Q1 deficit still allows for surplus in 2024

The Bank of Portugal’s warning that government spending plans could derail the country’s public finances seems to be correct if figures for Q1 public spending are anything to go by.

Portugal posted a deficit of 0.2% of GDP for Q1 which automatically runs the risk of a government budgetary overspend by the end of the year.

According to data released on Monday by the National Statistics Institute (INE), Portugal once again was in the red when it came to the nation’s accounts, which are hawkishly observed by Brussels, to the tune of 0.2% for January to March compared to 1.1% for the last quarter of 2023.

This phenomenon is not unheard of. Last year, for the first time since 2000, (when INE records began for this index) Portugal posted a surplus of €692 million for the first quarter. And in the first quarter of 2022, Portugal posted a deficit of 0.6%, and in the first quarter of 2021 the deficit had stood at 5.7%, yet in the same period in 2019 it has been zero.

The 0.2% deficit for Q1 corresponds to -€118,9 million as a result of increased expenditure (+11%) above increased revenues (+7.3%).

However, the economist Pedro Braz Teixeira from the Forum of Competitiveness says that the results can be reversed and don’t have to necessarily put the country’s accounts at risk for the rest of the year.

But warns that here is a political risk from measures that might be taken because of the current way that parliament is configured.

However, the economist and coordinator of NECP – Católica Lisbon Forecasting Lab, João Borges de Assunção says increases in public spending in Q1 (+11% on Q1 2023) are “worrying” but consistent with data sent to the budget office – General Directorate for the Budget whose data points to a €259 million deficit by March.

Jorge Borges de Assunção says, “It’s too early to draw conclusions for the whole year” while ISEG economist Ricardo Ferraz says that while the results are only for one quarter “warning bells should be ringing.”

Under new Brussels rules, EU member sates in the Euro Zone may not run accumulated debts of over 60% of GDP. Portugal is one of 12 that does, and one of eight that must adjust their budgets over periods of four and seven years, along with Austria, Belgium, Greece, Hungary, Slovenia, Germany, and Spain according to the think-tank Bruegel.

The European Commission began a review of the rules in 2020, though this was interrupted by the pandemic. The review restarted in October 2021 and led to an updated set of fiscal rules, which entered into force at the end of April 2024.

EU countries are required to both maintain their budget deficits below 3% of GDP, unless the “deviation is small and temporary”, and to keep gross government debt below 60 percent of GDP, unless debt is “sufficiently diminishing and approaching the reference value [i.e., 60 percent] at a satisfactory pace”.

The Excessive Deficit Procedure (EDP) involves a process by which the European Commission declares a deficit to be excessive and proposes corrective fiscal adjustment. Once this is endorsed by EU countries in the Council, the country concerned is expected to undertake the adjustment. If not, the procedure can lead to escalation, possibly resulting in financial sanctions. Meaningful sanctions have never been imposed, but there is some evidence that the EDP has created incentives to keep deficits below 3 percent.

In the new framework , there is only a single operational target in the form of a net expenditure path over a four-to-seven year adjustment period . This is set to ensure that “by the end of the adjustment period, assuming that there are no further budgetary measures, the projected general government debt ratio is put or remains on a plausibly downward path, or stays at prudent levels below 60 percent of GDP over the medium-term”

The good news for Portugal is that the EU adjustment requirements for Portugal are small, despite high debt levels, because Portugal enjoyed a sizeable primary surplus in 2023. However, as economists warn, if the government keeps running a budget deficit over the next quarters and does nothing to offset increased spending on wage increases, housing measures, and pensions, etc, the EU could come down on her like a ton bricks. It remains to be seen how.

Image: Government of Portugal: Portuguese Minister of Finances, Joaquim Miranda Sarmento