In Portugal’s upcoming budget, there is a proposal for tax exemptions exclusively for young people that have caught the eye of many. IF researcher, Toby Whelton, looks at how the UK could take inspiration from this policy.
Tax breaks for young people in Portugal
In the Portuguese government’s upcoming budget, there is a proposed decades-long tax exemption for all individuals under 35 years of age, that has garnered international attention for its novelty.
The policy would entail a first year tax exemption of 100% for young people earning up to €28,000. For the second to fourth year, this exemption would be reduced to 75%, then for years five through seven a 50% exemption and lastly a 25% exemption from years eight to ten.
The average median wage in Portugal is €20,000 a year which is taxed at a rate of 26%, with the next band – €21,000 to €27,000 – taxed at 33%. The proposed tax exemptions are estimated to cost the Portuguese government €645 million in 2025.
A brain drain
The primary goal of the policy is to stop the current “brain drain” of the Portuguese economy, whereby young Portuguese workers emigrate to other EU nations in search of better employment prospects. The Emigration Observatory estimates that 30% of Portuguese nationals aged 15−49 are currently working abroad.
Due to the governing party not having a majority, the budget is yet to pass, but the policy has received support from across the political spectrum as all main parties have acknowledged the need to incentivize young people to stay.
Even if the reason for the policy is primarily fiscal and pragmatic, the policy has in part been articulated in the language of intergenerational fairness. The Prime Minister, Luís Montenegro, stated the goal was to create a “tax system that would be more youth friendly” and to “give young people the future they deserve.”
A Portugal-specific problem?
It would be wrong to assume this is a problem unique to Portugal. In terms of the prospects of the youth, there are many parallels to the UK. The financialisation and deregulation of the Portuguese housing market post-2008 has seen rent and house prices soar, thereby pricing young people out, while wages have not kept pace. The young are struggling with the cost of living, employment prospects are bleak and there has been a withdrawal of social security and public provisions from the young. Portugal has an ageing population, doubtless exacerbated by their young emigrating, resulting in rising costs for looking after their old, which will fall on the remaining young.
Sound familiar?
A tale of two budgets
Portuguese youth are voting with their feet by moving to other countries and this is forcing their government to listen and act. Meanwhile, the conditions faced by the UK’s young continue to be ignored. Should they leave too?
There have been hints of forthcoming improvements in intergenerational fairness in the UK’s upcoming Budget: reported plans to increase Capital Gains Tax (CGT) would mean the wealth of the largely asset-rich older generations would be taxed more fairly relative to the earned income of largely younger workers; and rumours of pension tax-relief reform – reducing the tax-free lump sum from £250,000 to £100,000 – would reduce the tax-relief given to older and wealthier households.
However, claims of impending increases in: employers National Insurance Contributions (NICs); a potential rise in tuition fees; and the now confirmed rise in the state pension to £473 from next April; dispel any notion of a fundamental concern for intergenerational fairness as the costs continue to bear down disproportionately on the young.
What can the UK learn from Portugal?
While the Portuguese plans are interesting and food for thought, the purpose of this blog is not necessarily to advocate for tax exemptions for Britain’s young. Instead, we argue that the current tax system must be made intergenerationally equitable, such as charging NICs on workers over the State Pension Age as well as taxing earned and unearned income equally.
However, there are two overarching lessons we can learn from Portugal’s proposals:
- The UK must begin to conceptualise young people as a demographic in need of support and take them seriously. Policies must account for their effect on younger generations and certain policies should be designed to help young people in particular, as they face challenges not faced by other age groups. Not respecting them as the future drivers of the economy, will be to the detriment of older people today as well as the future of the economy.
- In order to help young people, policymakers should be willing to try novel ideas and challenge the status quo. The unprecedented challenges UK young people face require policy solutions that are not always possible within the current axioms and architecture of British politics. Incremental changes within the current system alone are not enough; the way we think about taxation, welfare provision and government spending must be fundamentally challenged in order to make Britain a truly intergenerationally fair society.
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Photo by Ummano Dias on Unsplash