Analysis of the Draft State Budget 2022

2022 will be the first year when the Recovery and Resilience Plan (RRP) is expected to be significantly implemented (1.4% of GDP) and GDP in volume will be higher than before the pandemic. However, the pandemic and the geopolitical shock arising from the invasion of Ukraine will have a considerable impact on public finances. 

The Draft State Budget (DSB/2022) foresees a budget deficit of 1.9% of GDP for 2022, representing a 0.9 p.p. of GDP reduction in 2021, which is penalised by the unfavourable impact of one-off measures. Excluding the impact of one-off measures, the adjusted deficit would be 1.8% of GDP, an improvement of 1.4 p.p. of GDP, compared to 2.0 p.p. of GDP in 2021. Overall, the analysis carried out by the Portuguese Public Finance Council indicates that the objectives of budget balance and public debt are likely to be achieved, as long as the downward risks also identified do not fully materialise.

The gradual recovery of economic activity and the elimination of most of the emergency measures adopted in response to the pandemic crisis will contribute significantly to reducing the budget deficit. The size of the effect of these two factors on the balance amounts to 6815 M€, more than four times the improvement of 1576 M€ that the Ministry of Finance forecasts for the budgetary balance in 2022. As 2022 is the first year of an inflationary process that is not fully anticipated, the budgetary balance tends to improve in the very short term through various mechanisms that, however, are quickly depleted.

In 2022, the ratio of public revenue to GDP shall be 44.7% of nominal GDP, a decrease of 0.6 p.p. of GDP compared to the value recorded in the previous year. This development will be largely due to the decrease in the tax burden to 35.1% of GDP in 2022, representing a drop of 0.4 p.p. of GDP compared to 2021, when this indicator reached the highest value of the last 27 years (35.6% of GDP).

Public expenditure as a share of GDP is expected to decrease from 48.1% in 2021 to 46.6% in 2022. This forecast reduction of 1.5 p.p. of GDP (which excluding the effect of the RRP would be 2.9 p.p. of GDP) benefits from the effect of the denominator, since the growth of nominal output (7.5%) is higher than that of public expenditure (4.1%).

Excluding the effect of the economic cycle and one-off and temporary measures, the structural deficit underlying the DSB/2022, recalculated by the CFP, is estimated at 1.8% of GDP. 

The MF forecasts that the public debt ratio will continue the downward path resumed in 2021, anticipating a decline of that indicator from 127.4% of GDP in 2021 to 120.7% of GDP in 2022.

The fiscal forecast for 2022 is subject to some budgetary risks that were indicated by the CFP in the Report of the Economic and Fiscal Outlook 2022-2026, and which the analysis of the DSB/2022 strengthens. Thus, the downside risks to the balance include:

• Uncertainty about the duration and escalation of the military conflict between Russia and Ukraine, the consequences of which could imply an impact of a magnitude greater than that envisaged by the Government in the mitigation measures it intends to implement in 2022, or determine the adoption of additional measures;
• Emergence of new variants of COVID-19 which, despite the progress in vaccination and in the control of the disease, may delay the reduction and elimination of pandemic-related measures, penalising the recovery of the budget balance;
• Activation of State guarantees granted in response to the pandemic crisis and geopolitical shock, namely credit lines to firms; 
• Overestimation of the savings and efficiency gains to be obtained under the expenditure review exercise; 
• Responsibilities related to requests for restoring the financial balance and arbitration proceedings submitted by concessionaires and sub-concessionaires under Public-Private Partnerships (PPP) projects that involve higher expenditure than that considered in the DSB/2022; 
• Additional transfers to Novo Banco under the Contingent Capitalisation Agreement; 
• The possibility that TAP may need a higher amount of financial support than that considered by the MF in the DSB/2022 (in the national accounts perspective).

On the upside, a higher elasticity of tax and contributory revenues to the respective tax bases than that assumed in the DSB/2022 would contribute to a better evolution of the budget balance than forecast therein. 

The Report accompanying the DSB/2022 includes a proposal to update the multiannual framework of public expenditure (MFPE) for the period from 2022 to 2026, which, however, is not included in a proposal for the Major Planning Options (MPO). The recurrent practice of updating the multiannual framework together with the Budget that should be linked to it converts, in practice, the MFPE into a mere formal exercise, subordinated to the annual budgetary logic.

As a result of the absence of truly multi-year budgeting, the annual State Budget remains the epicentre of our fiscal practice, and its role continues to be overestimated compared to what it should be in the strict application of the current Budgetary Framework Law (LEO): budgetary decision-makers continue to systematically attribute to this annual document the major economic policy options which, under the terms of that same Law, should be shared with multi-year instruments.

Date of last update: 27/04/2022