On 9 May 2023 the IMF issued a report following discussions with Portugal under Article IV of the IMF’s articles of agreement.

The economic recovery from the pandemic continued strongly into 2022 with growth of 6.7% led by stronger tourism and private consumption. The economy is however being weakened by high inflation and tighter financial conditions driven by rising global energy and food prices and spill-overs from the Ukraine war. Real GDP growth is projected to slow in 2023 to around 2.6% for the year. In the medium term economic growth is projected to stabilize at around 2 %.

A more severe global or regional slowdown or greater volatility in commodity prices would pull down economic growth. Higher interest rates rising would lead to tighter lending standards. If there is also a dampening effect on house prices this could increase systemic risk and reduce domestic demand.

The economy could however be helped by faster growth in tourism and sustained labour market resilience. Growth potential could however by slowed in the medium term by global fragmentation or slower application of Next Generation EU (NGEU) funds.

The fiscal position improved significantly in 2022, reinforcing public debt reduction. Support was provided to households and energy-intensive firms and there was a tax reduction on energy-related products. Owing to greater than expected government revenue the fiscal deficit decreased sharply and the public debt-to-GDP ratio declined quickly to a level below the pre-pandemic ratio.

Additional fiscal support for 2023 includes public wage and pension increases, a temporary VAT exemption on essential items and housing support. As energy prices are falling there is an opportunity to phase out the broad-based support measures and move to more targeted support to vulnerable households. Any further support should be given only in severe downside situations and should be temporary, non-distortionary and targeted.

The IMF report recommends measures to raise revenue performance and improve the efficiency of government spending. Tax reforms should decrease distortions, reduce the use of lower value added tax (VAT) rates and review the benefit of tax expenditures. Efficiency of tax collection could be improved by modernizing the tax system, including digitalizing the tax administration. More revenue could be raised through stronger property taxes.

The main government spending priorities include improving pension sustainability, containing the upward creep in the public wage bill, strengthening the health service and better targeting social spending.

Policies to support the housing supply, such as measures to increase the supply of residential and rental property, would help ease housing affordability and reduce the housing market imbalance.

Reinstating the carbon tax which was suspended during the energy crisis would help to achieve carbon neutrality targets. A gradual increase in the carbon tax, scaling up of green investment and providing targeted support for the vulnerable would help to reach Portugal’s target of carbon neutrality by 2045.