CFP alerts to budgetary impact of IRS reduction

O Council of Public Finance (CFP) warned that the non-inclusion of the new measure to reduce the IRS rates may have an impact on the budget projection may affect the revenue forecast of this tax, given the change in the temporal distribution of refunds.

“ The current budgetary projection does not include the new measure to reduce the IRS rate recently announced by the Government, nor does it consider a set of policy decisions with potential significant impact on the budgetary trajectory of the coming years. The non-incorporation of this measure may change the time distribution of IRS refunds (by dislocating their accounting between periods) and consequently affect the projection of revenue from this tax, if the effects of these administrative changes remain on national accounts”, read in the report Economic and Budgetary Perspectives 2026-2030.

In the same report, the CFP further explains that the “normalisation of IRS repayments and recovery notes, after the temporary effect resulting from the application of lower withholding rates in 2024 and 2025 will benefit the revenue in 2026, resulting in a reduction in revenue from this tax in 2027”.

More leaves the warning: “However, any withdrawal rate reductions in 2026 above the estimated value for policy measures could extend these effects to subsequent years“.

Government predicts surplus, but Public Finance Council anticipates deficit

The CFP considers that the budget forecasts of the proposed State Budget for 2027 (OE2027) are plausible, but calls for more efficient management of resources in the State. 

The government's budget proposal envisages an economic growth of 2.3% this year and 2.1% in 2027 and balanced accounts this year and a surplus of 0.1% in 2027.

According to the opinion released, the CFP considers that the trajectory of the budgetary balance in the OE2027 is plausible, and the institution also updated its estimate for a balance from 0.1% of GDP to 2026, above that predicted by the Government (0,0%) but below 0.2% projected in September.

For 2027, the CFP projects a deficit of 0.1% of GDP, which represents a difference of 0.2 p.p. of GDP compared to the forecast of finance.

This is due to the fact that the projection of the CFP does not incorporate the effects of measures “not sufficiently specified” by the Ministry (combats VAT fraud in the fuel sector and the remaining revenue from real estate disposal) and the impact on the liquidation of IRS resulting from the extraordinary reduction of retentions at the source of November 2026, and if these were included, “the projection of the CFP would result in a surplus close to the value of POE/2027”.

Still, the body warns about the composition of the balance, and the aggregate surplus of general government “combines a central government deficit of 2.8% of GDP – the largest since 2017, excluding the pandemic years – with surpluses of 2.6% of GDP in the Social Security Funds and 0.2% in the Regional and Local Administration”.

“The dependence of the overall result on the behaviour of the social security sub-sector, which is particularly exposed to the economic cycle, persists,” warns the CFP.