Analysis of the Stability Programme 2023-2027

Being the first Stability Program presented by the XXIII Constitutional Government, its analysis is of special importance for presenting the budgetary perspectives for the whole legislature and an additional year. The short time available for the completion of this Report, in time to inform the parliamentary hearing of 26 April, is, however, a relevant limiting factor.

Medium-term budgetary developments in the stability programme

The path of the budget balance presented in this document for the period 2023 to 2027 continues the commitment to achieve budgetary balance. The expected developments in public revenue and expenditure point to an annual improvement in the budget balance, an indicator that in 2027 is expected to return to the position that occurred a year before the outbreak of the pandemic.

The weight of public revenue is expected to fall from 44.4% of GDP in 2022 to 42.2% of GDP in 2027, as a result of a cumulative growth forecast for nominal product (27.9%) higher than expected for General Government (GG) revenue in nominal terms (21.8%). The decrease of 2.1 p.p. in GDP predicted by the MF will reflect the expected reductions, both for the weight of tax and contributory revenue (-1.4 p.p. of GDP) and for the weight of remaining public revenue (-0.7 p.p. of GDP), the latter reflecting the decrease in the weight in GDP of other current revenue resulting from the dissipation of financial flows received under the RRP,  as well as the performance of sales of goods and services which, according to the scenario of the Ministry of Finance, will evolve below the expected growth for economic activity until 2027.

As for public expenditure, its weight is expected to fall from 44.8% of GDP in 2022 to 42.1% of GDP in 2027, following a cumulative growth of nominal GDP (27.9%) higher than that of expenditure in nominal terms (20.4%). This reduction in expenditure of 2.6 p.p. of GDP is contributed by the behavior of primary current expenditure (-2.9 p.p. of GDP) and capital expenditure (-0.6 p.p. of GDP). On the contrary, a reversal of the path of reduction of interest charges in GDP initiated in 2015 is expected, with an increase of 0.8 p.p. of GDP between 2022 and 2027. All its components will contribute to the reduction of primary current expenditure, which are expected to register average annual growth below that of nominal GDP in the period under review. The decrease in the weight of capital expenditure results from the reduction foreseen in the item "other capital expenditures" (-1 p.p. of GDP), attenuated by the increase in GFCF (+0.4 p.p. of GDP), the only component of primary expenditure whose weight in GDP is expected to increase between 2022 and 2027.

Fiscal policy measures are concentrated in 2023, resulting in an increase in expenditure in 2023 compared to 2022 of 3010 million € and a loss of revenue of 1228 million €, which leads to a direct negative impact on the change in the budget balance of 4238 million €, equivalent to 1.6% of GDP. On the expenditure side, measures of a one-off nature are planned for 2023 with a budgetary impact on expenditure of 2013 million €, which should be fully reversed in 2024 according to the SP/2023.

For the entire period 2023-2027, fiscal policy measures are expected to contribute negatively to the revenue level of GGs, although more than half of this effect is not specified. The cumulative impact of the policy measures signaled on public revenue will amount to 1908 million € in the year 2027. Of this amount, more than 60% (1150 million €) derives from a measure included in the document as "Reduction of the Tax Burden" in the IRS, not specifying the tax mechanisms that will contribute to this objective. On the expenditure side, the main fiscal policy measures imply an increase in the level of expenditure of 747 million € between 2022 and 2027. This variation is the result of a reduction of 391 million € to be obtained in the context of the expenditure review exercise and an increase of 1138 million € resulting from the mid-term update of pensions, the extraordinary income support and the interim updates of the values of the remuneration of GG workers and the meal allowance. It is also important to bear in mind that the interim increase in pensions of 500 million € from July 2023, by raising the level of pensions in December 2023 to the level they would have had if the update to 2023 had strictly followed the legal criterion, permanently increases pension expenditure by approximately one thousand M€ (0.4% of 2022 GDP) from 2024 (inclusive).  There is a risk that the permanent increase in the level of expenditure could be higher if the one-off measures for 2023 are successively extended, rather than discontinued as assumed in the SP/2023.

The SP/2023 forecasts a decrease of 21.9 p.p. of GDP in the public debt ratio, reaching a value below 100% of GDP already in 2025, and reducing to 92% of GDP in 2027. The favorable contribution of the nominal GDP effect is preponderant in the debt dynamics foreseen in the SP/2023, contributing to a reduction of 25.3 p.p. of GDP in cumulative terms, this contribution being mostly due to price growth (15.6 p.p.). Compared to the 2015-2019 period, the strongest projected reduction in debt is based on higher primary surpluses and a more favourable dynamic effect reflecting lower interest charges and price growth, with a contribution expected from the less intense real growth of the economy.

Coherence of the macro-fiscal scenario

As part of the assessment of the medium-term budgetary forecast underlying SP/2023, the recalculation exercise carried out by the CFP on the basis of the macroeconomic scenario and the policy measures foreseen in that budgetary programming document points to the deficit at 0.3% of GDP in 2023. This figure considers half of the budgetary cost foreseen by the MF for the measure of subsidization of natural gas to companies, as assumed by the CFP in the Economic and Fiscal Outlook 2023-2027 published in March; if the full cost of the measure were assumed, the deficit would be 0.5% of GDP. From 2024, the recalculation of the CFP indicates the return to a budget surplus. For this development, the behavior of interest charges, which in this exercise are significantly lower than those foreseen by the MF, is decisive. With regard to the debt ratio, the recalculation points to a sharper decrease in debt to 90.3% of GDP compared to the 92% of GDP presented in PE/2023.   

Multiannual Public Expenditure Framework

The draft update of the Multiannual Public Expenditure Framework (MPEF) annexed to the SP/2023 considers an upward revision of the total expenditure limits of the Central Administration and Social Security for the years 2024 to 2027, keeping unchanged the limit for 2023 of the MFPE approved by the Law of Major Options (Law no. 24-C/2022, of December 30). This draft update of the MPEF incorporates an increase in the total expenditure limit in all years, in particular in 2025, highlighting, in addition to the charges with the management of the public debt, the increase of the expenditure limit of Social Security and CA programs in the social area. The biggest difference occurs in the Public Debt Management Program, whose upward update represents more than three-quarters of the projected revision. The financing of expenditure subject to the MPEF is also updated, reinforcing the weight of taxes, in contrast to European funds, as a result of the end of the RRP one year before (2026) the end of the SP's time horizon. The SP/2023 report does not clarify what causes the MPEF update. Nor is the compatibility of the expenditure limits of the multiannual framework and its financing, expressed from a cash perspective, with the budgetary targets set in national accounts in the SP demonstrated. This demonstration, which is not mandatory under the Budgetary Framework Law (BFL), even if it is implicit when considering the compatibility of the update of the MPEF with the medium-term budgetary objectives set out in the SP, would benefit budgetary transparency and accountability.