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IMF Recommends Tax Reforms in Portugal

The Director of the International Monetary Fund (IMF) for Europe, Alfred Kammer, has praised the evolution of the Portuguese economy, recommended a comprehensive tax reform, and warned that uncertainties, whether political or external, always have an impact on investment.

In an interview with Lusa, asked if a minority government could be a risk to Portugal’s economic prospects, Alfred Kammer admitted that “uncertainty is always a negative thing and one should try to reduce it as much as possible.”

“Whenever there is an increase in uncertainty, wherever it comes from, there is an impact, particularly on investment, because of the outlook. That’s a problem and it doesn’t matter if it comes from a minority government, from the perception of a change in policies, or if it comes from high external uncertainty, including geo-economic fragmentation,” he said.

However, Alfred Kammer pointed out that Portugal has had very strong growth in recent years, despite the slowdown expected for this year, but still above the eurozone.

“What we are seeing are the effects of European monetary policy, which are depressing demand but also decreasing external demand, but growth has been quite strong and quite robust over the last few years,” he said.

The IMF has revised Portugal’s economic growth upwards to 1.7% this year, slightly more optimistic than the government (1.5% in a scenario of no policy changes), and cut the inflation rate to 2.2%, according to economic forecasts released this week.

In his portrait of the Portuguese economy, the head of the IMF highlights the trajectory of reduction of public debt in relation to GDP in recent years, having stood at 99.1% in 2023.

“Portugal has done an exceptionally good job of reducing public debt over the past decade. It is one of the fastest declining debt-to-GDP ratios in Europe after the pandemic, having fallen from 135% of GDP to 99% of GDP,” he points out.

Alfred Kammer defends the importance of this option, arguing that high debt creates vulnerabilities and is “a burden” when higher interest rates raise the cost of servicing debt.

“It was a remarkable achievement and we believe that a prudent fiscal policy should continue to be followed in the future,” he recommends, arguing that cushions should be created for additional public spending in the future.

He thus lists among the suggestions for Portugal “a comprehensive fiscal reform, eliminating or reducing budgetary expenditures, gradually increasing the price of carbon and its taxation and focusing on some of the spending pressures that are arising due to the aging of society.”

Alfred Kammer also argues that “public investment has an important role and for that, we need to have fiscal space.”

The IMF forecasts a budget surplus of 0.2% of GDP this year and a debt ratio of 94.7% and 80.1% in 2028.

The Washington-based institution this week improved its forecast for global growth by 0.1 percentage point (pp.) to 3.2% this year and points to a 0.8% advance in the eurozone economy this year.

Samantha Gannon

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