Essential points in government’s proposed 2021 state budget

The Portuguese economy is expected to return to pre-pandemic levels in 2022 and in that year the budget deficit is expected to stay below 3% of GDP, complying with the Brussels rules that are currently suspended.

In the proposed State Budget for 2021 (OE2021), the government expects the economy to sink this year to a recession of 8.5%, a more pessimistic figure than the 6.9% drop forecast in the 2020 budget, still under the responsibility of the former Finance Minister, Mario Centeno.

The Finance team, now led by João Leão, expects the economy to grow 5.4 percent in 2021 and 3.4 percent in 2022.

If these forecasts are confirmed, it will also be in 2022 that Portugal will again comply with the rules imposed by Brussels on the budget deficit.

According to the budget proposal, the deficit is expected to reach 7.3% of GDP in 2020, 4.3% in 2021 and 2.8% in 2022.

The government debt ratio will also improve in 2021 to 130.9% of GDP after reaching 134.8% in 2020.

The strong recession in 2020 and the recovery expected by the government will also be felt in the labour market. So this year unemployment is expected to rise to 8.7%, falling to 8.2% in 2021.

It is on the basis of this macroeconomic scenario that the proposal of the State Budget for 2021 was presented on Monday, with Prime Minister António Costa ensuring that it is a budget that promotes the income and social support of the Portuguese.

“We will continue to promote the income of the Portuguese with lower pensions. The minimum amount of unemployment benefit will also be increased permanently to prevent those most affected by this crisis from falling below the poverty line. In total, the fiscal measures foreseen in this Budget will leave a further €550 million in the pockets of Portuguese families next year,” he said.

These are the main measures foreseen in the government’s budget proposal for next year:

Employment and social support

• Exceptional increase of the lowest pensions by €10, paid from August, which will cost €99 million.
• Raising the unemployment benefit threshold from the current €438.81 to close to €505, a measure costing €75 million.
• Creation of the Exceptional Income Support for Workers in response to the pandemic crisis, which will cover employees, domestic service and green receipt workers (zero hours contracts), with a minimum value of €50. A measure that will cost €450 million.
• Support for informal workers lasting up to six months is maintained.
• The revenue from the IMI Addendum and a part of the IRC will be channelled to the Social Security budget.

Health

• An extra risk allowance of up to €219 for health professionals working in areas dedicated to Covid-19, a measure costing €60 million.
• The hiring of 261 professionals for the National Institute of Medical Emergency (INEM) and 4,200 for the National Health Service (SNS).
• Respiratory protection masks and disinfectant gel will remain subject to the reduced VAT rate. The measure has an estimated cost of €23 million.
• Reinforcement of investment in primary health care units of the National Health Service up to €90 million.
• Waiving of the fees for primary health care, which will have a financial impact of €47.3 million.
• A sum of almost €26 million for the construction of the new Alentejo Central Hospital in Évora and €5.5 million for the tender for the construction of the Seixal Hospital in the Setúbal district.
• The companies will be able to deduct from their profits the donations made to EPE hospitals.

Education

• Hiring a further 3,000 staff in schools next year.
• Increase in the number of free places in crèches, covering children from families up to the 2nd income bracket, benefiting around 65,000 children. A measure costing an estimated €11 million.
• Primary and secondary education and school administration with a budget of over €7 billion, an increase of 7.1% compared to 2020.
• Scientific and higher education institutions will be exempt from paying VAT on activities related to containing the spread of Covid-19.

Housing

• The Institute for Housing and Urban Rehabilitation (IHRU) will receive €10 million for the restoration of State’s heritage property for housing purposes and €317.6 million euros for housing promotion policies.

Taxes

• VAT paid by consumers on accommodation, culture and catering expenses incurred during a quarter can be deducted from consumption in these same sectors during the following quarter. The measure has an estimated cost of €200 million.
• VAT paid on sports activities and fitness centres will now be partially deducted from personal income tax in a way similar to the deduction currently made for restaurant, workshop, hairdressing and veterinary expenses.
• The personal income tax withholding tax rates will be reduced in 2021 by the equivalent of €200 million.
• A permanent reduction in the VAT rate on electricity will save families €150 million next year.
• Houses taken from local housing or other business activity will no longer be subject to capital gains tax, even if they are not channelled into housing rental.

Businesses

• Offshore entities are excluded from public support created under the exceptional and temporary measures of the pandemic.
• Large companies that make a profit in 2020, make use of public support or enjoy certain tax benefits cannot lay off workers and will have to maintain their level of employment in 2021 as of 1 October 2020.
• The government has earmarked €500 million in guarantees for TAP so that the company can eventually finance itself on the market, in addition to the €1.2 billion already approved in loans.

Bank

• The Ministry of Finance announced that it would correct the proposed Budget as the report submitted to Parliament provided for a loan from the State to the Resolution Fund to capitalise the Novo Banco. After the correction, the proposed Budget would not have provided for any State funding to the Fund.
• The Banco de Fomento will be operational by 2020 and will channel part of the public policies aimed at improving the conditions for business investment.

Transport

• Funding of around €260 million for the Public Transport Tariff Reduction Support Programme (PART).
• The Environmental Fund plans to allocate more than €36 million to the Lisbon Underground to finance the expansion of the network and purchase new trains.
• €384 million investment in rail infrastructure: €147 million for the Southern International Corridor, €99 million for the Northern International Corridor, €78 million for the North-South Corridor and €60 million for the Supplementary Corridors.

Culture

• Implementation of the “Heritage Lottery”, in the form of a ‘scratch card’, and the establishment of an ” exceptional cultural patronage ” scheme, through tax benefits.
• Creation of the status of cultural professionals.

Animals

• The government will create pet overseer and transfer more than five million euros to local administrations to support kennels.