Analysis of the Draft State Budget for 2024

From the 2023 implementation to the 2024 budget forecast

The Draft State Budget for 2024 (DSB/2024) forecasts a surplus of 0.2% of GDP for 2024, a reduction of 0.6 p.p. of GDP (1507 million €) compared to the surplus of 0.8% of GDP estimated for 2023. It also foresees a public debt ratio of less than 100% of GDP. 

According to information from the Ministry of Finance (MF), the reduction in the surplus for 2024 is mainly due to the budgetary cost of economic policy measures, both new and those approved in previous years, as well as other budgetary pressures resulting from the legislation in force and contracts signed. This adds up to the effect of one-off measures previously planned for 2023 (454 million €, i.e. 0.2 p.p. of GDP). According to the CFP's calculations, based on this information, the net direct impact of the new policy measures on the budget balance is unfavourable and amounts to 2202 million € (0.8 p.p. of GDP). Of this amount, 1614 million € corresponds to measures to expand public expenditure, mainly in personnel and social benefits, and 588 million € to revenue reduction measures, mainly aimed at reducing personal income tax. The carry-over effect generated by measures approved in previous years and other budgetary pressures also has an unfavourable impact on the budget balance by 2392 million € (0.9 p.p. of GDP). Counteracting these effects, the DSB/2024 counts on a favourable impact on the budget balance from the macro scenario and other effects estimated at 3521 million € (1.4 p.p. of GDP), which will offset almost three-quarters of the effect of the fiscal measures and pressures previously listed. 

The favourable economic environment (positive output gap), underlying the DSB/2024, will continue to benefit the cyclical component of the budget balance, albeit 0.3 p.p. of potential GDP less than in 2023, in a context of higher interest charges. Thus, discounting the effect of the economic cycle, and the impact of one-off measures, the DSB/2024 points to the structural balance reaching a position around the structural balance, respectively of 0.0% of potential GDP in 2023 and -0.1% of potential GDP in 2024. This position is consistent with the Medium-Term Objective, which is necessary to ensure a safety margin capable of responding to normal cyclical fluctuations without incurring an excessive deficit situation, as well as to consolidate the path of reduction in the government debt ratio.

The update of the CFP's no policy change scenario published in September (Economic and Fiscal Outlook Report), incorporating new information and the policy measures foreseen in the DSB/2024, points to a budget balance of 0.1% of GDP and a debt ratio of 98.7% of GDP in 2024, values broadly in line with those presented in the DSB/2024. However, the starting point of this projection is  more favourable than that anticipated by the Government: the budget surplus is expected to reach 1% of GDP in 2023 and the public debt ratio to decrease to 102.6% of GDP. This projection is subject to the risks identified in the September publication and those linked to the quantification and implementation of the new economic policy measures.

Projected budgetary developments for revenue and expenditure in 2024

According to the DSB/2024, the share of public revenue is expected to increase by 1.3 p.p. to 44.7% of GDP. The increase in capital revenue (+0.7 p.p. of GDP) and other current revenues (0.4 p.p. of GDP) will contribute to this evolution, reflecting the expectation of an increase in transfers receivable under the RRP. Excluding the effect of the RRP, the increase in revenue would be 0.3 p.p. of GDP. The increase in the tax burden from 35.3% to 35.5% of GDP, driven exclusively by the growth in the weight of indirect taxation (+0.6 p.p. of GDP), will also contribute to the increase in public revenue, despite the expected decrease in the share of direct taxes on GDP (-0.4 p.p. of GDP). The IRS (personal income taxation) reduction projected for the next year explains this evolution, mainly supported by the fiscal impact of the changes in the rates and in the tax brackets, whose evaluation by the CFP through the simulation in the EUROMOD-JRC interface confirms. This simulation also allows us to conclude that, in relative terms, the largest beneficiaries of this measure will be the households located between the fifth and ninth decile of income (which do not correspond to the IRS tax brackets). The MF's forecast for indirect taxes implicitly implies an elasticity in relation to nominal private consumption higher than the unit, while the evolution of corporate income tax revenues in relation to nominal GDP, as well as personal income tax and effective social contributions in relation to wages, have implicit elasticities lower than one. Thus, and despite the fact that tax revenue is generally balanced, the aggregate of tax and contributory revenue may be above the target set out in the DSB/2024, provided that the actual social contributions present a performance in line with that forecasted for remunerations. 

The public expenditure to GDP ratio is expected to increase from 42.6% in 2023 to 44.5% of DGP in 2024. In nominal terms, the DSB/2024 forecasts expenditure to grow by 9%, more than double nominal GDP growth (4.4%). This increase of 10,153 million € is mainly due to primary current expenditure, which is expected to increase by 6,875 million €, with more than two-thirds of this increase due to highly rigid expenditure, such as compensation of employees (+1,538 million €) and social benefits (+3,111 million €). However, the explanatory factors of the evolution of social benefits identified in the DSB/2024, highlighting 2223 million € of budgetary pressures on pension expenditure , do not justify the total increase foreseen in this item by the MF. The opposite situation occurs in capital expenditures, since the explanatory factors justify an increase higher than the 2676 million € forecast in this aggregate. In the particular case of Gross Fixed Capital Formation, the increase of 1793 million € (or 24.2%) is strongly anchored in the expectation of an acceleration of public investment under the RRP (+1149 million €). In fact, the MF points to the expenditure to be executed under the RRP to amount to 5555 million € (2% of GDP), 3258 million € more than in 2023. However, due to the fiscal neutrality of the RRP grants, only the part financed through loans (312.5 million €) will have a negative impact on next year's balance. Interest charges are expected to increase again next year (602 million €), although lower than the estimated increase for 2023 (1003 million €). 

Multiannual Framework of Public Expenditure (MFPE)

The Report that accompanies the DSB/2024, despite affirming the link to the expenditure limits of the MFPE (expressed in public budget accounting), foresees a change in the limit of Central Administration and Social Security expenditure for 2024 by an additional 9.4 billion €, keeping the expenditure limits for the following years unchanged. The non-compliance with the annual limit of total expenditure set for the following economic year, which should be binding from the outset, demonstrates the prevalence of the annual budgetary logic to the detriment of the medium and long-term perspective, even if legally possible by virtue of the wording introduced in the Budgetary Framework Law in 2022. This undermines budgetary accountability in the medium and long term and reflects the difficulties to plan expenditure in multiannual terms, to schedule it and to carry out its financial programming. 

Public debt

The Ministry of Finance forecasts that the public debt ratio will correspond to 98.9% of GDP in 2024, which would represent a reduction of 4.1 p.p. of GDP compared to 2023. This decrease is mainly driven by the favourable contribution of the primary balance (2.5 p.p. of GDP). For the first time since 2019 this is more relevant than the dynamic effect (2.1 p.p. of GDP). The latter is less significant compared to recent years due to the expected reduction in inflation (which is reflected in a lower increase in the GDP deflator). These favourable contributions to the reduction of the government debt ratio offset the unfavourable impact of the interest effect (2.3 p.p. of GDP) and the deficit-debt adjustment (0.5 p.p. of GDP). Also according to the MF's forecast, the State's gross financing needs are expected to decrease in 2024, with the State's net financing being mainly ensured by Treasury Bonds and Treasury Bills.

The DSB/2024 anticipates that the trend of worsening financing costs will continue in 2024, with the implicit interest rate expected to rise by 0.2 p.p. to 2.3% of the previous year's debt stock. This is a gradual increase that results from the fact that the Treasury Bond to be repaid in 2024 has a coupon rate higher than the forecast for the cost of financing the new medium and long-term debt. 

Fiscal risks

Risks to the MF's macroeconomic outlook are the main revenue risk. In addition to the impact that a more adverse macroeconomic environment would have on the level of revenue, through the operation of the automatic stabilisers, there is also the risk of non-implementation of some of the policy measures proposed by the Government in the current geopolitical situation. For example, the possible need to respond to a possible escalation in fuel prices, as a consequence of the worsening of the current geopolitical tensions, would have an impact on the Tax on Oil and Energy Products (ISP). Also, the expected effect of the "fight against fraud and [tax] evasion" is uncertain. On the upside risks, it is important to highlight the possibility that tax and contribution revenue may be higher than expected by the MF, if effective social contributions perform in line with the expected growth in remuneration. 
On the expenditure forecast, there are some risks, including the need to adopt additional measures to support households and businesses, to mitigate the economic repercussions of the military conflicts in Ukraine and the Middle East, as well as the risk of materialization of public expenditure associated with contingent liabilities. On the other hand, some risks are identified in the sense that the execution of expenditure may be lower than expected, namely a lower execution of public investment financed by  national funding and the non-implementation of RRP expenditure in the amounts foreseen in the DSB/2024.

Date of last update: 25/10/2023