Government plans to lower tax burden in 2022

  • ECO News
  • 12 October 2021

The figures present in the proposed State Budget for 2022 (OE2022) signal a decrease in the tax burden next year. In 2020 it reached a new all-time high of 35.3% of GDP.

The figures present in the proposed State Budget for 2022 (OE2022) point to a decrease in tax burden next year. The OE report is silent on the tax burden trajectory, which reached an all-time high in 2020 of 35.3% of GDP, but the available data allow us to understand what is implicit in the government’s accounts.

“If GDP grows as is forecast, the tax burden will decrease,” António Costa promised at the end of August this year, in an interview on RTP, where he spoke of tax relief measures for the middle class and young people. The “IRS package” included in the State Budget for 2022, which includes splitting the tax brackets, extending the increase in the deduction for dependents from the second child onwards, extending the “Regressar” programme and expanding the Youth IRS, translates into a loss of tax revenue of €205 million.

In addition, the State Budget for 2022 proposes to create a recovery tax incentive for companies to invest more, which will result in a €150 million loss in corporate income tax revenue, a decrease in autonomous corporate income tax and the end of the special payment on account (PEC), which together represent €15 million less in taxes.

The government’s accounts point to the materialisation of the prime minister’s words: GDP is revised upwards and the economy will grow at a faster rate than the growth in tax revenue and social contributions, the two elements of the tax burden.

Nominal GDP will grow by 6.9% in 2022, above the 4.4% growth in tax revenue and the 4.5% growth in social contributions. This means that the weight of this revenue in GDP should fall, leading to a drop in the tax burden between 2021 and 2022: from 34.9% of GDP to 34.2% of GDP, respectively.

It is uncertain that these are the tax burden numbers that the government has in mind since the Ministry of Finance is silent on this indicator in the State Budget 2021 report, and there are several ways to calculate it.

More difficult, with the data available at the moment, is to know whether the tax burden will fall between 2020 – whose data does not appear in the OE, the government has chosen to compare with 2019 – and 2021, since these government figures are not directly comparable with those of Statistics Portugal (INE).

Contrary to what was expected by the government, the tax burden increased in 2020 to 35.3% of GDP, according to INE in the latest revision of the national accounts. This was a new high, above the previous peak of 34.7% of GDP reached in 2018.