Portugal’s 2025 State Budget introduced a package of personal income tax and social benefit reforms. The tax measures included changes to tax deductions, tax brackets and tax credits. The benefit measures raised social assistance and introduced an extraordinary pension increase. The reforms aim to reduce fiscal drag, strengthen work incentives for young people and protect vulnerable groups from income losses, particularly pensioners. This note assesses the fiscal, distributional, poverty, and inequality impacts of these reforms.
Assessing Portugal’s 2025 State Budget law
Abstract
Budgetary cost. The full package costs EUR 2.2 billion per year, about 1% of GDP. PIT reforms account for 62% of the total cost.
Higher incomes for most. The reforms raise disposable income by 1.8% on average (EUR 306 per year). Tax reforms benefit mainly higher-income households; benefit reforms support the bottom half of the distribution.
Poverty falls. The overall poverty rate drops by nearly 2 percentage points (p.p.). Benefit reforms drive most of this decline, with the largest reductions among older adults.
Inequality declines slightly. Benefit reforms offset the regressive effects of tax reforms, producing a small net decline in the Gini coefficient.
Portugal’s 2025 State Budget law included a broad package of tax and benefit measures. On the tax side, the main reforms updated the PIT system: they expanded the deduction for young workers, raised deduction limits for wage earners and pensioners, indexed tax brackets against fiscal drag, and increased the rent tax credit ceiling. On the benefit side, the government raised reference values for the social insertion income (RSI) and the social complement for the elderly (CSI), and introduced an extraordinary increase in low pensions. The box below describes these measures in detail.
This note assesses the fiscal and distributional impacts of these reforms using the European Commission’s tax-benefit microsimulation model, EUROMOD, based on EU-SILC 2022 input data. All reforms are assessed against a 2025 baseline that reflects automatic updates of the tax and benefit system and nominally updated monetary variables.
The reform package has a net fiscal cost of EUR 2 2 million, about 1% of GDP (Table 1, column 7). PIT reforms account for the largest share, reducing PIT revenues by 7%. Benefit reforms add EUR 730 million in spending.
Looking at the individual tax measures, the expanded deduction for young workers is the costliest single measure at EUR 876 million (see also the supplementary material for an in-depth analysis of the new deduction). Bracket indexation costs EUR 428.5 million while other PIT measures reduce revenues by less than 1% each. On the benefit side, the extraordinary pension increase has the highest fiscal impact at EUR 608 million. The increase in the CSI reference value costs EUR 172 million, and the RSI reform costs EUR 10 million. The pension increase also moderates the revenue loss from PIT reforms. It reduces the PIT revenue shortfall by 0.2 p.p. (columns 4, 6, and 8).
Source: OECD calculations based on the EUROMOD J1.0+ model and EU-SILC 2022 data.
Among the tax reforms, the expanded deduction for young adults and the indexation of PIT brackets generate the largest fiscal impacts. These measures cost EUR 876 million and EUR 428 million respectively, when accounting for their direct effects and their impact on the rent support benefit (Table 2 – columns 4 and 10). All other reforms reduce PIT revenues by less than 1% each (columns 7, 9 and 13).
Source: OECD calculations based on the EUROMOD J1.0+ model and EU-SILC 2022 data.
The increase in the RSI reference value reduces rent support expenditures by ‑0.2% (Table 3 – columns 4 and 5). The CSI reform interacts with the RSI, child benefit, and rent support, slightly reducing its net budgetary impact by 2 million (columns 6 and 7). The pensions reform generates sizable interactions. It increases PIT revenues by 53 million and reduces CSI expenditures by 73 million, thus moderating its net fiscal impact. Overall, these interactions reduce the gross cost of the pension reform by EUR 133 million.
Source: OECD calculations based on the EUROMOD J1.0+ model and EU-SILC 2022 data.
The reforms raise disposable income by 1.8% on average, equivalent to EUR 306 per year (Figure 1). The distribution of gains differs sharply between tax and benefit reforms. Tax reforms concentrate gains in the top half of the income distribution, especially in the deciles 9 and 10. Benefit reforms offset this by concentrating gains in the bottom half. Overall, households in the first and second deciles see the largest proportional gains: 3.3% and 2.6% respectively, equivalent to about EUR 199 and EUR 226 per year.
The pattern of gains also differs by age group (Figure 2). For people aged 25‑49, tax reductions drive most of the income increase. For people aged 65 and over, pension and social benefit increases play the dominant role. Adults aged 80 and over see the highest income gains of any age group (+2.5%).
The full reform package reduces the overall poverty rate by nearly 2 p.p., from 15.7% to 13.9% (Table 4). Benefit reforms drive most of this decline, cutting poverty by 1.6 p.p. Tax reforms reduce poverty by just 0.2 p.p. The largest reductions occur among older adults. For those aged 65‑79, the poverty rate falls by nearly 6 p.p. to 13.6%, below the national average. For those aged 80 and over, it drops from 26.5% to 19.8%.
Note: OECD calculations using the EUROMOD J1.0+ model and EU-SILC 2022 data. Poverty line set at 60% of the median equivalised household disposable income, anchored to the 2025 baseline.
The reform package also reduces income inequality (Figure 3). Tax reforms alone would slightly increase the Gini coefficient, since they mainly benefit taxpayers who already earn enough to pay taxes. Benefit reforms more than offset this effect, concentrating gains in the bottom half of the distribution. The net result is a small decline in the Gini coefficient.
Impact of the 2025 State budget reforms on the Gini coefficient of disposable income
Source: OECD calculations using the EUROMOD J1.0+ model and EU-SILC 2022 data.
The reforms described in this note were carried out as part of the 2025 Technical Support Instrument (TSI) project “Boosting the Usage of Distributional Impact Assessments through Microsimulation”, funded by the European Union. The beneficiary authority in Portugal was the Ministry of Finance. The reforms assessed during the project implementation, including those described in this note, were for capacity building purposes only and do not necessarily reflect the official views of the beneficiary authority.
The supplementary material includes an in-depth analysis of the average tax burden for young workers by age and earnings level.
More information on Portugal’s tax and benefit system is available in the OECD Descriptions of Tax and Benefit systems.
How do taxes and benefits affect disposable household income, benefit replacement rates, benefit adequacy, and financial work incentives? Find it out using the OECD tax-benefit web calculator.
More information on the EUROMOD microsimulation model: here.
Contact: Sara Riscado (Sara.Riscado@oecd.org, Daniele Pacifico (Daniele.Pacifico@oecd.org) and Ella-Marie Assal (Ella-Marie.Assal@oecd.org).
This work is issued under the responsibility of the Secretary-General of the OECD, and does not necessarily reflect the official views of OECD Member countries.
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