The general government sector (GG) recorded a 5240 million euros (M€) deficit in the first six months of the year, (i.e. 5.4% of GDP generated in the period), which represents a significant annual deterioration in the budget balance of 4019 M€ (4.2 p.p. of GDP), driven by increased public spending (2069 M€) and by a drop in revenue (1949 M€).
This result, which already reflects the impact of the budgetary response measures to the pandemic crisis, with incidence in a full quarter, is also affected by the expenditure related to the Novo Banco recapitalization in Q2 (1035 M€) and the transfer of the Mutual Agricultural Credit Guarantee Fund to the Deposit Guarantee Fund (80 M€) held in Q1. As in Q1, the GG balance continues to benefit from significant additional time adjustments, the magnitude of which amounted to approximately 2000 M€ (2.2 p.p. of GDP) in the 1st semester, of which approximately 594 M€ (0.6 p.p.) related to VAT, PIT and social contribution extension payments. Without these additional adjustments, the deficit in the first half of the year would have been set at 7.6% of GDP, or 6% of GDP if the latter did not consider the revenue not yet collected for the extensions of tax and contributory obligations.
The GG primary balance (before interest charges) returned to a deficit position in the period under review (-2341M€, equivalent to -2.4% of GDP), stopping the series of successive primary surpluses recorded in the last 12 quarters.
GG revenue stood at 38 989 M€ (40.1% of GDP), 4.8% less than a year earlier in the same period. Two-thirds of this decrease resulted from the negative evolution of tax and contributory revenues (-1292 M€; -3.8%). Without the additional adjustment on the extension of tax and contributory obligations, the GG total revenue would record a year-on-year decline of 6.2%.
Public expenditure reached 44 229 M€ in the first half of 2020 (equivalent to 45.5% of GDP generated in that period), 4.9% more than in the first six months of 2019. More than two-thirds of this growth was justified by the Social Security Funds subsector (+1459 M€), largely reflecting the unfavorable impact of the pandemic by COVID-19.
The government debt ratio rose 6.6 p.p. to 126.1% of GDP, matching the end of 2017 level, but still below the most recent Ministry of Finance forecast (133.8%) included in the 2nd Notification of the Excessive Deficit Procedure. For this development contributed both the higher volume of nominal debt and the nominal GDP contraction.
The result observed for the balance and public debt, although below the expected for the whole of the year, did not decrease the high degree of uncertainty about the persistence of the economic effects of the pandemic, still in progress, which may affect the 2nd semester developments with a relevant impact on the annual estimate advanced by the different forecasters.
Date of last update: 08/10/2020