Deficit to leap to 6.9% in 2020 with aid to TAP

Portugal’s Public Finance Council (CFP) estimates that government financial aid to TAP will raise the deficit to 6.9% of GDP in 2020, a 0.4 percentage point increase over its previous projections.

In the report “General government budgetary developments until March 2020”, the CFP stated that the “significant” deterioration of the deficit to a figure between 6.5% in the baseline scenario and 9.3% in the adverse scenario, indicated in the “Economic and Budgetary Prospects 2020-2022,” published in early June, did not take into account that aid to the airline.

This new figure for the deficit projected by the body chaired by Nazaré da Costa Cabral does not yet incorporate the amendments made by the parties to the Amending Budget during the debate on the speciality, which, according to the finance minister, amounts to 1.4 billion euros.

The 946 million euros aid operation to TAP will also have a negative impact on debt projections, with the CFP pointing out that the ratio will rise to 133.5% of GDP in the baseline scenario and 142.3% of GDP in the adverse scenario.

Faced with the current uncertainty, the CFP points out that the financial assistance to TAP, whose “budgetary impact of 946 million euros may be greater than expected,” comes on top of the risks of “a possible extension in time of this epidemiological phenomenon that will impose additional restrictions on economic activity.”

For the first quarter of 2020, despite considering that the impact of the pandemic was still “minor” at that stage, the CFP states that there was a deficit of 1.1%, a figure that does not take into account the amount of taxes and contributions that remained unpaid as a result of the exceptional and temporary measure that allowed companies to defer and phase in three or six instalments their payment.

The report also stated that after the budget surplus reached in 2019, “the government returned to a deficit in the first quarter of 2020, a deterioration of the budget balance which, in year-on-year terms, represents the largest of the last eight quarters.”

The increase in public expenditure, which was four times higher than revenue, contributed to this deterioration in the balance”, the document states.

On the revenue side, the CFP mentions that the figure recorded is 217 million euros higher than that seen in the first quarter of 2019, but points out that this growth, which represents a year-on-year rate of change of 1.1%, “is strongly influenced by the additional adjustment of around 550 million euros made for tax and contributory revenue, the likelihood of effective collection of which is unknown” – in an allusion to the measure of deferred payment of taxes and contributions.

The CFP also stressed that expenditure on subsidies increased by 31 million euros in the first quarter, a figure that does not yet take into account the impact of the pandemic, since for the year as a whole an increase of more than 2 billion euros is forecast, reflecting an implicit growth of 233%.

“In fact, most of the impact of the expenditure side measures adopted since the pandemic crisis (in particular the simplified layoff) will fall under this heading, which is why it is expected that expenditure on subsidies will accelerate in the coming quarters”, also noted the Council chaired by Nazaré da Costa Cabral.

On the evolution of public debt, the CFP said that the downward trend of the ratio that had begun in the second quarter of 2019 was interrupted, standing at 120% of GDP in the year ending in the 1st quarter of 2020.