Go to main content
aa+
-aa
pt | en
CFPCFP
Contraciclo - O blogue da CFP

Additional-Inflation Impact on the Tax Revenue and Social Contributions in 2022 and 2023

By: Francisco Ruano

The General Government revenue generated by the set of taxes and social contributions existing in the Portuguese legal framework globally depends: i) on the dynamics of the underlying macroeconomic aggregates; ii) on the impact of policy measures; and iii) on other residual effects (greater efficiency regarding the tax collection and fight against tax evasion, fewer compliance costs, etc.).

 

The high inflation context faced in the last two years led to a relevant increase in the tax revenue and the social contributions. Therefore, estimating the amount of these gains is important to determine what generically can be described as an “inflationary dividend”. This additional revenue can be classified as an “inflationary dividend” since it does not result: i) from the evolution of economic activity in real terms; ii) neither from the price growth in line with the ECB's medium-term objectives and previously anticipated by economic agents; iii) nor the impact of policy measures aimed at achieving a budget consolidation equivalent to the one ultimately registered due to this effect.

 

The methodology used to quantify the “inflationary dividend” consisted in the breakdown of the tax revenue and the social contribution gains in the several explanatory components mentioned above (real and nominal macroeconomic evolution, policy measures and other effects). Additionally, the nominal component (price effect) was divided into the revenue generated by the price growth in line with the European Central Bank's medium-term objective (2%) and the one arising from the price growth above this reference. For the years 2022 and 2023, the taxes and social contributions were estimated based on the evolution of the underlying macroeconomic variables and the elasticities used in the CFP projection model [1] 

 

From the following graphs, it can be observed that the “inflationary dividend” (impact of the additional price effect) amounted to €3846 M and €5440 M in 2022 and 2023. The size of this “dividend” explains approximately a third and two thirds of the total increase in the tax revenue and social contributions in the respective years. Conversely, the volume effect decreased from 4120 M€ in 2022 to 1946 M€ in 2023 due to the slowdown of the economic activity in real terms. Therefore, the volume effect was responsible for only 24.5% of the increase in the tax revenue and social contributions in 2023.

 

Sources: Statistics Portugal, MoF and CFP calculations.

The weight of the “inflationary dividend” increased in 2023. This evolution was largely due to the additional revenue arising from the PIT and the social contributions, reflecting the acceleration in the average wages (8.3% in 2023 vs. 6.0% in 2022) and the consequent additional price effect related to these two items. Conversely, the deceleration of the private consumption deflator (5.1% in 2023 vs. 7.1% in 2022) and of the Consumer Price Index (4.3% in 2023 vs. 7.8% in 2022), implied the reduction of the “inflationary dividend” resulting from the VAT revenue (€939 M in 2023 vs. €1405 M in 2022). 

 

Sources: Statistics Portugal, MoF and CFP calculations 

 

In the last two years, the additional price effect or “inflationary dividend” contributed substantially to the tax revenue and the social contributions growth.  It is estimated that its global impact amounted to 1.6% of GDP in 2022 and 2.0% of GDP in 2023. Despite its relevant contribution to the recent budgetary consolidation, the margin to obtain revenue increases of this magnitude will tend to be reduced, since the wages and prices of goods and services are expected to increase at a more moderate pace. Therefore, in following years the budget exercises will be constrained by revenue growth rates closer to the real dynamics of its underlying macroeconomic aggregates, since the nominal effects will tend to be less relevant than the ones recently observed.

 


[1] The same taxes and social contributions were also estimated based on the elasticities present in several publications to compare the values ​​obtained and strengthen the results of the present exercise. These publications include:

Braz, C., Campos M., e Sazedj S. (2019). “The new ESCB methodology for the calculation of cyclically adjusted budget balances: an application to the Portuguese case.” Working paper, Bank of Portugal.

Mourre, G., Astarita C., e Princen S. (2014). “Adjusting the budget balance for the business cycle: the EU methodology.” European Economy – Economic Papers 2008 - 2015 536, Directorate General Economic and Financial Affairs, European Commission.

Price, R., Dang T., e Botev J. (2015). “Adjusting fiscal balances for the business cycle: New tax and expenditure elasticity estimates for OECD countries.” OECD Economics Department Working Papers.

Date of last update: 15/05/2024

Fiscal policy . 15 May 2024