Tax Cuts and Local Upgrades Ahead After Portugal’s €1.3B Surplus

The Portugal Budget Authority has confirmed a €1.298 B surplus for 2025, a result that strengthens the country’s credit profile and may unlock room for selective tax cuts in the next State Budget.

Why This Matters

• Surplus beats forecasts: Government had pencilled in a €782 M deficit; reality swung almost €2 B in the opposite direction.

• Debt ratio could dip below 90 % of GDP for the first time since 2009, reducing future interest bills.

• Local councils gained fire-power: Municipalities posted a positive balance, signalling potential for better roads, schools, and digital services outside Lisbon.

• Signals to Brussels: A healthier balance sheet strengthens Portugal’s hand as new EU fiscal rules kick in 2026.

How the Numbers Break Down

Revenue grew 7.2 %, outpacing a 6.7 % jump in spending. The extra cash mainly came from a robust labour market—payroll taxes climbed 8.9 %—and a solid showing from IRS and VAT. Corporate tax (IRC) slipped, but not enough to derail the trend.

Sub-sector balances tell a more nuanced story:

• Social Security: €1.196 B surplus, fuelled by record employment and wage growth.

• Local Government: €442 M in the black, after years of tighter purse strings.

• Central Government: Still €647 M in the red despite higher tax intake, largely due to wage rises for civil servants and a spike in health-care arrears.

• Regional Governments: €105 M deficit, mainly Madeira and the Azores grappling with storm-damage bills.

What Drove the Improvement

Jobs market still humming: Unemployment stayed near 6 %, boosting pay-roll taxes and limiting welfare outlays.

Inflation cooled slower than wages: Nominal salary growth outpaced price rises, lifting taxable income.

Energy-relief phase-out: Fewer subsidies for gas and power shaved roughly €400 M off expenditure versus 2024.

PRR cash lag: Delays in Recovery & Resilience Plan projects shifted some co-funded spending into 2026, flattering this year’s bottom line.

Skeptics and Caveats

The Bank of Portugal and the European Commission caution that today’s surplus leans on one-offs. Both institutions project a near-balanced position, not a surplus, for 2026 once delayed infrastructure bills hit and public-sector wage creep continues. They flag three risks:

• Structural spending: Health and pensions still on a long-term upward path.

• Pro-cyclical policies: Income-tax cuts and higher public salaries could widen the gap if growth cools.

• External shocks: Rising defence budgets or fresh energy shocks would erode fiscal space.

What This Means for Residents

The Finance Ministry says every extra €1 B of surplus cuts debt service by roughly €35 M a year—money that could instead fund schools or lower taxes. Practical implications include:

• Possible IRS bracket tweaks as soon as the 2026 Budget, especially for middle-income earners.

• Better odds of municipalities scrapping or trimming the local property surcharge (adicional de IMI) in 2027.

• Higher confidence from banks, which could shave a few basis points off mortgage spreads tied to government-bond yields.

• More robust buffers for civil-protection funds, meaning faster payouts if wildfires or floods strike.

Looking Ahead: 2026 Budget Season

Finance Minister Joaquim Miranda Sarmento signalled that part of the 2025 windfall will repay early the remaining loans from the European Financial Stabilisation Mechanism, cutting the maturity wall in 2028-31. Draft budget guidelines, due in September, will also sketch a catastrophe-relief fund and a modest cut in the marginal IRS rates for the 2nd to 5th brackets.

Economists expect the 2026 blueprint to target a 0.1 % surplus, keeping Brussels happy while leaving wiggle room for fresh investment once the PRR pipeline finally accelerates. The real test will be sustaining discipline once EU stimulus fades and salary contracts roll over.

For households, the takeaway is simple: a healthier national chequebook today doesn’t guarantee permanent giveaways tomorrow, but it does make lower taxes and better services possible—provided the next rounds of spending stay within the lines.