OECD Economic Surveys: Portugal 2026

GDP growth is projected to reach 1.9% in 2025, before reaching 2.2% in 2026 and 1.8% in 2027, supported by rising real incomes and strong internal demand, and the implementation of the Recovery and Resilience Plan (RRP) until 2026. However, trade tensions and global policy uncertainty pose significant risks to the outlook.

Domestic demand will remain the main growth driver. A strong labour market and rising real incomes will sustain private consumption, as the unemployment rate stabilise at a low level, while public investment will accelerate supported by European funds, but the projected slowdown in global and European growth, rising trade barriers and an assumed 15% US tariff on Portuguese goods, including steel and autos, will weigh on exports and private investment. Inflation is expected to remain around 2.2% in 2026 and reach 2.0% in 2027 (Table 1), as wage growth remain strong and import costs raise as a result of tariffs and exchange rate effects.

Downside risks due to rising geopolitical tensions and trade fragmentation are considerable. Weaker-than-expected global trade growth and disruptions in supply chains, could directly weaken export growth. A sharp contraction in demand from major Euro-area trading partners would not only reduce exports, but also depress confidence, with knock-on effects on private consumption and business investment.

The fiscal stance is accommodative, with rising public investment and higher pension and wage bill spending, while tax revenues are set to decline due to recent reductions in personal and corporate taxation The authorities should carefully consider further expansionary measures, such as corporate and age-based personal income tax cuts, that risk fueling inflation and lower fiscal space. Despite this, the primary surplus is projected to remain sizeable at 1.3% of GDP in 2026 and 1.5% in 2027, helping to keep public debt on a declining path (Table 1). Given past underinvestment in growth-enhancing programmes and rising long-term spending pressures, the planned budgetary expansion in 2026 need to prioritise high-impact public investment and support potential growth, while maintaining a prudent medium-term fiscal path.

Financial risks appear contained but require continued vigilance. Household mortgage debt has declined, but new borrowing has increased alongside rising house prices, raising macroeconomic vulnerabilities. The central bank implemented a sectoral systemic risk buffer targeting residential real estate in 2024 and will introduce a new countercyclical capital buffer from January 2026. Continued close monitoring of household debt and timely macroprudential responses will be key to maintaining financial stability.

Portugal has significantly reduced public debt and rebuilt some fiscal buffers over the past decade. However, sustaining this trajectory will become more difficult with population ageing, rising pension and health care costs and the need to address underinvestment in infrastructure, health care and education. To navigate these pressures without compromising growth, it is essential to maintain a prudent medium term fiscal policy while rebalancing spending towards productivity-enhancing investments.

Continued implementation of the Recovery and Resilience Plan offers a window of opportunity to boost potential growth. To maximize the impact of this plan, prioritising high-impact investments and accelerating execution will be key.

Ageing-related spending is projected to increase rapidly in the coming two decades (Figure 2). At the same time, past underinvestment in education and infrastructure is weighing on potential growth. Rebalancing spending towards more growth-enhancing uses requires addressing the rapid rise in pension entitlements by prolonging working lives, improving the targeting of social spending and prioritising preventive and primary healthcare spending.

Fiscal sustainability will also require strengthened fiscal governance to better prioritise public spending and ensure cost-effective investments. Modernising the budget framework, including the implementation of performance budgeting, is crucial to ensure an efficient use of public funds. The authorities incorporated spending reviews as part of the budget process from 2025 which could help identify inefficient spending. Accelerating the implementation of the 2015 Budget Framework Law and of new accounting standards, one of the objectives of the RRP, would further support the shift of expenditures towards more growth-enhancing uses.

The system of taxes and benefits is overly complex, increasing administrative costs and reducing revenues. Tax expenditures, at 6.2% of GDP, including many reduced value-added tax rates, are not effective

to support growth and equity goals. Portugal should simplify and broaden its tax system, building on the work of its new tax evaluation unit (U-TAX), to assess and gradually phase out inefficient tax expenditures in the VAT, personal and corporate income tax regimes, which could help lower tax rates. Consolidating means-tested benefits into a simplified and better-targeted system with harmonised rules, would improve take up and poverty reduction, while reducing fragmentation and administrative costs.

With the working-age population set to decline over the long term, boosting productivity is essential to support fiscal sustainability and living standards. Labour productivity remains 17% below the OECD average. A significant share of employment in the business economy is concentrated in micro firms, around 40%, which often lack professional management skills and underinvest in technology and innovation. Despite generous public support, research and development has not yielded commensurate innovation outcomes. Improving productivity will require a more favourable business environment, including streamlining complex administrative processes as part of the public sector’s digitalisation efforts. In parallel, reforming regulations in professional services and retail trade would reduce costs and improve productivity. Introducing and enforcing a permanent lobbying registry and codes of conduct on how to engage with lobbyists, as planned, would help to prevent conflict of interests and reduce corruption risks.

Labour shortages and population ageing will weigh on growth and living standards. Extending working lives, upskilling older workers, and strengthening skills policies, especially vocational and lifelong learning will be crucial. Easing labour market access for migrants and women would boost employment. Raising employment and productivity will also require raising the quality of the education and training systems and curbing the still high use of temporary contracts.

Portugal’s labour market has recovered strongly from the COVID 19 shock with employment reaching record highs and unemployment near historical lows (Figure 3).

Despite robust labour market performance, many firms report difficulty recruiting suitably skilled workers. Labour shortages are growing across key sectors, notably in the information and technology activities, administrative and support activities,construction and wholesale and retail sectors, as well as in seasonal sectors. Educational attainment has increased, but field-of-study and qualification mismatches and limited alignment between training and labour market needs, lead to skill mismatches. Enrolment in initial vocational education has declined during the pandemic and the work experience of recent vocational graduates is limited. Expanding secondary vocational education and training and strengthening work-based training components, ensuring strong involvement of employer bodies, would help to better meet labour market needs.

Adult skills remain low, particularly among older workers and the long-term unemployed, which make little use of lifelong learning. Though spending on active labour market policies is slightly above the OECD average, there is room to further target activation policies towards older workers, notably by rebalancing expenditures towards training and counselling. Targeted upskilling programmes, notably for digital skills, promoting flexible work arrangements for older workers and integrating local public employment services and vocational training centres would support longer working lives. .

Many people, particularly the youth, struggle to buy a home, rent, pay off their mortgage, or move to find suitable housing or better jobs. Making housing more affordable will require a comprehensive set of reforms to increase supply, bolster residential mobility, better use the existing housing stock, and improve support for those in need.

Housing supply is constrained by high barriers to construction. Regulatory burdens in the construction sector raise costs and uncertainty, slowing projects and contributing to persistently low investment despite high demand (Figure 4). Obtaining building permits takes long and approval procedures are often cumbersome and vary across municipalities, weighing particularly on smaller construction firms.

Adding to the supply challenges, the tax framework discourages housing transactions, fails to mobilise underused properties, and exacerbates inequality. While exceptions apply for young first-time buyers since 2024, property transaction taxes are generally high, which deters residential mobility and downsizing. Tax values of immovable property are outdated and municipalities rarely apply higher rates on vacant dwellings. This reduces incentives to put underused housing into productive use. In combination with generous capital gains tax exemptions, the system favours longstanding homeowners, who have often seen large housing wealth gains, while excluding prospective buyers. Property tax reforms can help stimulate housing supply, make housing markets more dynamic, and raise revenues effectively and equitably.

A small stock of social housing and poorly targeted housing allowances provide insufficient support for many low- and middle-income households. The small social housing stock, focused on very poor households, is oversubscribed and subject to long waiting lists. Meanwhile, housing allowances are modest and often benefit high income households. As a result, many lower income households lack adequate support. Many older tenants rely on legacy rent-controlled contracts, contributing to segmentation and limited rental supply for new tenants. While current plans to expand social and affordable housing are welcome, sustained and predictable long-term funding and better targeted and higher housing allowances will be critical to meeting high needs. Housing quality additionally is often poor, undermining people’s well-being and contributing to high energy poverty as well as to emissions. More financial support is needed to boost energy renovations.

Portugal has made significant progress in reducing greenhouse gas emissions over the last two decades, thanks largely to a rapid shift to renewable electricity. Still, to achieve its emission goals, mitigation efforts need to broaden beyond energy industries. At the same time, Portugal is increasingly vulnerable to the effects of a warming climate, including through more frequent heatwaves and wildfires. A more coordinated and well funded adaptation strategy is needed to strengthen adaptation at the local level and to mobilise private investment in risk prevention.

Faster and broader decoupling is needed to meet emission goals and ensure stable energy supply. Meeting emission goals requires sustaining the fast pace of emission reductions achieved during a period of weak economic growth. Rapid progress in scaling-up electricity production from renewable sources has helped reduce emissions, but going ahead greater efforts are needed in energy consuming sectors, notably transport and buildings (Figure 5). Meanwhile, increased reliance on intermittent sun and wind energy sources poses challenges for system flexibility that call for large investments in grid and storage capacity.

Stronger and more uniform carbon price signals will be key to accelerating cost-efficient emission cuts across sectors. Nearly all carbon emissions are priced either through a carbon tax or excise taxes. However, large differences in effective emission prices across fuels and users, aggravated by sizeable fossil fuel subsidies, weaken incentives to cut emissions with the lowest abatement costs. Portugal has committed to phasing out fossil fuel subsidies by 2030, and emission prices for transport and buildings are set to rise with the EU’s ETS2. Implementing these plans to align, raise and harmonise effective emission prices across sectors would accelerate economy-wide mitigation efforts, while providing targeted support will be key to protect vulnerable groups from higher prices.

Continued progress in adaptation is needed to protect people and businesses from a warming climate. Much has been done over the last few years to improve prevention and management of natural disasters, especially wildfires. Still, while local governments play a key role in identifying risks and implementing adaptation measures, their responsibilities are not always well defined, overlap with those of other actors, and outcomes are not systematically monitored. Improving coordination and ensuring sufficient capacities would empower municipalities to pursue effective adaptation measures. Private insurance coverage is low, which entails large contingent liabilities for the public sector in the event of climate risks, and weakens incentives to prevent damages. Enlarging mandatory insurance requirements, while raising public awareness of risks, would improve risk pooling and leverage private sector capacities for a faster recovery after damages occur.