Foundations for Growth and Competitiveness 2026

Portugal

Portugal’s economic performance continues to lag most advanced OECD economies. While the gap in the investment rate has decreased, weak long-term productivity growth has led to a persistent gap in output per hour worked. The sizeable shortfall in GDP per capita also reflects Portugal’s relative labour market underperformance. Despite an historically low unemployment rate, employment rates remain relatively weak for the youth and still have room for improvement for women and older workers.

Ongoing structural changes, slow productivity growth and an ageing population require an adaptable economy, safeguarding competitiveness and fiscal sustainability by promoting sustained productivity and employment gains. Reducing regulatory barriers to competition would facilitate the entry and growth of innovative start-ups. Improving training and childcare services and strengthening work incentives for older workers and the long-term unemployed, would allow for longer working lives and ease skill shortages.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Competition: Enhance the quality of regulations

Competitive pressures are weak in some sectors. According to the OECD Product Market Regulation (PMR) indicators, regulations in retail trade and some professional services remain restrictive, despite the welcome reform of regulated professional services in 2023. The use of ex-ante Regulatory Impact Assessments could be improved further and ex-post evaluation of existing rules is not mandatory. Lobbying activities and potential conflicts of interest are not systematically monitored.

Recommendations

✓ Lower entry barriers and streamline regulations in professional services and the retail sector.

✓ Further expand the use of Regulatory Impact Assessments for new regulations and undertake sectoral reviews of existing policies and their competition impact.

✓ Approve legislation introducing a permanent lobbying registry and codes of conduct on how to engage with lobbyists and ensure effective enforcement.

Taxation: Improve the efficiency of the tax system

The tax system relies heavily on labour taxes, which raise labour costs for low-wage workers, while property taxes are comparatively low. Numerous tax expenditures create sizeable revenue losses and increase compliance costs. In particular, the Corporate Income Tax has many exemptions, as well as a state surtax and municipal surcharges and reduced rates for small and medium-sized enterprises.

Recommendations

✓ Simplify the tax system and broaden the tax base by reducing inefficient tax expenditures and consider using this fiscal space to lower tax rates. Consider phasing out the state surtax by eliminating ineffective and distortionary tax exemptions.

✓ Reduce labour costs for low-wage workers by shifting the labour tax burden toward recurrent property taxes.

Labour market: Activate and upskill the current workforce

With an ageing population and high labour shortages, activating and upskilling will be key to continue to boost workers’ skills and productivity. Youth employment is low, and employment rates for women and older workers still have some room for improvement. Difficulties in accessing childcare for children below two and the associated costs can be a challenge for low-income households and may hold back female labour participation. The use of temporary labour contracts remains high, while costly legal processes add to the cost of hiring on permanent contracts.

Recommendations

✓ Develop national quality certification standards for lifelong learning programmes that set clear benchmarks for content, teaching quality, and learning outcomes.

✓ Expand access to affordable quality childcare, prioritising low-income households and underserved areas.

✓ Enhance the balance of protection across contract types by continuing efforts to promote the use of permanent contracts and reducing the cost of dismissals.

Housing: Strengthen affordability and mobility

Long-standing challenges in Portugal’s housing market, compounded by a resurgence in demand, have led to a surge in house prices and rents. Many households, particularly younger people, struggle to buy, rent, pay off their mortgage, or move to find suitable housing or better jobs. Housing supply has stagnated, and residential mobility is low. The social rental housing stock remains small and waiting times for people in need are long and can exceed several years, particularly in urban areas.

Recommendations

✓ Simplify and harmonise building permitting procedures across municipalities as planned by expanding digital platforms and simplifying approval rules with clear maximum timeframes.

✓ Gradually shift the tax burden from transactions to recurrent taxes on immovable property, including through regular updates of taxable property values to reflect market prices.

✓ Expand the social rented housing stock by increasing investment, ensuring adequate funding for construction and operation, and setting targets aligned with local housing needs.

Energy: Raise investment to adapt to a warming climate

Portugal has cut its total GHG emissions over the past two decades, notably by shifting energy production to natural gas and renewable sources. However, public investment has lagged the OECD average, and further progress is needed. The transport system relies heavily on cars and the building stock is in poor condition, while energy production from renewables is set to expand further. Adaptation will also be critical, as Portugal faces growing risks from wildfires, droughts and sea level rise.

Recommendations

✓ Increase investment in expanding and maintaining public transport infrastructure based on cost-benefit analysis, prioritising rail investments in high-demand corridors.

✓ Continue expanding and diversifying renewable energy production by improving investor certainty through clear auction timelines. Enhance balancing capacity through coordinated planning with Spain to strengthen the electricity grid and storage, align reserve capacities, and ensure overall system resilience.

✓ Establish a formal public-private risk-sharing mechanism, for example by making insurance for natural catastrophes compulsory for all buildings and aligning premiums with risk exposure.

Recent progress on structural reforms

Portugal has undergone significant structural reforms in recent years. Major reforms include a new framework for regulated professions in 2023, the restriction on the use of fixed-term contracts in 2023, as well as reform of the national health service (NHS) to promote better primary care and foster more integrated care. The fiscal framework has also been strengthened through the progressive integration of spending reviews into the annual budgetary process and the planned evaluation of all tax expenditures by a dedicated tax unit (U-TAX), established in 2024.