Analysis of the Draft State Budget for 2022

The economic outlook for 2022 is still surrounded by particular uncertainty arising from the COVID-19 pandemic. The CFP Opinion on the macroeconomic forecasts underlying the State Budget endorsed these forecasts, which point to a robust recovery of the Portuguese economy (5.5% of GDP growth in volume), but noted "risks of a predominantly downward nature, directly or indirectly associated with the evolution of the pandemic situation and the implementation of the Recovery and Resilience Plan (RRP) in the economy”.

The Draft State Budget for 2022 (DSB/2022) foresees a budget deficit of 7134 M€, equivalent to 3.2% of Gross Domestic Product (GDP), which will imply a reduction of 1.2 p.p. of GDP relative to the previous year. Excluding the impact of one-off measures, the deficit will be reduced by 1.7 p.p. of GDP according to the government forecast, which corresponds to a pace of reduction of this indicator three times greater than that estimated for 2021 (reduction of 0.5 p.p. of GDP).

The policy measures have an unfavourable direct impact on the budget balance deteriorating it by 3043 M€ (-2875 M€ if the RRP is excluded), with its greatest expression on expenditure (6002 M€). Excluding the effect of the measures allocated to that Plan, the amount of expenditure measures implicit in the fiscal forecast amounts to €2 799 million, of which more than half (€1.7 billion) impact on the most rigid components of public expenditure – compensation of employees and social benefits. 

A comparison with 2019 shows that even when removing from the expenditure the one-off effects, the impact of the RRP and the "emergency measures", the primary expenditure forecasted for 2022 will be 3.4 p.p. of GDP above its pre-pandemic value. Of this increase, 2 p.p. of GDP relate to current primary expenditure, in particular the increased weight of the more rigid components of expenditure, namely compensation of employees and social transfers. This increase in the weight of rigid expenditure occurs in a context in which the GDP in volume at the end of 2022 is forecasted to be 1.3% above the level of 2019 (and the GDP at current prices to be 5.5% higher than before the pandemic).  

The General Government (GG) revenue share should reach 43.6% of GDP in 2022, decreasing 1.2 p.p. of GDP from the value expected by the Ministry of Finance (MF) for 2021, which is reflected in a foreseen reduction of the tax burden from 35.0% of GDP in 2021 to 34.2% of GDP in 2022. Tax and social contributions should account for more than 90% of the growth in public revenue.
Public expenditure as a share of GDP is expected to fall from 49.1% in 2021 to 46.7% in 2022. This reduction stems exclusively from the 6.9% growth forecast for nominal GDP. In nominal terms, expenditure is expected to increase to a large extent due to the RRP, whose impact will fall mainly on capital expenditure, in particular on Gross Fixed Capital Formation, which should record the most significant increase since 2010. Excluding the RRP, public expenditure should decrease compared to 2021, influenced by the effect of the elimination of most COVID-19 measures.

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 3% of GDP.

The MF forecasts that the debt ratio will decrease from 126.9% of GDP in 2021 to 122.8% of GDP in 2022. This decrease of 4.1 p.p. of GDP is entirely explained by the favourable dynamic effect (which alone would reduce debt by 5.9 p.p. of GDP), reflecting the economic growth forecast. This effect is mitigated by the primary deficit and the deficit-debt adjustment, both of which have an unfavourable impact on the reduction of the debt ratio.  

The fiscal forecast for 2022 is subject to the risks arising from the uncertainty surrounding the evolution of the pandemic situation. A possible worsening following the emergence of new variants of SARS-COV-2 could make it necessary to maintain support measures or even adopt new ones, even though a budget allocation of 400 M€ is planned for next year to meet unforeseen costs of the pandemic. The imposition of new restrictions on travelling may cause the financial support to TAP foreseen for 2022 to prove insufficient. Downward risks associated with Novo Banco are also identified, taking into account that the DSB/2022 does not consider any transfer under the Contingent Capitalization Agreement and that this financial institution may still request an amount of up to 597 M€. Reference should also be made to the risks associated with the possible activation of State guarantees granted under some of the measures in response to the pandemic crisis (credit lines) and credit moratoria granted by banks to economic agents.

In terms of external risks, it should be noted that the pandemic situation is again assuming worrying proportions in Eastern Europe, Russia and also in Great Britain. These negative developments, if they continue and spread to other economies, could mean a less positive external scenario for the Portuguese economy than those which have been considered in macroeconomic projections. In addition to the possible contraction of external markets, there are disturbances on the supply side, exogenous to the Portuguese economy, but which affect it significantly. The rise in the external prices of fossil fuels and raw materials, the cost of transport and distribution have a negative impact on domestic productive capacity and may induce a greater and persistent rise in prices than those considered in the most recent economic forecasts.

The DSB/2022 includes a proposal to update the multiannual framework of public expenditure (MFPE), which is different from the one included in the draft law on the  Major Planning Options (MPO) for 2021-2025, not yet approved by Parliament. This medium-term fiscal programming instrument defines total and per program expenditure limits, for the current year and the following four years, including the projection of funding sources. The materiality of the changes underlying this update of the MFPE, which in 2022 represent more than 26.6 billion euros in relation to the approved MFPE, would recommend that the reasons justifying them to be explained, regardless of the legal possibility of their being made. The persistence of an annual update of the multiannual framework together with the Budget that should be bound by it transforms, in practice, the MFPE into a mere formal exercise, subordinated to an annual fiscal reasoning.

Date of last update: 25/10/2021