Portugal has undergone significant economic changes over the past two decades, undergoing a sharp deficit reduction plan to cut the cumbersome waste within its public sector by reforming its fiscal policy, tax rates, and welfare systems. Portugal’s economic performance since has held strong, with solid GDP growth over the coming decade; while not without its problems, with Portugal’s debt-to-GDP ratio remains high by historical standards, Portugal’s economic performance relative to other Eurozone countries has proved impressive.
Fiscal Policy
Portugal’s fiscal policy has been characterized by high public debt, which peaked at 132.9% of GDP in 2014. In response to this, the Portuguese government implemented a series of fiscal consolidation measures. These measures included spending cuts, tax increases, and structural reforms aimed at reducing the budget deficit and stabilizing the country’s debt-to-GDP ratio.
Portugal has a progressive income tax system, with rates ranging from 14.5% to 48%. The corporate tax rate is 21%, which is lower than the European average. In 2019, the Portuguese government introduced a new “green tax” on carbon emissions, aimed at promoting environmental sustainability. In addition to income and corporate taxes, Portugal also has a value-added tax (VAT) system, with rates ranging from 6% to 23%. The standard VAT rate is 23%. As part of the austerity agenda to cut the deficit, Portugal kept its progressive tax structure and implemented budget cuts and welfare reforms.
The government’s efforts have paid off, as Portugal’s budget deficit has decreased from 11.2% of GDP in 2010 to 0.2% of GDP in 2019. Additionally, the country’s debt-to-GDP ratio has declined to 121.5% in 2019, indicating a more sustainable fiscal position.
Economic Performance
Portugal’s economy has experienced significant fluctuations over the past two decades. In the early 2000s, the country experienced a period of economic growth, fueled by a boom in the construction sector and increased consumer spending. However, the global financial crisis of 2008 had a severe impact on Portugal’s economy, leading to a recession that lasted until 2014. Thanks to the fiscal reforms that cut its budget deficit, the Portuguese economy has made a gradual recovery, with GDP growth averaging 2.4% per year between 2014 and 2019. In 2019, the country’s GDP was €212 billion, and its GDP per capita was €20,622.
The Portuguese government has implemented several structural reforms to promote economic growth, such as reducing bureaucracy and improving labor market flexibility through its welfare reforms. However, challenges remain, such as the high level of public debt, which limits the government’s ability to invest in social welfare programs and infrastructure.
Ultimately, Portugal’s fiscal reforms through keeping taxes high and cutting public sector waste have contributed to its post-recession recovery from 2008. Portugal has since experienced modest economic growth, outpacing that of neighbouring struggling economies in Southern Europe.
Free Marketeer 