“Income tax exemptions (IRS) specifically for young people increase fiscal costs and are distortive, with no clear evidence of effectiveness in curbing youth emigration. It is advisable to reverse them,” reads the conclusion of the IMF’s post-adjustment programme mission report, drawn up following a technical visit to Portugal in recent weeks.

Exacerbation of imbalances

Similarly, the Fund considers that measures to support young people in purchasing their first home — such as public guarantees and tax exemptions — “are not subject to income criteria, whilst at the same time boosting demand and contributing to exacerbating imbalances”.

Advocating a simplification of the Portuguese tax system and a reduction in exemptions “to increase revenue and improve efficiency”, the IMF considers that “the numerous exemptions, reduced rates and special schemes narrow the tax bases and increase compliance costs, especially for small and medium-sized enterprises (SMEs)”.

They do not benefit those who need it

In this context, the IMF also argues that “reduced VAT rates and exemptions are not well targeted and often benefit higher-income households” – citing the reduced VAT rate in hotels and restaurants as an example – and therefore “should be eliminated”.

Furthermore, it considers that “harmonising the [current] corporate income tax (CIT) rates according to company size would remove a disincentive to business growth”.

Response to the energy shock

As for the response to the energy shock caused by the war in Iran, the IMF warns that “it must be carefully designed”: “While temporary and targeted support may be justified, higher energy prices should continue to be passed on to end-users in order to preserve price signals and reduce demand”, it argues.

It therefore rejects a broad-based tax cut (e.g. on VAT) and considers that the reduction in the special tax on fuel consumption (ISP) “should be replaced by well-targeted support for lower-income households and struggling but viable firms in energy-intensive sectors”.

Housing

On the housing front, the IMF believes that “reducing imbalances in the property market requires supply-side measures”, identifying as a priority “facilitating the construction of new homes and encouraging owners of vacant properties or short-term rentals to sell or let their properties on a long-term basis”.

Support for low- to middle-income households, meanwhile, should be based on targeted housing subsidies and increased social housing availability.

“Rebalancing property taxation, shifting from transaction taxes to recurrent taxes, would encourage mobility, whilst taxation of under-utilised housing must be strictly enforced”, it states, highlighting the need to “facilitate the enforcement of contracts to improve the rental market”.

Labour market

With regard to the labour market, the IMF highlights the importance of reforms that boost productivity growth, emphasising that this is “the key to bringing living standards in Portugal closer to those of its eurozone peers”.

Attributing the “weak productivity growth” in Portugal to “insufficient investment, both in human and physical capital, exacerbated by a restrictive business environment”, it also advises greater labour market flexibility: “Making permanent contracts more flexible will encourage their wider use, reduce labour market duality and help improve the allocation of resources to the most productive sectors or firms,” it states.