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Portugal The General Government
The share of general government expenditure (including
capital outlays) in GDP rose from 23 percent in 1973 to 46
percent in 1990 (see
table 5, Appendix). On the revenue
side, the
upward trend was less pronounced: the share increased from
nearly
23 percent in 1973 to 39.2 percent in 1990. From a modest
surplus
before the revolution in 1973, the government balance
swung to a
wide deficit of 12 percent of GDP in 1984, declining
thereafter
to around 5.4 percent of GDP in 1990. Significantly, both
current
expenditures and capital expenditures roughly doubled
their
shares of GDP between 1973 and 1990: government current
outlays
rose from 19.5 percent to 40.2 percent, capital outlays
from 3.2
percent to 5.7 percent.
Apart from the growing investment effort, which
included
capital transfers to the public enterprises, government
expenditure patterns since the revolution reflected rapid
expansion in the number of civil servants and pressure to
redistribute income, mainly through current transfers and
subsidies, as well as burgeoning interest obligations. The
category "current transfers" nearly tripled its share of
GDP
between 1973 and 1990, from under 5 percent to 13.4
percent,
reflecting the explosive growth of the social security
system,
both with respect to the number of persons covered and the
upgrading of benefits. Escalating interest payments on the
public
debt from less than half a percent of GDP in 1973 to 8.2
percent
of GDP in 1990 were the result of both a rise in the debt
itself
and higher real effective interest rates.
The narrowing of the government deficit since the
mid-1980s
and the associated easing of the borrowing requirement was
caused
both by a small increase in the share of receipts (by two
percentage points) and the relatively sharper contraction
of
current subsidies, from 7.6 percent of GDP in 1984 to 1.5
percent
of GDP in 1990. This reduction was a direct consequence of
the
gradual abandonment by the government of its policy of
curbs on
rises in public utility rates and food prices, against
which it
paid subsidies to public enterprises.
Tax reform--comprising both direct and indirect
taxation--was
a major element in a more comprehensive effort to
modernize the
economy in the late 1980s. The key objective of these
reforms was
to promote more efficient and market-oriented economic
performance. Beyond considerations of efficiency, a good
tax
system also should be simple (i.e., easy to administer),
fair,
and transparent.
Prior to the reform, about 90 percent of the personal
tax
base consisted of labor income. Statutory marginal tax
rates on
labor income were very high, even at relatively low income
levels, especially after the revolution. The large number
of tax
exemptions and fiscal benefits, together with high
marginal tax
rates, entailed the progressive erosion of the tax base
through
tax avoidance and evasion. Furthermore, Portuguese
membership in
the EC created the imperative for a number of changes in
the tax
system, especially the introduction of the value-added tax
(VAT-- see Glossary).
Reform proceeded in two major installments: the VAT was
introduced in 1986; the income tax reform, for both
personal and
corporate income, became effective in 1989. The VAT, whose
normal
rate was 17 percent, replaced all indirect taxes, such as
the
transactions tax, railroad tax, and tourism tax. Marginal
tax
rates on both personal and corporate income were
substantially
cut, and in the case of individual taxes, the number of
brackets
was reduced to five. The basic rate of corporate tax was
36.5
percent, and the top marginal tax rate on personal income
was cut
from 80 percent to 40 percent. A 25-percent capital gains
tax was
levied on direct and portfolio investment. Business
proceeds
invested in development projects were exempt from capital
gains
tax if the assets were retained for at least two years.
Preliminary estimates indicated that part of the
observed
increase in direct tax revenue in 1989-90 was of a
permanent
nature, the consequence of a redefinition of taxable
income, a
reduction in allowed deductions, and the termination of
most
fiscal benefits for corporations. The resulting broadening
of the
income tax base permitted a lowering of marginal tax
rates,
greatly reducing the disincentive effects to labor and
saving.
Data as of January 1993
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