The Portuguese Public Finance Council publishes the Analysis of the Draft State Budget for 2020 (DSB/2020).
The DSB/2020 sets up what could be called a continuity budget, as the fiscal consolidation strategy of recent years continues with an expected budget surplus of 0.2% of GDP in 2020 and a reduction in the public debt ratio of 2.7 p.p. of GDP, complying with the debt reduction rule. This reduction has to be considered as good news. In addition to compliance with national and European rules, the reduction in debt burden allows the release of public resources for purposes other than the payment of interest and is a condition for the creation of fiscal space that will become important in more adverse times. Moreover, the reduction dynamics itself has allowed greater ease and lower cost in public funding, in a virtuous cycle that feeds itself.
The (recalculated) structural balance is planned to a deficit of 0.1% of GDP, a value close to the medium-term target of achieving a structurally balanced budget. On the other hand, the planned evolution of expenditure does not meet the applicable reference value, with the primary expenditure net of discretionary revenue measures and one-off measures, presenting a deviation of 0.9% of GDP in 2020. This deviation combined with the programmed path for the structural balance points to a risk of deviation from compliance with European rules as reflected in the most recent recommendation of the Council of the European Union.
The continuity strategy is also evident in the lack of financial expression of the new policy measures planned for 2020, negatively affecting the balance at around €109M. The greatest impact of policy measures in 2020 will result from the carry over effects of measures previously taken, with a negative (direct) impact on the balance of 553 M€ (800 M€ on the expenditure side and increased revenue of 246 M€).
There are prevalent risks that must be pointed out. In addition to the pressures from current expenditure, the projected budget surplus of about 0.2 percent of GDP depends, on the revenue side, on the achievement of the economic growth forecast, whose associated risks are tilted to the downside and mostly of external nature. Another downside risk to the budget balance is the need of support for the financial sector, which might exceed the amounts already foreseen in the draft budget.
Recent economic growth, foreseen to continue in the near future, allowed both the progressive elimination of the budget deficit and the public debt ratio reduction. However, it resulted more from the absorption of unemployment, in the recent past at abnormally high levels, than from productivity increases arising from unequivocal economic progress.
Increased growth and productivity depend on a more investment-friendly environment in a context of increasing international competitiveness. This will imply progress in the tax system, in education and vocational training, in the selectivity in public investment, in the judicial system efficiency and, in general, in the quality of public expenditure and administration. The design of structural public policies aimed at growth would greatly benefit from a budgetary process framed in multi-pluriannual and strategic terms.
The Portuguese Public Finance Council again emphasizes the importance of the multiannual framework to public accounts, and therefore the implementation of the 2015 Budget Framework Law, now postponed to April 2020.