Economic and Fiscal Outlook 2025-2029 (update)

Macroeconomic outlook

The global economy continues to be affected by high levels of uncertainty, exacerbated by the unpredictability of the US administration's trade policy and the escalation of geopolitical tensions. To date, the effects on the Portuguese economy have been limited despite the volatility of the external environment. The technical assumptions of this projection exercise are based on the trade policy framework known at the beginning of September. 

In this context, CFP's macroeconomic no-policy-change scenario projects a slightly lower growth of economic activity compared to that presented in April. The Portuguese economy is expected to grow real Gross Domestic Product (GDP) by 1.9% in 2025, a downward revision from the 2.2% previously projected. For 2026, the projection now shows a slowdown in the pace of growth to 1.8% compared to the 2% expected in the previous year. This is due to lower public investment rates throughout the horizon as well as a lower share of exports in GDP. In 2027, the most significant deceleration, to 1.6%, results from the end of the investment cycle associated with the Recovery and Resilience Plan (RRP). The outlook for medium-term growth remains unchanged at 1.8%, underpinned by productivity growth and positive migration balances. The absence of these two factors would penalize potential growth.

Growth in 2025 is expected to be driven by consumption and investment. The projection for private consumption benefits from the expected impact of economic policy (and administrative) measures of a one-off nature, similar to what happened at the end of 2024: the extraordinary pension supplement and the adjustment of the withholding tax tables of the personal income tax. In the case of investment, the growth projection reflects the expectation of a greater financial execution of the RRP with a positive impact on public investment. Failure to materialize would negatively impact the projection.

The CFP projects a gradual reduction in the inflation rate in line with the ECB's monetary policy objective. Measured by the rate of change of the Harmonised Index of Consumer Prices (HICP), it is projected to decline to 2.3% in 2025, after 2.7% in 2024, gradually converging to 2.0% over the medium term. 

The labour market has surprised on the upside in the first half of 2025, but the medium-term outlook remains constrained by an unfavourable demographic profile. Employment growth is projected at 1.5% in 2025, a pace that will slow over the projection horizon, in line with the updated demographic projections in the technical assumptions of the exercise. The unemployment rate is expected to maintain a downward profile, decreasing from 6.1% of the active population in 2025 (6.5% in 2024) to 5.8% in the medium term.

CFP Macroeconomic Scenario (change, %)

Sources: CFP own projections (2025-2029) and Statistics Portugal (2024).

Fiscal outlook

The CFP projects a balanced budget for 2025 and a return to budget deficits from 2026 onwards. The budgetary impact of permanent measures to increase public expenditure and reduce revenue, adopted in 2024 and 2025, aimed at improving the income of households, young people, pensioners, companies and the wage increases for various professional groups in the public service, contributes to this trajectory. This trajectory, which does not yet reflect the impact of additional defence spending, is marked, in 2026 and 2027, by the use of RRP loans with a projected negative impact, respectively, of 0.5% and 0.1% of GDP.

Compared to the previous projection for 2025, the CFP maintains the perspective of a balanced budget. Incorporating revisions that offset each other (less revenue, but also lower investment execution), the budget balance projected in April remains unchanged. The projection thus continues to point to a deterioration of this indicator by 0.7 p.p. of GDP compared to 2024, entirely determined by the increase in expenditure. However, this projection remains sensitive to several factors, such as the degree of execution of public investment, the use of RRP loans, developments in tax revenue, in particular concerning PIT collection notices and CIT refunds, the possible postponement or non-implementation of one-off operations and the adoption of expenditure containment mechanisms,  in particular through the management of available funds. Announcements made after the closing date were not considered, such as the new reprogramming of the RRP and the sale of state properties. Thus, the possibility of a slight budget surplus is not excluded if more favourable conditions than currently projected materialise.

A gradual deterioration in the budget balance is expected between 2026 and 2029. For 2026, a return to a deficit of 0.6% of GDP is projected, explained by the permanent measures previously adopted, accentuated by the effect of the increased use of RRP loans (without this effect, the deficit would be 0.1% of GDP). For 2027, a deficit of 0.6% of GDP is also anticipated. In fact, despite the lower use of RRP loans which benefits the budget balance by 0.4 p.p. GDP, this positive effect is offset by the drop in PIT revenue. This decline results from the normalization of refunds and collection notices, thus returning to levels prior to those observed during the application of extraordinary withholding tax rates, which temporarily postponed the full revenue impact of the tax cuts  introduced in 2024 and 2025. 

In 2028 and 2029, the deficit is expected to worsen to 0.7% and 0.8% of GDP, respectively, reflecting a reduction in the tax and contribution revenue ratio. 

From 2026 onwards, the growth trajectory of net expenditure is expected to deteriorate compared to the path presented in April. The projection maintains a growth  trajectory for net expenditure above the commitment assumed by the Portuguese State in the National medium-term fiscal-structural plan (MTP), revising the growth of this indicator upwards for the years 2026 to 2028. This revision is mainly due to a higher growth in current primary expenditure than projected in April, mainly driven by expenditure on personnel and social benefits, as well as a greater impact of discretionary revenue measures.

CFP Fiscal Scenario (% of GDP)

Sources: CFP own projections (2025-2029) and Statistics Portugal (2024), first notification of 2025 under the Excessive Deficit Procedure.

For 2029, the CFP projects the public debt ratio will decrease by 9.4 p.p. of GDP compared to 2024, reaching 85.6% of GDP by the end of the projection horizon. This trajectory is mainly explained by primary surpluses, also benefiting from the contribution of a favourable dynamic effect, although progressively lower, reflecting a lower price effect, especially from 2026 onwards. Despite some instability in the euro area, Portuguese debt has shown resilience, reflecting a consistent improvement in the country's risk perception in recent months. This development signals the credibility gained in the debt markets. 

Risks and factors not considered in the no-policy-change projection

The macroeconomic scenario remains surrounded by a high uncertainty environment, with risks on economic activity mostly tilting to the downside and remaining broadly balanced for inflation. On the external level, the following risks stand out, on the negative side: the instability around the governance of US trade policy, including doubts about the ability to ensure its compliance and stability of the agreement reached with the EU; increased volatility in financial markets and higher financing costs, given high levels of public debt in the euro area and political hotspots, notably in France. In this context, and from the point of view of economic growth, the increase in defense and infrastructure spending in Europe presents itself as a positive risk. At the domestic level, the human and material costs of extreme weather events, as exemplified by the forest fires experienced in recent months, and the possibility of public investment growing at a slower pace than expected, in particular due to additional delays in the financial implementation of the RRP, stand out negatively. On the contrary, higher-than-projected household consumption growth is an upside risk, particularly in the context of the recently adopted income pro-cyclical stimulus measures; and a growth in employment that may continue to surprise on the upside.

The fiscal scenario presents a several factors not considered in the projection and risks that may influence its trajectory. In particular, as it is a no-policy-change projection, it does not take into account the increase in defence spending necessary to meet the NATO commitment of 3% of GDP, nor the measures already announced for further reductions in PIT and CIT envisaged in the Government's programme until 2029, as well as the annual increases in expenditure on the Solidarity Supplement for the Elderly after 2025, which depend on an annual decree, as shown in Box 4. Nor was any consideration given to a possible refund of revenue collected from the Extraordinary Contribution on the Energy Sector (CESE) relating to gas, or a possible extension of the declaration of unconstitutionality to other energy sectors beyond gas.

Regarding risks, in addition to those identified in the macroeconomic scenario, with predominantly downward effects, the following should also be mentioned: contingent liabilities such as public-private partnerships and public guarantees (namely the InvestEU and Youth Guarantee lines); extreme events and natural hazards; additional defense investment spending to secure the government's commitment of 3% of GDP in 2029; increased health expenditures due to the aging of the population and technological development; and the extension of career revisions to other professional groups in public administration. On the upside, there may be factors leading to a more favourable fiscal path. Among these, a higher elasticity of tax revenue, a more robust growth in contributions, a lower execution of nationally financed public investment (including through the loan component of the RRP) and lower interest charges, if the scenario for public debt proves to be more favourable, stand out.

Date of last update: 22/09/2025