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The Portuguese Public Finance Council (CFP) report published today – Fiscal Risks and Sustainability of Public Finance – aims to identify and to analyse the risks to fiscal management as well as their impact on public finance and, in particular, of public debt. In this analysis, which will be updated every two years, the CFP assumes as its starting point its medium-term projections in a scenario of invariant policies (released in March).
In the recent years the Portuguese economy has achieved better macroeconomic and fiscal results than those initially projected by national and international institutions. However, very significant fiscal risks remain. For the CFP, the recognition of these risks and the attempt to regularly identify them and quantify their impact are essential to the sound management of public finances.
This report considers risk a measure of uncertainty as to the possible deviation from the expected result of a variable, which may assume a positive or negative value. Sustainability is understood as the ability of the State to honor the commitments it has made with citizens and with the creditors. The analysis of risk in this report is focused on five areas: macroeconomic performance, public revenue and public expenditure, contingent liabilities and public debt.
From the analysis it can be concluded that the main risks underlying the fiscal forecasts (and therefore underlying the sustainability of public finances) are related to the materialisation of growth trajectory inherent to the macroeconomic scenario assumed. These macroeconomic risks result from the economic cycle and the potential for growth in the long term.
In what concerns the economic cycle and based on the evolution of the GDP between 1977 and 2017, we conclude that the probability of Portugal being in recession in any year is approximately 15%. Assuming that the probability of recession is independent in each year, the probability of a recession occurring in any five-year period is approximately 55%.
On average, a recession in Portugal “costs” 3.1% of GDP and the Portuguese economy takes the same number of quarters to recover the previous level of GDP than the duration of the recession, except for the last two recessions. With regard to the recession during the global financial crisis of 2008, the Portuguese economy is expected to recover the level of pre-crisis real GDP during 2018.
In this report, the CFP presents a sustainability analysis of the public debt for the next 15 years, simulating the evolution of public debt to several exogenous shocks for that time frame.
Under those assumptions, public debt as a percentage of GDP is expected to decline to 106% in 2022 (mainly due to the accumulation of primary surpluses). From 2023 onwards, the reduction is less pronounced and public debt ratio is expected to converge to 94.7 % by 2033.
The analysis points to a marked sensitivity of the debt ratio to shocks in the GDP growth rate and in the value of the primary balance. Thus, real changes of +1 pp and -1 pp in GDP growth imply that the debt is between 71.6% and 122%, respectively, at the end of the 15 years of projection.
Date of last update: 25/07/2018
