Portugal has paused plans intended to stem the country’s brain drain by offering young people a decade of progressive tax breaks that would have seen them paying nothing at all in their first year of work.
The proposal, advanced by the centre-right minority government of Luís Montenegro, had been one of the most eye-catching schemes in Portugal’s 2025 budget.
But it was pulled from the budget at the last minute on Thursday afternoon as a “show of goodwill” to allow for further negotiations with the opposition Socialist party, whose support or abstention will be key to getting any budget through parliament.
Montenegro’s administration had already ditched a proposed 15% cap on income tax for 18- to 35-year-olds in favour of the decade-long progressive scheme, which was similar to one supported by the Socialists.
Under the now-paused plans, young people earning up to €28,000 (£23,500) a year would have been given a 100% tax exemption in the first year of work, dropping to 75% from the second to the fifth year, 50% between the sixth and ninth and 25% in the 10th year.
The average annual salary in Portugal is about €20,000 and income tax rates range from 13% to 48%. The government had estimated the scheme would have cost €645m in 2025, while the 15% cap would have cost €1bn.
The incentive aimed to tackle a devastating youth brain drain in Portugal, which has a population of 10.4 million. According to the Emigration Observatory, about 850,000 young people – 30% of those aged 15 to 39 – have left the country at some point, and are living abroad because of low wages and poor working conditions at home.
Although overall unemployment in Portugal fell to 6.1% in the second quarter of 2024, among young people it was almost four times higher at 22%.
Montenegro has said Portugal needed to ensure its young people could “find an opportunity here” so they did not have to abandon their families and friends to seek economic opportunities abroad.
“It’s worth believing in Portugal,” the prime minister said in August. “We are capable of doing in Portugal what we are often capable of doing abroad.”
He said his government was working to make it easier for young people to buy their first homes by exempting them from some municipal taxes, stamp duty and fees. The scheme intended to make reducing personal income tax “a touchstone” of government policy, he added.
The lack of affordable housing, which has been exacerbated by Portugal’s efforts to recover from the 2008 financial crisis by embracing deregulation and seeking to attract foreign investment, has led to a series of large protests in recent years.
Critics point to the liberalisation of the rental market, the proliferation of short-term rental properties, the issuing of “golden visas” that confer residence permits in exchange for buying properties worth €500,000 or more, the introduction of tax-saving “non-habitual residency scheme” for foreigners and the creation of a digital nomad visa to allow well-off foreigners to work remotely and pay a tax rate of just 20%.
At the end of September, thousands of people protested in Lisbon and other cities across Portugal against soaring rents and house prices. The government has promised to address the issue with a €2bn spending package and to build about 33,000 homes by 2030.
If Montenegro’s government, which took over from the Socialists in April, cannot get its budget approved in parliament by the end of November, Portugal could face its third snap election in as many years.
His centre-right Democratic Alliance took 80 seats in March’s general election – well short of a majority in the 230-seat legislature – followed by the Socialists with 78 seats and the far-right Chega party, which was founded just five years ago, with 50.
Speaking shortly before he took office, Montenegro said his government had “the confidence of the voters”, adding: “It also has what is required of all political players, including those now in opposition – that is a sense of responsibility.”
Reuters contributed to this report
