Portugal's Cost-of-Living Squeeze Deepens — ISP Reform, Rising Fuel Bills, and a Political Clash Over Who Pays
Two developments on Tuesday underscored how the cost-of-living crisis is reshaping Portugal's political landscape: the Council of Ministers approved a structural overhaul of the fuel tax regime, while the Socialist Party accused the government of...
Two developments on Tuesday underscored how the cost-of-living crisis is reshaping Portugal's political landscape: the Council of Ministers approved a structural overhaul of the fuel tax regime, while the Socialist Party accused the government of pocketing an inflation windfall worth hundreds of millions of euros.
The ISP Overhaul
The government approved a proposal of law that changes the underlying legal framework of the Imposto sobre Produtos Petrolíferos (ISP), Portugal's excise duty on fuel. The reform lowers the statutory minimum tax thresholds, giving the executive room to cut fuel duties further if prices continue to climb.
Until now, the government has relied on temporary executive orders — portarias — to periodically reduce the ISP by redirecting windfall VAT revenue generated by higher pump prices. The most recent portaria, published last Friday, sets the extraordinary discount at 8.34 cents per litre. But these cuts were approaching the legal floor set by EU excise duty directives, limiting how much further the government could go.
Tuesday's reform removes that constraint. If Brent crude remains above USD 100 and the Strait of Hormuz disruption persists, the government now has the legal tools for deeper cuts.
The Opposition's Counterattack
Hours after the Council of Ministers announcement, PS leader José Luís Carneiro visited Lisbon's Mercado de Benfica to deliver a pointed critique. His central claim: if inflation overshoots the budget assumption by 1.5 percentage points — reaching 3.6% instead of the forecast 2.1% — the state will automatically collect an additional EUR 500 million in VAT revenue.
"This is immoral — the state making money from the sacrifices of the Portuguese people," Carneiro told journalists. Extended across all tax categories, the PS estimates the windfall could reach EUR 1.668 billion, or 0.52% of GDP.
Two Visions, One Crisis
The disagreement reveals a fundamental policy divide. The government's approach is incremental: use ISP adjustments to return some of the extra VAT take, preserving fiscal discipline while providing targeted relief. The PS wants something more aggressive — zero VAT on a basket of essential foods, a temporary VAT cut on fuel and gas from 23% to 13%, an ISP exemption on agricultural diesel, and a support package for transport companies.
The PS estimates its package would cost 0.15% of GDP per quarter, arguing this is easily affordable given the inflation-driven revenue surplus. The Finance Minister disagrees, and has publicly opposed the zero-VAT proposal.
What's at Stake
The political temperature will rise on Friday, when the PS brings these demands to a parliamentary debate. The timing is charged: it falls just days before the 20% US tariff on EU goods takes effect on April 9, adding another layer of economic uncertainty.
For Portuguese households, the numbers are already painful. Diesel has climbed roughly 44 cents per litre since March 8 and now averages EUR 2.16. Gasoline 95 has risen about 20 cents to EUR 1.95. The question is no longer whether the government will intervene further — it is how far it is willing to go, and whether the opposition can force its hand.
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