New Tax Scheme Targets Portugal’s Youth Exodus Problem

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Portugal’s centre-right government, led by Prime Minister Luís Montenegro, is proposing a bold initiative aimed at transforming the country into a low-tax haven for young adults. In an effort to curb the ongoing brain drain and retain its youthful workforce, the government is offering significant tax breaks for those starting their careers. This ten-year plan, part of the 2025 budget proposal, seeks to reduce income tax rates for young workers, with the first year of employment being completely tax-free.

The proposal reflects Portugal’s urgent need to reverse the exodus of young, educated individuals, which has been a persistent challenge for over a decade.

Since 2008, more than 360,000 young people aged between 15 and 35 have left the country, representing two-thirds of all emigrants during this period. Many are leaving for better-paid jobs in wealthier European countries, exacerbating an already strained economic situation.

Montenegro’s plan offers a structured reduction in taxes over ten years. In the first year of employment, young workers would pay no income tax. In the second to fourth years, 75% of the tax due would be exempt, followed by 50% in years five to seven, and 25% in years eight to ten. This progressive reduction is designed to offer significant financial relief, especially in the early stages of a career when earning potential is lower.

Speaking earlier in the year, Montenegro emphasised the government’s goal to “retain talent” and ensure that fewer young people leave the country. The aim is to create a tax system more accommodating to younger generations, particularly in the face of Portugal’s high taxes, relatively low wages, and rising housing costs—factors that have driven many educated individuals abroad.

A Divided Parliament

However, the plan’s future is uncertain. Montenegro’s government, a fragile minority, will present the budget in the coming days, but it remains unclear if there are enough votes in parliament to secure its approval. The proposal is already facing opposition from the Socialist Party, which has voiced its objections, particularly around the accompanying corporate tax cuts. If Montenegro fails to pass the budget, the very survival of his government could be at risk.

The previous Socialist government had also introduced tax breaks for young people, but these were limited to university graduates. Montenegro’s proposal, in contrast, is open to all individuals under 35, regardless of educational background. This broader approach, according to the government, offers a more “balanced solution” and reflects negotiations with the opposition, which reduced the programme’s length from 13 years to 10.

Despite these adjustments, support from the Socialist Party is not guaranteed. Analysts, such as Marina Costa Lobo, director of Lisbon’s Institute of Social Sciences, have warned that the Socialists could risk appearing “irresponsible” if they refuse to back the budget, especially given the fragile political climate.

A Long-Term Brain Drain

Portugal has long been a country of emigrants, with an estimated one-quarter of its population living abroad. This is the highest rate in the European Union. In recent years, however, the departure of young, skilled individuals has been recognised as a significant economic challenge. The country has invested heavily in education, but much of the benefit has flowed to richer European countries such as France and Germany, where Portuguese graduates often seek higher-paying jobs.

Gonçalo Matias, chair of the Francisco Manuel dos Santos foundation, highlighted the irony of Portugal’s position, noting that the country has benefited substantially from European funds but is now losing its skilled workforce to wealthier nations. Matias described the tax proposal as “sensible and balanced,” but stressed the need for broader reforms, including addressing the affordability of housing and improving job opportunities.

The government’s initiative comes as Portugal continues to experience population growth, thanks in part to its attractiveness to foreign migrants. Programmes such as the golden visa, which encouraged investment from wealthy expatriates, are being phased out, but the new youth tax breaks would be open to non-Portuguese citizens as well.

Economic Risks

The proposal has drawn scepticism from international bodies such as the International Monetary Fund (IMF), which has questioned the effectiveness of age-based tax cuts in stemming emigration. The IMF also warned that the plan could jeopardise Portugal’s fiscal stability. The projected cost of the youth tax breaks stands at around €650 million annually, which the IMF noted could strain the country’s ability to reduce its public debt while also maintaining necessary public investment.

In Portugal, where the average annual wage is approximately €20,000, workers pay a top income tax rate of 26%. For those earning between €21,000 and €27,000, the rate rises to 32.75%. The government’s proposed tax reductions would significantly lower the financial burden on young workers in these income brackets, making it easier for them to remain in Portugal.

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