European Commission validates Portuguese government deficit of 7.3%. Debt exceeds 135% of GDP

The European Commission considers that the government’s forecast for this year’s budget deficit is correct. In the Autumn 2020 Economic Forecast released this Thursday, the EU executive foresees a budget imbalance equivalent to 7.3% of GDP in 2020, the same as forecast by the Ministry of Finance in the proposed State Budget for 2021 (OE 2021). For 2021 it points to a deficit of 4.5%, slightly above the 4.3% estimated by Portugal’s finance minister.

As for public debt, the European Commission’s prospect is that it will rise to 135.1% of GDP, above the 134.8% forecast by the government in State Budget 2021. This difference can be explained by the more pronounced recession that Brussels sees for Portugal this year: the forecast is for a 9.3% drop in GDP, above the 8.5% predicted by the Portuguese government. In 2021, the public debt should fall to 130.3% – mainly due to the GDP growth effect – a better forecast than the 130.9% of the State Budget for 2021.

According to the European Commission’s calculations, the pandemic crisis will have an impact of 7.25% of GDP on public finances, “reversing last year’s budget surplus.” Most of this impact will come from the operation of automatic stabilizers, such as unemployment benefit, and from fiscal policy measures adopted to counter the crisis, such as the simplified lay-off. These measures will have a cost estimated at 3% of GDP.

Next year, the economy’s improvement, the lower fiscal burden of crisis mitigation measures and the recovery of tax collection should lead to a significant reduction in the deficit, which is also helped by a one-off revenue related “the reimbursement of the pre-paid margin that was deducted from the financial assistance loan granted by the European Financial Stability Facility (0.5% of GDP).”

However, the risks to public finances continue to weigh heavily due especially to the “piling up of public contingent liabilities stemming from some public corporations and the crisis mitigation measures targeting the private sector,” the European Commission points out, adding that the same risks also exist for some public companies. This is the case of TAP, which will receive a guarantee of 500 million euros in 2021 (if the State Budget for 2021 was approved), or Novo Banco, whose contingent capital mechanism will not yet be exhausted with the amount foreseen for 2021.

In relation to the deficit in 2020, the Portuguese budgetary imbalance will be lower than the Euro Zone average (-8.8% of GDP). In 2021, the Portuguese deficit should also be better than the average (-6.4%).