Draft Budget for 2022 foresees slower growth, more state support

  • Lusa
  • 13 April 2022

According to the political parties, the document includes a cut in the forecast for economic growth this year to below 5% and an upward revision of inflation to around 4%.

The State Budget for 2022 presented to Parliament on Wednesday by Portugal’s Socialist Government, following its approval in cabinet on Tuesday – and whose main measures were presented to the parties in Parliament on Monday – foresees slight changes to the economic scenario outlined in the 2022-2026 Stability Programme already submitted to the European Commission.

According to the parties, the document includes a cut in the forecast for economic growth this year to below 5% and an upward revision of inflation to around 4%.

According to statements made by members of the parties present at meetings with Government officials, the public sector deficit target of 1.9% of gross domestic product should be maintained this year.

The Prime Minister, António Costa, has stressed that the budget bill will be similar to the one that was rejected in Parliament in October, but will take account of the impact of the war in Ukraine and include measures to mitigate the impact of rising food and energy prices.

The Government intends to maintain the measures set out in the October bill, such as the split of personal income tax brackets and the extraordinary increase in pensions.

Here are some key points of what is known about the bill:

Economic growth revised downwards

The macroeconomic scenario of the budget should include, for this year, a cut in the 5% GDP growth foreseen in the Stability Programme, which has already meant a downward revision from the 5.5% projected in October.

At the end of the meeting to present the general lines of the document with the Deputy Minister for Parliamentary Affairs, Ana Catarina Mendes, and the Ministry of Finance team, the President of Chega, André Ventura, revealed that the Finance Minister, Fernando Medina, had said that there would be a revision of the growth of the Portuguese economy compared to the document recently delivered to Parliament.

Inflation revised upwards to 4%

The figure was advanced by the president of the Liberal Initiative (IL), João Cotrim de Figueiredo. As he left a meeting with the Government in Parliament he said “that the inflation variable that will be the basis of this budget is 4.0%”. In the Stability Programme 2022-2026, the Government had predicted that the Consumer Price Index (CPI) for this year would be 2.9% and the Harmonised Index of Consumer Prices (HICP) 3.3%.

Deficit target of 1.9% maintained

According to Cotrim de Figueiredo, the Government is maintaining its budget deficit objective of 1.9% of GDP for this year, as written into the Stability Programme.

Measures to mitigate price rises

The Government has announced new emergency measures aimed at curbing the increase in energy and agricultural food prices resulting from the war situation in Ukraine, to form part of the budget, such as the reduction of the ISP (petroleum products tax) equivalent to the reduction of VAT to 13%, a subsidy to support the increase in gas costs of energy-intensive companies and the temporary VAT exemption of fertilisers and feed, as well as the reduction of the ISP on agricultural diesel until the end of the year, among others.

Number of income brackets to increase from seven to nine

The number of income brackets subject to IRS (personal income tax) will rise from seven to nine in 2022, with the new third bracket, between €10,736 and €15,216, with a rate of 26.5%. Under the October proposal, the third bracket that covered until now annual collectable incomes over €10,732 and up to €20,322 – which was subject to a rate of 28.5% – has been divided into two new brackets.

Young IRS extended

A special IRS rule is extended for two more years to allow young people to benefit from a discount on the tax, also extending it to self-employment and ending the income limit that has existed until now. The Government also intends to extend until 2023 the Regressar (Return) programme, which grants tax incentives to emigrants who wish to return to Portugal. Elsewhere, it remains to be seen what will happen to the measure previously foreseen whereby capital gains obtained from the sale of securities held for less than a year will become compulsory for those with an annual taxable income of more than €75,009.

Extraordinary increase of pensions

The extraordinary increase in the lowest pensions was provided for in the proposed State Budget rejected last year in Parliament, and the Government has already said that this measure will form part of the new budget with retroactive effect to January of this year. At the time, after negotiations in Parliament on its then budget bill with the Left Bloc (BE), Communist Party (PCP), People-Animals-Nature (PAN )and the Greens (PEV), the Government committed to applying the extraordinary increase to pensioners who receive up to the equivalent of to 2.5 IAS (the social support index) per month, which in 2021 corresponded to €1,097 (and now €1,107.5 due to the IAS update).

Extension of the increased deduction from the second child onwards

The Government proposed the phased extension of the increased deduction on IRS for children up to three years of age applicable from the second child onwards, to children up to the age of six, providing in 2022 for an increase in the value of the deduction from €600 to €750 and in 2023 a further increase from €750 to €900.