Local Government Budget Outturn in 2023

This report is based on public budget accounting data for 300 of Portugal's 308 municipalities (98.8% of actual expenditure in 2019). Considering this universe, Local Government reached a budget surplus of 24 million € in 2023, a significant reduction from the 353 million € balance achieved in 2022 and lower than forecast in the Report accompanying the draft State Budget for 2023 (SB/2023) (which pointed to 256 million € surplus). The decrease in the surplus is the result of an increase in actual expenditure by 1.2 billion €, higher than the actual revenue increase (0.9 billion €).

In 2023, municipalities' actual revenue grew by 8.7%, above the 4,5% forecast in the SB/2023 for the local sub-sector (4.5%), underpinned by an  increase in transfers, particularly those received under decentralised competencies, which accounted for almost two thirds of this change. Contrary to what was forecast in the SB/2023, own non-tax revenue (fees, property income, sale of goods and services and others) contributed in the same way, although proportionally less. On the other hand, municipal tax revenue grew by 2,5%, at a much slower pace than in 2022 (12.5%).Even so, it contradicted the decrease expected in the SB/2023 Report. 

Growth of municipal spending accelerated to 12.3% in 2023, almost doubling the increase recorded in 2022 driven by current primary expenditure (9.3 p.p. of the 12.3%), but also by capital expenditure (2.5 p.p.) and interest (0.5 p.p.). This growth was the result of higher spending on staff (13.5%) and on the purchase of goods and services (12.1%). In the first case, this reflects across-the-board pay rises for all general government workers, as well as the transfer of staff in service as part of the decentralisation process, although with much lower impact than in 2022. In the case of goods and services acquisition, the referred increase, in addition to reflecting the effect of inflation, which persisted in 2023, is influenced by expenditure related to the decentralisation of competences. Unlike revenue, the economic classification of expenditure does not allow for the specific identification of expenditure financed by transfers made under the Decentralisation Financing Fund (FFD). This information, which is a necessary condition for greater transparency about the decentralisation process, made progress in its monitoring in 2023, but is still insufficient for a proper assessment.

With regard to investment, namely supported by capital transfers, mainly from European funds, there was an 11.2% increase in 2023 (+257 million €), contrasting with the reduction recorded in 2022, although much lower than anticipated in the SB/2023 Report (21.5%).

Despite the limited information, there is evidence that municipalities' unpaid expenditure has increased in 2023, both in terms of non-financial liabilities (1.1%) and in terms of unpaid bills and arrears. This development reversed the 2022 downward trend, largely due to the unfavourable evolution of a small number of municipalities. This evolution is paralleled by the evolution of the average payment period (PMP) of municipalities, which worsened, albeit by just one day, to 23 days, despite the unavailability of data for 34 of the 308 municipalities, which may bias this comparison.

The total municipal debt considered for the purposes of the legal limit was slightly reduced in 2023, notwithstanding the worsening of some individual situations. The total municipal debt of 302 of the 308 municipalities - financial and non-financial debt - considered for the purposes of the legal limit fell by 21 million €, from 3570 million € to 3549 million €. Based on this indicator alone, at least 12 of the 302 municipalities were above the total debt limit on 31 December 2023, three less than at the end of 2022. These developments reflect the decrease in debt observed in 191 municipalities (a reduction of 266 million €), more than offsetting the increase reported by the remaining 111 municipalities (245 million €).

However, if all municipal liabilities were taken into account, there would have been no reduction in debt in 2023. In other words, if the debt excluded by the legislator were to be included, there would have been a slight increase of 4 million €. This situation was fuelled by a 38 million € increase in legally excluded debt, especially in 2023 relating to loans stemming from contracts signed by the municipalities of Lisbon, Loures and Oeiras as part of World Youth Day.

As the municipal reality is characterised by heterogeneous situations, a more disaggregated analysis reveals financial difficulties in some municipalities, some of which are ongoing, and which should continue to be monitored. The increase in financial difficulties in 2023 even led two of these municipalities, Alfândega da Fé and Freixo de Espada à Cinta, to resort to financial assistance from the Municipal Support Fund (FAM) at the beginning of 2024. A possible revision of the local finance law should go hand in hand with a revision of the framework for financial recovery mechanisms.

Last of all, for the transparency of budgetary and financial developments in the subsector, it is necessary that municipalities with missing information (and other local authorities and entities) provide it in accordance with the legally established terms and in a timely manner, in particular to DGAL. Compliance with the duty to publicise accounting documents and other economic and financial information on the respective institutional websites also contributes to this.

Date of last update: 18/07/2024