Pandemic leaves Portugal with a deficit of 1.1% in Q1

The budget deficit was 1.1% of GDP in the first quarter of this year, in national accounts, the one that interests Brussels, show the data published this Wednesday, June 24, by the Statistics Portugal (INE). This was the last full quarter in which Mário Centeno led the Finance Ministry.

“The general government balance was negative in the 1st quarter of 2020, reaching -570.9 million euros, corresponding to -1.1% of GDP, which compares with 0.1% in the same period of the previous year”, states INE, pointing out “in year-on-year terms, there was an increase in total expenditure (4.3%), higher than the increase in total revenue (1.1%)”. Although they already reflect the impact of the pandemic, these figures do not yet fully incorporate this effect since they refer to the period between January and March of this year.

The government’s forecast for 2020 is a budget deficit of 6.3% of GDP, according to the Supplementary Budget presented this month. However, since only three months of budget execution have elapsed, mainly at a time of high uncertainty, it is not possible to establish extrapolations for the whole year. Moreover, João Leão, the new Minister of Finance, has already assured that the Finances will not “rigidly interpret the deficit target”, showing openness to let the automatic stabilisers (such as the unemployment subsidy) work freely.

What explains this significant deterioration in the budget balance? The biggest explanation lies on the expenditure side, which has increased more than revenue, contrary to what has happened in recent years, because of the expenditure related to the pandemic. First of all, expenditure on social benefits grew by 3% and intermediate consumption by 9.3%, “reflecting the increase in expenditure on health services specific consumption in the context of the fight against the Covid-19 pandemic and on subsidies paid (18%).”

On the revenue side, it did not fall in the first three months despite tax deferrals, lower private consumption and an increase in unemployment during March. Revenue from taxes on income and wealth increased 1%, social contributions rose 2.7% and current revenue grew 16.1%. Revenue from taxes on production and imports (VAT, for example) decreased 0.6%, a sign of the drop in consumption. It should also be noted that “capital revenue increased by 12.6%, justified by the increase in transfers received from the European Union.”