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Portugal Politics January 2022

Portugal: Incumbent Socialist Party secures majority in January’s snap election, signaling stability ahead

Incumbent Prime Minister António Costa surprised analysts by securing a sweeping majority in parliament for his center-left Socialist Party (PS) in a snap election held on 30 January. Polls prior to the election suggested a technical tie with opponent Rui Rio of the center-right Social Democratic Party (PSD) wherein neither party secured a majority.

The snap election was called by President Marcelo Rebelo de Sousa when parliament failed to pass the PS’s 2022 budget proposal on 28 October last year. The proposal, which would increase the number of tax brackets and lessen the income tax for some, contrasts the PSD’s view that the economy should be boosted via investment, that is, by lowering corporate taxes.

Now that the party has a majority, the PS’s budget should be approved as soon as it is put to vote in parliament. Additionally, given its majority in parliament, the PS no longer has to rely on votes from far-left parties to pass budgets as it has had to in the last six years. Therefore, while broad policy continuity should be expected, there is a possibility that the government will take a more market-friendly approach.

This result affects the economy in two key ways. First, the speed with which the PS’s budget will be passed means that the impact of October’s political crisis will be minimal on the country’s governance; the expected result would have likely required extensive budget negotiations. Second, the expectation of a stable four-year legislature lessens uncertainty regarding the country’s economic future.

On the economy, Holger Schmieding, economist at Berenberg, commented:

“As Costa will now be able to pass the budget, Portugal can begin to spend EUR 16.6 billion in EU recovery funds. According to estimates by the European Commission, the recovery plan envisaged by Costa’s outgoing minority government would lift Portugal’s GDP by between 1.5% and 2.4% by 2026. […] Thanks to labour market reforms that reduced severance pay and decentralised labour contract negotiations, unemployment declined to 6.3% in November 2021 from its peak of 18.2% in January 2013. But Portugal’s households’ median net income remains among the lowest in the Eurozone. Costa wants to increase income per worker but will continue to safeguard Portugal’s fiscal stability. With largely sensible economic policies, Portugal can stay on a solid recovery track.”

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