Portugal’s bold plan to win back youth

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Young people are a nation’s greatest asset. As societies grow older, youth are relied upon to enter work, pay taxes and rear the next generation. But in an international labour market, talent retention is hard work for governments let alone businesses.

In the EU’s single market, it is particularly cut-throat. Many southern and eastern European economies — including Portugal, Italy, Poland and Romania — often see their youngest and most educated up sticks for the bloc’s more prosperous, and higher paying, northern economies. Plenty have not returned, hollowing out economies back home. The brain drain is, according to former Italian prime minister Enrico Letta, the “dark side” of the EU’s freedom of movement.

Last week, Portugal decided to take matters into its own hands. The minority government of Prime Minister Luís Montenegro unveiled an imaginative budget proposal to turn the country into a low-tax haven for young adults, offering a decade of tax breaks to those starting their careers. Under the plan, those aged 35 and under who earn up to €28,000 would pay no income tax for the first year. Tax relief would then be tapered over the next 10 years. Foreigners would also be able to benefit.

There is a consensus in Lisbon that drastic action is warranted. Between 2008 and 2023, an estimated 361,000 people aged between 15 and 35 left the country, accounting for two-thirds of all emigrants during that period. Portugal is not the first to consider age-based financial incentives to arrest a brain drain. In 2019, Poland cut income tax for workers under the age of 26. Italy had a tax reduction scheme for returning employees and the self-employed. In 2015, Hungary’s Prime Minister Viktor Orbán even tried to lure young Hungarians back with free flights and a monthly stipend.

There is a logic to providing reliefs to cash-strapped, ambitious youngsters starting their careers. The transition from education to work is a costly one, particularly for those from poorer households. Portugal’s proposal sends a clear signal to young people that it is thinking boldly to persuade them to stay. But whether financial incentives actually make a significant difference in retaining or attracting talent is unclear. The IMF warned Portugal that the impact of preferential tax rates on emigration is “uncertain”.

Tax is just one of many factors young people consider when deciding where to live. The range of well-paying job opportunities and professional networks in Brussels, Berlin and Paris, for example, is a big draw. Portugal, by contrast, has a long way to go to diversify its industrial base beyond tourism and spur more job creation. Its youth unemployment rate is over 5 percentage points higher than the EU average. Workers also consider housing costs, child care support and public amenities when deciding where to set up. That is something the government needs to consider with its tax proposal, which is estimated to cost about €650mn a year.

Expats will want to see more evidence that Portugal’s long-term prospects are improving, particularly as they could be in for a hefty marginal tax rise when the proposed reliefs disappear in their thirties. That means initiatives to cut red tape, incentivise investment and raise Portugal’s burgeoning status as a hub for entrepreneurs are just as important.

Portugal’s plan, if it does pass through parliament, may jolt other European nations into bolder actions. The problem is that tax perks can only go so far when other countries are dangling their own carrots. Countries need to address a whole range of factors in their business environment if they want to win the race for talent.