when making their forecasts, nor did they account for another post-election policy — a further reduction in the Personal Income Tax (IRS) rate, which is expected to cost €500 million in fiscal impact this year.
In other words, if other conditions remain unchanged, the institutions’ budget balance forecasts for this and next year — already more pessimistic than the government’s — could become even more negative.
However, the government has argued that these measures are feasible precisely because Portugal’s fiscal situation allows for them. It claims that the data it holds shows that even with increased spending and reduced revenue, the set budget balance targets will not be affected.
Currently published public account data supports the government's position. According to the National Institute of Statistics (INE), Portugal’s budget balance remained positive at 0.2% of GDP in the first quarter of this year, outperforming the same period last year.
A new stimulus for the economy?
In addition, the government hopes the economy will respond positively to these measures, helping offset part of the budgetary impact through increased tax revenue.
Based on past experience, the most likely scenario is that economic growth may accelerate toward the end of the third quarter and the beginning of the fourth quarter due to the additional fiscal stimulus.
With more disposable income in September (e.g., adjustments to IRS withholding and pension supplements), Portuguese citizens are expected to increase consumption. This phenomenon is particularly evident among low-income individuals, who often have limited opportunities to save.
This aligns with the results seen from similar measures implemented last year. The IRS tax cuts introduced in September 2024 (which were larger than those in August 2025), along with pension supplements issued in October, clearly boosted private consumption and economic activity in the fourth quarter, leading to a 1.4% quarterly increase in Portugal’s GDP.
However, by early 2025, this positive effect had faded, and the Portuguese economy contracted by 0.5% in the first quarter.
As for the potential positive effects of the IRC tax cut, they are expected to appear in the medium to long term. The government is confident, even believing that increased tax revenues from economic growth could compensate for the initial losses. Prime Minister Montenegro stated during the parliamentary debate: 'We implemented a similar measure for the first time in 2024, and by year-end, tax revenue actually increased; I expect that even with a 1 percentage point tax cut this year, IRC revenue will not decrease. Let’s wait and see.'
Also optimistic, Finance Minister Leão emphasized during a press conference after the cabinet meeting: 'The reduction in IRC is very important for improving Portugal’s economic competitiveness,' and added that it would make 'investing in Portugal more attractive.'
'For millions of pensioners, today is a good day; for businesses, it’s also a good day, so it’s a good day for Portugal,' said Minister of the Presidency Luís Goes Ramos.
The pension supplement to be paid in September will apply to recipients from the social security system, the General Retirement Fund (CGA), and bank sector pensioners, covering a total of 2.3 million people — more than 90% of the retired population. Around 1.5 million of them receive monthly pensions below €522.50, while the overall average pension is around €450.
of the retired population. Around 1.5 million of them receive monthly pensions below €522.50, while the overall average pension is around €450.
(Reported by Diogo Cavaleiro and Raquel Martins)