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The Draft State Budget for 2025 (DSB/2025) is the first budget to respect the government's commitment to the evolution of net expenditure over the 2025-2028 period in the National medium-term fiscal-structural plan (MTP), submitted to the European Commission and also subject to approval by the Council of the European Union. The information on the draft budgetary plan (DBP) notes that net expenditure will grow by 4.9% in nominal terms in 2025 (below the commitment of 5%, but above the average of 3.6% and the European Commission's reference trajectory of 4.1%). This matter will be examined in the MTP analysis to be published by the CFP.

 

For 2025, the DSB forecasts a surplus of 0.3% of GDP and a public debt ratio of 93.3% of GDP, which corresponds to a reduction in these indicators, respectively, by 0.9 and 4.7 p.p. of GDP compared to that reported in 2023 by the national statistical authorities. This represents an expansionary fiscal policy driven by the fiscal impulse generated by expenditure financed with European funds, particularly from the Recovery and Resilience Plan (RRP), which is expected to reach in 2025 its highest amount should by the end of the plan, nearly 6.8 billion €.

 

Based on the available information and the CFP projection, the DSB/2025 forecasts for the budget balance and public debt as a ratio of GDP are plausible. In fact, the update of the CFP's no-policy-change projection scenario published in September (Economic and Fiscal Outlook Report), incorporating the statistical revision of the new national accounts base, new information and the policy measures outlined in the DSB/2025, points to a budget surplus of 0.4% of GDP and a debt ratio of 88.6% of GDP. This result is supported by the starting point of this projection, which is more favourable than the government's, contributes to this result, as it is expected that in 2024 the surplus will reach 0.6% of GDP and the public debt ratio 92.3% of GDP.

 

Expected fiscal developments for revenue and expenditure in 2025

According to the data in the DSB/2025, the share of public revenue should increase by 0.7 p.p. to 45.5% of GDP. This change is explained by the increase in the weight of capital revenue (+0.6 p.p. of GDP) and other current revenue (+0.3 p.p. of GDP), reflecting the expected increase in funds to be received under the RRP. Excluding this effect, the share of GG revenue would fall by 0.3 p.p. of GDP, reflecting an expected reduction in the weight of direct tax revenue (0.6 p.p. of GDP), which would slightly offset the expected increases in the share of indirect taxes (+0.2 p.p. of GDP) and social contributions (+0.1 p.p. of GDP). It should be noted, however, that excluding the impact of the measures, the Ministry of Finance (MF) forecast for personal income tax has practically a zero elasticity with respect to salaries. Underlying the tax revenue forecast an elasticity greater than unity is only found in indirect taxes. Thus, although tax and contributory revenue are expected to show a similar, albeit lower dynamic compared to the forecast for  economic activity, it is possible that this aggregate could be higher than the forecast in the DSB/2025, provided that the PIT performs in line with the forecast for expected growth in wages next year.

 

According to the DSB/2025, the share of public expenditure in GDP should increase from 44.4% in 2024 to 45.2% in 2025, partly influenced by the planned implementation of the RRP. In nominal terms, expenditure growth is expected to slow down (from 9.9% in 2024 to 6.6% in 2025) and remain higher than the rise in nominal output (4.8%). Almost two thirds of the forecast increase of 8,286 million € will occur in current primary expenditure (+5,207 million €, a change mostly justified by rigid expenditures, such as staff costs and social benefits), while increases are also forecast for capital expenditure (+2,470 million €) and interest charges (+609 million €, double the estimated increase for 2024). Considering that the payment of 399 million € relating to the extraordinary pension supplement in 2024 will not be repeated in 2025, it is possible that the forecast value for social benefits other than in kind may be overestimated. The increase in capital expenditure depends almost entirely on the acceleration of the RRP execution. In fact, in the particular case of GFCF, the forecast increase of 1,564 million € (or 16.7%) would only be 340 million € (4.8%) without the effect of the RRP. According to the DSB/2025, total expenditure under the RRP should reach 7,801 million € (2.7% of GDP), 3,846 million € more than estimated by the MF for 2024. Without the effect of the RRP, public spending would increase by 3.7% in 2025, instead of 6.6%. Due to the budget neutrality of the RRP subsidies, only the part financed through loans (1,049 million €, 736 million € more than forecast for 2024) will have a negative impact on the budget balance. 

 

Public Debt

The MF forecasts the debt ratio will fall by 2.6 p.p. of GDP next year, down to 93.3% of GDP. This decrease is determined by the primary balance (-2.5 p.p. of GDP), followed by the dynamic effect (-2.2 p.p. of GDP). The latter effect is less significant than in recent years due to the less substantial role of inflation, which is why the rate of reduction of the ratio has slowed down. In the opposite direction is the unfavourable contribution of the stock-flow adjustment (2.1 p.p. of GDP). In fact, the stock-flow adjustment, which corresponds to the change in the public debt stock that is not explained by the budget deficit/surplus, looks high in 2025, when compared to the average of the last 20 years. According to the MF, the expected development is essentially due to: i) the adjustments between public accounting and national accounting; ii) below par issues; iii) the accumulation of deposits, which are used with some discretion and have an evolution that is difficult for other institutions to project. 

 

Also according to the MF's forecast, the State's gross borrowing requirements are expected to increase significantly in 2025. The net borrowing forecast for the State explains most of this increase, mainly due to the expected increase in the net acquisition of financial assets and, to a lesser extent, a higher budget deficit in public accounts. The State's net financing will be met mainly by issuing Treasury Bonds and Treasury Bills. For this financing, no significant increase in costs is expected, given, on the one hand, the low percentage of debt stock renewed annually and, on the other, the signalling by the central banks of the main advanced economies of a less restrictive phase in monetary policy (even though conditional to inflation developments), which this year has led to a decrease in the cost of new issues of debt.

 

Fiscal Risks

As over  80% of public revenue is made up from  tax and contributory revenue and, since its headings depend on the dynamics of the macroeconomic variables on which the taxes and duties that generate them are levied, failure to achieve the scenario set out in the DSB/2025 could compromise the level of revenue forecast by the MF. In addition to this effect, there is also a downward risk related to the lack of specification of the measure ‘’fighting fraud and tax evasion‘’ concerning VAT and corporate income tax, which may be difficult to implement. On the upside, there is a possibility the nominal tax burden could exceed the MF's expectations if the PIT, a progressive tax, shows a dynamic at least in line with the expected evolution of wages, which would not confirm the MF's apparent conservatism regarding this item. It’s worth noting that since 2020, the actual tax burden has exceeded the MF's expectations in all draft State Budgets presented.  

 

On the expenditure side, the risk of a deterioration in the macroeconomic scenario persists due to the escalation of geopolitical tensions, military conflicts and the trade war, which could lead to a deterioration in the budget balance compared to what was forecast in the DSB/2025. There is also the possibility that the measure to extend initial parental leave could have an impact on the SB/2025, if the respective law is approved by the Parliament by the end of this year, as well as the possible adoption of additional policy measures. Furthermore, risks associated with the GG's contingent liabilities, which can materialise in public spending, should also be highlighted. On the other hand, some factors can lead to lower GG spending in 2025 than forecast in the DSB/2025, namely a lower execution of public investment supported by national funding and spending financed through RRP loans. This would benefit the budget balance in the short term, although with adverse consequences for medium term economic growth.

 

Multiannual Framework of Public Expenditure

The report accompanying the DSB/2025 presents a draft update to the total expenditure limit for Central Government and Social Security for 2025 by a further 1,096 million € compared to expenditure limits included in the MTEF annexed to the Proposed Law of Major Options for 2024-2028, which had yet to be approved when the DSB/2025 was presented. The inclusion of non-effective expenditure in the MTEF, such as financial operations, undermines transparency and the assessment of the real evolution of public spending. Presenting the data in a consolidated manner would also contribute to improve transparency. The proposed expenditure limit for 2025 is in line with the balance target of 0.3% of GDP in national accounts, although the reconciliation between the expenditure limit presented and this balance is not clearly explained in the Report. In the DSB/2025, the programme budgeting exercise was expanded, including more organic missions, which make up 18.8% of the expenditure covered by the MTEF for 2025 - an aspect that appears to be a positive step towards full implementation of the provisions of the Budgetary Framework Law.

Date of last update: 29/10/2024

State Budget . Report nº 10/2024 . 29 October 2024