Portugal’s State Budget with one of the lowest deficits in the Euro Zone in 2021

  • ECO News
  • 20 October 2020

A European analysis shows that Portugal's deficit will be one of the lowest.

António Costa’s government meets again this Tuesday with the Left Bloc (BE), the Portuguese Communist Party (PCP) and the People Animals Nature Party (PAN) to negotiate their support for the proposed State Budget for 2021 (OE 2021) delivered on October 12 in Parliament. One criticism made by the left is that the State Budget does not go as far as it could now that the European budget rules are suspended. The budget plans delivered to the European Commission show that the budget deficit with which the Portuguese government has drafted the State Budget for 2021 (OE 2021) is one of the lowest in the Eurozone. Among 17 countries, only Latvia, Greece and Luxembourg point to lower deficits.

According to the documents submitted by the member states to the European Commission, the deficit of 4.3% of the implicit GDP for State Budget 2021 is only above that of Latvia (-3.9%), Greece (-3.9%) and Luxembourg (-2.7%) and is equal to that of Germany (4.3%). On the other hand, it is significantly below those of Spain (-7.7%), Ireland (-5.7%) and France (-6.7%), for example. This suggests that Portugal plans to have a shorter fiscal stimulus than most European countries in 2021.

However, in the difference between the deficit of 2020 and that of 2021, which can be interpreted as the fiscal adjustment of each country, Portugal is in the mid-table with a deficit reduction of three percentage points. In Estonia, the deficit will even increase by a tenth, there are six countries where the deficit will decrease less than in Portugal and there are nine where it will decrease more.

In 2020, Portugal is also among the group of countries with the lowest deficit in the year the pandemic hit Europe. Only Ireland (-6.2%), Germany (-6.3%), Estonia (-6.6%) and the Netherlands (-7.2%) estimate a lower budget deficit this year, while France (-10.2%), Belgium (-10.3%) and Spain (-11.3%) expect to have much higher deficits.

The same analysis made for other fiscal indicators such as the structural deficit or the cyclically adjusted deficit do not show major differences in conclusions. In structural adjustment, Portugal also appears in the mid-table with a six-tenths reduction in the structural deficit. In value, the Portuguese structural deficit of 2021 (2.4% of potential GDP) is also only above that of Greece, Luxembourg and Latvia.

Accused of not going as far as it could, the government has argued that Portugal has a high public debt in relation to the size of the economy, which will increase significantly in 2020 to almost 135%. This is a reason for the government to be more cautious in the fiscal stimulus, since it is not known when the European rules will apply again, in order not to repeat the financial bailout of the previous decade, maintaining investor confidence in Portugal’s ability to repay its debt.