Portugal faces key test in unwinding fuel tax cuts

Portugal has absorbed lessons from the 2022 energy and inflation crisis, but the real test will come when it begins reversing fuel tax cuts, highlighting a critical moment for fiscal policy credibility and inflation management.

European policymakers — including leaders of the ECB, European Commission and IMF — have stressed that governments should avoid repeating past mistakes by limiting support measures to those that are targeted and temporary.

“In 2022, we were still bound by our previous guidance on asset purchases and interest rates when the energy shock hit. That prior commitment limited our flexibility to act. We are now prepared, if appropriate, to make changes to our policy at any meeting”, said ECB President Christine Lagarde during a conference in Frankfurt at the end of March, making it clear that “any fiscal responses to the energy price shock should be temporary, targeted and tailored”.

This view is shared by the head of the European Commission, Ursula von der Leyen, who has already warned that, “given the experience of the last energy crisis”, from which the institution has drawn “important lessons”, the proposals that Brussels will present on Wednesday to alleviate the current crisis “must be targeted at vulnerable groups, be timely, that is to say, swift – not a year from now, but immediately – and must be temporary”.

“They should be applied for a limited period and, if enshrined in law, there must be a guarantee of a timely exit from these measures”, von der Leyen said last week.

In the same spirit, IMF Managing Director Kristalina Georgieva recommended that, in the face of rising energy costs, governments “should provide targeted and temporary support to the most vulnerable”.

Portugal has broadly followed that approach with sector-specific aid, but will now have to demonstrate discipline when unwinding reductions in the fuel tax known as ISP.

The ISP cuts, introduced to cushion households and companies from rising energy prices, have become a central policy tool during successive shocks, including the recent surge linked to geopolitical tensions in the Middle East. However, maintaining these measures carries fiscal costs and risks prolonging inflationary pressures if not reversed in a timely manner.

The credibility of Portugal’s policy response will depend less on crisis management — where the country has gained experience — and more on its ability to normalise support without destabilising prices or growth. This is particularly relevant as new energy shocks risk pushing inflation higher again in the coming years.

In other words, the upcoming rollback of fuel tax relief will serve as a benchmark of Portugal’s fiscal discipline, testing whether temporary support can be withdrawn without undermining economic stability or reigniting inflation.