Portugal: Young workers offered tax-free salaries to halt brain drain

Portugal hopes to stop a stampede of young people leaving the country by introducing tax breaks, including a total exemption on salaries for a year.

Portuguese Finance Minister Joaquim Miranda Sarmento in Lisbon. Picture: AFP.

Portugal hopes to stop a stampede of young people leaving the country by introducing tax breaks, including a total exemption on salaries for a year.

The minority centre-right government’s budget will aim to give those under 35 and earning up to €28,000 ($45,000) a year a 100 per cent tax exemption in the first year of work, gradually reducing to 25 per cent between years eight and 10.

Joaquim Miranda Sarmento, the Finance Minister, said that the tax breaks were “a fundamental tool to meet the objective of retaining and attracting young people to Portugal”.

According to the Migration Observatory, about 850,000 people aged between 15 and 39, or 30 per cent, have left the country and are living abroad owing to poor working conditions and low wages.

During budget negotiations with the main opposition Socialist Party, the government dropped its initial proposal of a 15 per cent cap on income tax for all young people and replaced it with a scheme similar to that proposed by the Socialists.

Some analysts have supported the move but Filipe Garcia, the head of the consultancy Informacao de Mercados Financeiros, estimated that the measure would cost almost 0.2 per cent of GDP. This amounts to less than half of the government’s initial forecast, though, which Mr Garcia said was “good news because its effectiveness is highly debatable, so the less it weighs on the budget, the better”.

Marlon Francisco, an economist at the World Bank, said: “The main obstacles facing young people in Portugal are not related to the tax burden but to low salaries, which are uncompetitive at international level, and limited career prospects.”

The budget also proposes a one-percentage-point reduction in the corporate tax rate to 20 per cent, which was the main sticking point in failed negotiations between the government and the socialist opposition.

Failure to pass the budget could lead to the collapse of the government, which took over in April, potentially leading to a third snap election in as many years.

The most likely outcome is that the Socialists abstain to avoid fresh elections, said Antonio Costa Pinto, a political scientist at Lisbon University, because polls showed growing support for the governing party of Luis Montenegro, the Prime Minister.

THE TIMES