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Economic and Fiscal Outlook

The Portuguese Public Finance Council (CFP) economic outlook, under a no-policy change assumption, anticipates the Portuguese economy real growth to recover to 4.7% in 2021 and to 5.1% in 2022, after a contraction of 7.6% in 2020. This upward revision takes on board the recently approved Recovery and Resilience Plan (RRP), the economic developments from the 2nd quarter of 2021 onwards and the lifting of restrictions on economic activity in a country with one of the highest vaccination coverage rates in the world. 


In this scenario and in the medium term, economic growth should converge to values around the potential output growth (2.0%).

In the labour market, an unemployment rate increase to 7.3% is foreseen in 2021, stabilizing around 6.4% in 2025.


The CFP estimates a continued annual budgetary imbalance reduction over the projection horizon, with the deficit decreasing between 2021 and 2023 from 4.2% of GDP to 1.6% of GDP and stabilising in the last two years of the scenario, standing at 1.4% of GDP in 2024 and 1.3% in 2025.


The debt ratio declines over the entire projection horizon, and is expected to reach 114.1% of GDP in 2025, decreasing 19.5 p.p. relative to 2020, with the pace of reduction being more significant in the first two years.


This projection holds downward macroeconomic and fiscal risks, namely:


  • the delay in vaccination processes in partner economies or the emergence of new variants that reduce the effectiveness of currently available vaccines could lead to a stall in lifting restrictions, negatively affecting the recovery of the economy, particularly through the tourism sector; 
  • a delay in the economic recovery, could increase the risk of business insolvencies and, consequently,  lead to a deterioration of labour market conditions and a reduction in household income, which, associated with their high level of indebtedness, exacerbates the risk of non-performing loans, especially after the end of credit moratoria, with an impact on the liquidity conditions of the economy;
  • a high level of indebtedness of firms, households and general government, may negatively affect the financing conditions of the economy over the projection horizon.
  • an execution of the NextGenerationEU program below expectations or the possibility that its impact on GDP to be lower than projected.


In the upside risks, a higher growth in social contributions than in remunerations (as has been seen in the most recent period), a greater elasticity of tax revenue vis-à-vis the tax bases, less public investment supported by national financing or less intense growth in social benefits may translate into a more favourable evolution than that projected for the fiscal balance over this time horizon. 


Public expenditure control is now, more than ever, essential. One instrument that should deserve new attention is the so-called 'spending review', an area where the steps taken in Portugal have so far been timid. In 2016, the Government created a working group with the purpose of studying the implementation of a true public expenditure review system. However, as pointed out by the CFP, there are no published data on the actual savings achieved in this expenditure review exercise, nor does this exercise compare with that carried out in other countries.


This effort to prioritize spending will be, in the coming years, one of the biggest challenges of management and public finances. Only this will make it possible - in an expected context of fiscal policies aimed at reducing excessive public debt - to obtain enough fiscal space to accommodate the significant upcoming budgetary costs of the environmental and digital transition (in addition to the costs of demographic aging) which, in the end, will be borne by taxpayers. Remember that the RRP will only finance a (small) part of these costs immediately.

Date of last update: 16/09/2021

Economic and fiscal outlook . Report nº 7 . 16 September 2021