From the economy to housing – OECD fine tooth combs Portugal’s prospects for 2026
The Organization for Economic Cooperation and Development says it is optimistic overall about Portugal’s economy for 2026 in its annual survey.
The Economic Survey – Portugal 2026 report predicts that Portugal will grow 2.2% in 2026 after an estimated 1.9% growth in 2025.
However the report published this week and unveiled on Tuesday in Lisbon has raised some red flags with the main risks coming from overseas, including a slowdown in the European economy, trade tensions, and geopolitical uncertainty all of which could cause jitters for overseas investors.
Positive on internal market
The OECD is more positive about Portugal’s internal market with a strong labour market and higher salaries which should continue to sustain consumer spending.
Public investment too is likely to increase with the support of European funds, particularly through European funds via the Recovery and Resilience Plan (RRP).
But the OECD advises Portugal’s coalition centre-right Democratic Alliance government to be prudent and cautious when it comes to spending and investments.
The organisation recommends that budgetary expansion measures and tax cuts should be carefully planned so as not to provoke inflation or reduce budgetary room for maneuver.
The OECD recommends the continued reduction in Portugal’s public debt within the context of the demographic aging, and offset this with careful spending increases on pensions and healthcare.
Labour and jobs
However, labour shortages, population ageing and weak investment during the economic and financial adjustment programme continue to weigh on growth and productivity.
The unemployment rate fell to a historic low of 6.4% in 2024 but labour shortages and subdued investment have limited the ability of companies to scale up and innovate.
These constraints risk dampening potential growth and fuelling tax pressures.
Rising house prices
The OECD also warns that rapidly rising house prices and rents are hindering residential mobility and access to housing, especially for the young.
Structural reforms are needed to sustain growth and safeguard fiscal sustainability, amidst a
challenging global landscape. Reducing the administrative burden, strengthening labour supply
and skills are key.
Reforms should also focus on expanding housing supply and implementing cost-effective climate policies.
It says that domestic demand will remain the main growth driver. A strong labour market and rising real incomes will sustain private consumption, as the unemployment rate stabilises 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 says the report.
Inflation
Inflation is expected to remain around 2.2% in 2026 and reach 2.0% in 2027 as wage growth remains strong and import costs rise as a result of tariffs and exchange rate effects.
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 targetting residential real estate in 2024 and will introduce a new countercyclical capital buffer from January 2026.
Continued close monitoring of household debt and timely macro-prudential responses will be key to maintaining Portugal’s financial stability.
On the RRP, 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.
Housing market -specific issues
On housing, the OECD is particularly harsh and critical with the organisation saying that housing supply is constrained by high barriers to construction with regulatory burdens increasing costs and uncertainty, slowing projects and contributing to persistently low investment despite high demand.
Obtaining building permits takes a long time 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 have applied 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.
Complicated and high taxes
On tax, the OECD says Portugal’s tax system remains complex, fragmented and heavily reliant on labour and consumption taxes like VAT, while tax expenditures and exemptions limit fairness and efficiency.
Tax revenues, including social contributions, increased from 30.9% of GDP in 2000 to 35.7% in 2024 slightly above the OECD average, but the system is complex and imposes high compliance costs especially on small and medium-sized firms. At the same time, the preferential treatment of inheritance taxes benefits mostly high-income households.
Broadening the tax base by reducing tax expenditures, notably for recurrent property and environmental taxes and improving the design of income and consumption taxes would support fiscal sustainability and more inclusive growth, as the ageing of the population will put labour related tax revenues under pressure.
Aligning emission prices across sectors, phasing out fossil fuel subsidies and promoting clean transport and energy renovations can make large inroads to reduce reducing greenhouse gas emissions. At the same time, shifting from taxing transactions towards taxing property ownership and imposing higher effective taxes on underused properties could bolster supply and promote a more efficient allocation of housing.
This would help make room for needed investment and potential reductions of the relatively high labour tax wedge around the minimum-wage, which could raise employment.
Reforming corporate income tax
There is scope to strengthen the design of the corporate income tax system (CIT). Portugal’s corporate tax system is complex, with multiple layers of rates and surcharges that raise compliance costs and create distortions.
There is a state surtax ranging from 3 to 9% depending on firms’ profits, applying to less than 1%
of firms, reduced rates for small and medium-sized enterprises depending on their location, as well as municipal surcharges at rates of up to 1.5%. In addition, extensive use of tax incentives (accounting for close to 20% of the CIT revenues), narrows the base, decrease tax liabilities and increases the administrative burden.
Direct tax withholdings are often too high, resulting in sizable rebate claims in the subsequent year, whose overall volume was close to 1% of GDP in 2024. This entails considerable additional costs for businesses.
Reducing ineffective tax expenditures could help financing the phase out of the state surtax. In
addition, there may be a case for reviewing size-contingent tax rates that were extended in 2025, as they may hamper the growth of small firms.
