Portugal is proposing a new way to stem the country's brain drain: a decade of progressive tax breaks for young people who pay nothing in their first year of work.
Luis Montenegro's centre-right minority government scrapped a proposed 15% cap on income tax for 18- to 35-year-olds, replacing it with a progressive plan backed by the opposition Socialists.
Under the plans, which form part of the country's 2025 budget, people up to the age of 35 and earning up to €28,000 (£23,416) a year will be 100% tax-free in the first year, before falling to 75%. Second to fifth year, 50% between sixth and ninth year and 25% thereafter.
The average annual salary in Portugal is €20,000 and income tax rates range from 13% to 48%. The government estimates the program will cost €645 million by 2025, while the cap will be €1 billion.
These incentives aim to tackle the devastating youth brain drain in Portugal. According to Migration Observatory, around 850,000 young people – 30% of 15- to 39-year-olds – have left at some point and live abroad due to low wages and poor working conditions at home. The population of the country is 10.4 million people.
Although the overall unemployment rate in Portugal fell to 6.1% in the second quarter of 2024, it almost quadrupled to 22% among young people.
Montenegro said the country needs to ensure its young people “can get a chance here” so they don't have to abandon their families and friends to seek economic opportunities abroad.
“It's worth believing in Portugal,” he said in August. “We can often do in Portugal what we can do abroad.”
Montenegro said its government was trying to make it easier for young people to buy their first homes by exempting them from some municipal taxes, stamp duty and fees. It aims to make personal income tax reduction “a touchstone” of government policy, he said.
The lack of affordable housing, exacerbated by Portugal's efforts to recover from the 2008 financial crisis by easing restrictions and attracting foreign investment, has led to a series of large protests in recent years.
Critics point to the liberalization of the rental market, the proliferation and supply of short-term rental properties. “Golden visas” granting residence permits in exchange for the purchase of property worth €500,000 or more, a tax-saving “non-habitual residency scheme” for foreigners and a creation of digital nomad visas to allow foreigners to work remotely and pay 20% tax.
At the end of September, thousands of people took to the streets of Lisbon and other cities across Portugal to protest against rising rents and housing prices. The government has pledged to tackle the problem with a €2 billion spending package and a pledge to build 33,000 homes by 2030.
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The budget proposal proposes to cut corporate tax by one percentage point to 20% in 2025, not two points as previously planned, and to offer tax breaks to companies that increase wages and their capital. The measures are estimated to cost €330m, down from the €500m cost of the previous plan.
Portugal could face its third snap election in as many years if Montenegro's government, which took over from the Socialists in April, cannot get parliament to approve a budget in the coming weeks.
His right-wing Democratic Alliance won 80 seats in the March general election – far short of a majority in the 230-seat assembly – while the Socialists won 78 and the far-right Sega party, which was founded five years ago, 50.
Speaking shortly before his inauguration, Montenegro said his government had “the confidence of the electorate”, adding: “Now all political players, including those in the opposition, need this – it's a sense of responsibility.”
Reuters contributed to this report
