Government measures against the pandemic cost 2.5% of GDP

The measures adopted by the government so far to strengthen the NHS response, to protect employment, to provide social support, and to safeguard the liquidity of companies will have a direct cost of 2.5% of GDP. The estimate is made by the European Commission in the spring economic forecast released this Wednesday.

“The government adopted fiscal policy measures to reinforce the response capacity of the health system, protect jobs, provide social support and safeguard firms’ liquidity, with an estimated overall direct budgetary cost of around 2.5% of GDP,” reads the part of the European Commission’s report dedicated to Portugal. Taking 2019 GDP as a reference, the 2.5% translates into around 5 billion euros.

The government’s most recent estimate is that it will spend between 300 and 400 million euros per month on lay-offs, and the final impact on public spending will depend on how many months this employment support measure will last.

This should be the most costly measure, but the state is also spending more money on health and on other social support such as family support, extraordinary help for the self-employed and managing partners, and extended unemployment benefits.

This increase in public expenditure, together with the fall in revenue due to GDP contraction, will lead to a rise in the budget deficit. Portugal will go from a budget surplus in 2019, the first in democracy, to a deficit of 6.5% this year, according to European Commission forecasts. This indicator shows Portugal better than the Eurozone average (deficit of 8.5%).

The structural balance, which in 2019 was close to balance (-0.5%), should increase to -3.2%, but this indicator should lose its importance in these years as the European budgetary rules are suspended. The cyclically adjusted budget balance, i.e. removing the effect of the cyclical component of the economy stands at -3.6% this year.

According to the European Commission, the deterioration of the budget balance  is because of automatic stabilisers (unemployment benefits, for example) and to the need for budgetary policy to support the economy. This is reflected in the 2.4% increase in public consumption forecast by the European Commission, which will contribute positively to GDP.

“Member States have responded by adopting budgetary measures to limit the economic damage caused by the pandemic,” explains Brussels, noting that “so-called ‘automatic stabilisers’, such as the social security benefits, with discretionary budgetary measures, should result in increased spending.”

In a scenario of invariant policies, the deficit is projected to decrease in 2021, on the back of the expected economic recovery and the phasing-out of fiscal policy measures taken to tackle the pandemic.

Thus, in 2021, the Portuguese deficit should shrink to 1.8% and that of the Euro Zone to 3.5%, still above the red line of 3% imposed by European rules, which are currently suspended.

However, the budgetary risk remains downward as there are uncertainties about the epidemic curve and the “persistent” effects on the economy and society in Portugal, warns the European Commission, also recalling the possible obligations assumed by the State.