EU Funds Ending Leaves Portugal with Sub-2% Growth and Stalled Wages

The Portugal former prime minister Pedro Passos Coelho has labelled the public sector a "major roadblock" to prosperity, warning that the economy could slip into sub-2 % growth after the current EU recovery funds run out.

Why This Matters

• Slow-motion growth: Most official forecasts show GDP easing from around 2 % in 2026 to barely 1.7 % in 2027.

• Cost-of-living squeeze: Weaker expansion restricts pay rises and limits scope for further tax cuts promised in the 2026 budget.

• End of EU money: Spending tied to the Plano de Recuperação e Resiliência (PRR) peaks next year; its fade-out removes €1.4 B of annual stimulus.

• Policy choices ahead: Residents could see harsher austerity or higher borrowing costs if growth misses targets.

The Lisbon Alarm Bell

Speaking at the launch of a new essay on innovation and AI in Lisbon, Passos Coelho argued that "talking about reform is fashionable, actually doing it is rare". He predicts Portugal will settle into 1 %–1.1 % long-term growth, a level he bluntly called "miserable". The remark echoed similar warnings this month from the Portugal Council of Public Finances, which flagged a return to deficits once pandemic-era transfers dry up.

How Solid Are the Forecasts?

• Banco de Portugal: 2.3 % in 2026 ➜ 1.7 % in 2027• OECD: 2.2 % ➜ 1.8 %• IMF: 2.1 % ➜ 1.7 %

The convergence is striking: every major body thinks the growth engine stalls just as the PRR winds down. That means the debate is less about whether the slowdown arrives and more about how Portugal cushions the landing.

What Critics Say Is Holding the Country Back

Passos Coelho, joined by several academic economists, lists three structural bottlenecks:

Tax complexity and level: Portugal’s total tax take stands 2 pp above the OECD average, discouraging capital-intensive investment.

Excessive red tape: Licensing a mid-sized solar plant still takes up to 14 separate approvals—twice the EU median.

Mis-aligned EU funding: Consultancy networks allegedly funnel R&D money toward a small circle of firms, crowding out newcomers in biotech and deep-tech.

The Government’s Counter-Plan

The Portugal Finance Ministry defends its 2026 budget as an “expansion-for-consolidation" strategy. Key measures already on the table:

• 0.3 pp cut in IRS rates for 2.6 M families.

• Roll-out of 20 additional Lojas do Cidadão to streamline paperwork.

• A new law capping commercial-court procedures at 12 months to speed up insolvency cases.

Officials argue these steps will push productivity high enough to offset the PRR sunset. Independent analysts counter that without a broader civil-service overhaul, the effects will be marginal.

What This Means for Residents

• Workers: Salary negotiations in 2027 may face a tougher environment; unions already signal 3 % pay claims could prove unrealistic.• Homeowners & borrowers: Slower growth usually tames base rates, yet Portugal’s elevated sovereign risk premium could keep mortgage costs sticky.• Entrepreneurs: Expect more calls for detailed impact studies when applying for EU-funded projects; oversight is tightening following misuse allegations.• Taxpayers: If growth undershoots, the next government may revisit plans for deeper IRS cuts or even consider a temporary surcharge to meet EU fiscal rules.

The Bigger Picture: Life After the PRR

The PRR channelled €16.6 B into infrastructure and digital upgrades, representing roughly 0.8 % of GDP per year since 2021. As those cheques cease, Portugal must rely on private investment and higher productivity to keep convergence with the euro area alive. The stakes are high: at 1 % growth, closing the income gap with Spain would take more than two decades.

Next Milestones

Late-2026: Publication of Passos Coelho’s full reform blueprint, co-authored with legal scholar Sérgio Sousa Pinto.

Q1-2027: Government presents its first post-PRR stability programme to Brussels.

Mid-2027: OECD releases a special survey on Portugal’s regulatory climate—likely shaping the next wave of reforms.

For ordinary households, the message is clear: the coming year may be the last window in which EU money softens economic headwinds. Financial planning that assumes steady wage growth or lighter taxes should be revisited now, not later.