Analysis of the Draft State Budget for 2026

Balance, fiscal policy stance and net expenditure

The budget forecast underlying the Draft State Budget (DSB/2026) points to a surplus of 0.1% of GDP, which results from the deterioration of the central government deficit partially offset by an increase of the Social Security Funds (FSS) surplus.  The DSB/2026 forecasts a further deterioration in the central government deficit to 2.2% of GDP, the highest since 2017, excluding the pandemic period. This deterioration is only partially offset by the strengthening of the surplus forecast for the Social Security sub-sector (FSS). The growing dependence of the budgetary performance on significant surpluses of the Social Security sub-sector makes it more exposed to the contingencies of the economic cycle.

The forecast of a positive budget balance in 2026 is partly based on temporary revenue, which may not be repeated in subsequent years, unlike expenditure, which remains permanent. In the year in which the impact of loans under the RRP will be significant (0.6% of GDP), the highest amount since the start of the plan, there will be the additional effect of new policy measures, aimed mainly at reducing revenue and increasing expenditure, which are expected to represent 0.1% of GDP. To offset these impacts, the DSB/2026 forecasts additional dividends to be received and financial gains from the sale of public real estate. Not taking into account the positive effect of these operations, the budget balance would be negative at 0.3% of GDP. 

The current scenario of the Ministry of Finance (MF) is based on a set of assumptions and forecasts that raise questions regarding the achievement of the budgetary objectives. Abstracting from the impact of PRR loans, the weaknesses identified in the budget forecast for 2026 are mainly concentrated on the public expenditure side, in particular intermediate consumption, social benefits in kind and investment. This understanding is corroborated both by the analysis of the consistency of the DSB/2026 budget forecast (based on the underlying macroeconomic scenario, policy measures and other known effects) and by the assessment of the plausibility of the budgetary targets, using the updated CFP projection for that same year as a reference.

The planned public expenditure on security and defence appears to fall short of Portugal's commitment to European cooperation in this area. Although the budget forecast implies an increase in defence expenditure of 0.1 p.p. of GDP, it should be noted that there is a planned allocation of €1.2 billion (0.4% of GDP) in the 2026 State Budget, recorded as expenditure on financial assets, which has no direct impact on the budget balance forecast. However, if this amount is used, in whole or in part, for expenditure such as salaries, goods and services or investment, it will have a negative impact on the balance. 

In the DSB/2026, the net expenditure growth rate points to compliance with the agreed trajectory, considering the flexibility provided for in the national derogation clause regarding the increase in defence investment expenditure. The DSB/2026 is silent on the evolution of the net expenditure trajectory and does not explain its update compared to previous programming documents. Based on the update of data for 2024 and using the MF information included in the information accompanying the DSB/2026 report, the CFP calculation indicates that the net expenditure growth rate for 2025 will be 5.5%, higher than the commitment made by the Government. For 2026, the growth rate is 4.8%, below the commitment. The accumulated deviations in the control account indicate that these will remain below the maximum threshold of 0.6% of GDP, given the flexibility provided for in the national derogation clause on increased defence investment expenditure.

Budgetary developments forecast for revenue and expenditure in 2026

The public revenue forecast is consistent with the macroeconomic scenario of the DSB/2026, in a year in which a reduction in the tax burden is expected.  According to the MF, in 2026 the ratio of public revenue is expected to decrease by 0.4 p.p. to 43.8% of GDP, reflecting a lower contribution of revenue from European funds, sales of goods and services, and direct taxes, particularly corporate income tax. The tax burden is expected to decrease by 0.1 p.p. to 34.7% of GDP, driven exclusively by the lower contribution of direct taxes and, more specifically, corporate income tax (-0.2 p.p. of nominal GDP). The forecast for tax and social security revenue, without the impact of the policy measures envisaged by the MF, are expected to grow by 4.8%, slightly below what would be expected given the macroeconomic scenario underpinning the DSB/2026, which, as highlighted by the CFP, may present "a possible overestimation of the real performance of the economy for 2026, whose components (internal and external) are subject to various downside risks." 

The DSB/2026 forecast appears to underestimate some components of current primary expenditure and capital expenditure, reflecting an increase in the rigidity of public expenditure. The DSB/2026 forecasts a decrease in the ratio of public expenditure to GDP of 0.1 p.p., to 43.7% of GDP. Excluding the impact of the RRP (2.4% of GDP, of which 0.6% has a negative effect on the budget balance), as well as one-offs and specific operations – namely, in 2026, the largest expected inflow from the sale of state-owned real estate and, in 2025, the reversal of the payment of the extraordinary pension supplement and support to Ukraine granted – the expenditure ratio thus adjusted would be 40.9% of GDP in 2025 and would increase by 0.7 p.p. to 41.6% of GDP in 2026. In nominal terms, the growth in expenditure adjusted for these effects (which accelerates from 4.1% in 2025 to 6.7% in 2026) is driven by primary current expenditure, namely social benefits and personnel costs, which are more rigid components. Even so, the budget forecast for some expenditure items appears to be underestimated, in particular intermediate consumption, GFCF with national financing and social benefits in kind. 

Public debt

The DSB/2026 forecasts that the public debt ratio will fall to 87.8% of GDP in 2026, below 90% for the first time since 2009. This decrease results from the positive effect of nominal growth and the maintenance of positive primary balances, in contrast to the stock-flow adjustment, which is expected to have a significant negative impact estimated at 2 p.p. of GDP (€6.1 billion) in 2025 and 1.8 p.p. of GDP (€5.8 billion) in 2026. The projections of various institutions converge on a ratio below 90% of GDP. The MF forecasts that in 2026 gross financing requirements will increase by €3.7 billion, mainly due to the repayment of Treasury Bills and, to a lesser extent, the EFSF, ESM and savings products. The increase in Treasury Bond issuances, which cover 135% of net financing, offsets the reduction in short-term instruments, reflecting a strategy of maturity consolidation and prudent management of refinancing risks. The average maturity of new debt remains high, ensuring a sustainable maturity profile.

Fiscal Risks 

In 2026, the budget forecast entails non-negligible risks, predominantly on the downside. Among the risks identified, the following stand out: (i) higher-than-expected expenditure growth, particularly in intermediate consumption, which appears to be influenced by the decline in the purchase of goods and services in health, and which is not sustainable; (ii) the use, in whole or in part, of the amount of €1.2 billion (0.4% of GDP) provided for in 'Chapter 60 – Exceptional expenditure' of the Ministry of Finance for actual military expenditure, not yet reflected in the budget balance forecast; (iii) the sale of real estate and the increase in dividends provided for in DSB/2026 not materializing or resulting in a lower than expected financial return; (iv) the impact of the housing policy measures announced by the Government, which are neither identified nor quantified; (v) the potential increase in the number of beneficiaries of the Solidarity Supplement for the Elderly, reinforced by the increase in the reference value.   

On the other hand, there are factors with the potential to favour the budgetary scenario. These include: (i) potential additional revenue gains from the elimination of the ISP discount and the update of the carbon tax in 2026 (see Box 1); (ii) the possibility that tax revenue will exceed the MF's expectations if the macroeconomic scenario of the DSB/2026 materializes; (iii) lower public investment supported by national financing and RRP loans; and (v) the lower utilisation of expenditure appropriations relating to budgetary control instruments. The financial proceeds from the possible sale of TAP and Novo Banco could contribute to a further reduction in public debt.

Assessment of the fiscal scenario of the DSB/2026

The budgetary scenario set out in DSB/2026 raises doubts as to its feasibility. The CFP projects a deficit of 0.6% of GDP for 2026, which contrasts with a surplus of 0.1% of GDP forecast by the MF, a difference of 0.7 p.p. of GDP (€2.3 billion), more than two-thirds of which is explained by public expenditure (approximately €1.65 billion). This difference stems mainly from the evolution of intermediate consumption, which is not properly justified, as well as from the forecast of revenues from the sale of real estate, deducted from investment expenditure in national accounts, the realization of which depends on the effective completion of the operation under the terms provided for by the MF. With regard to public debt as a ratio of GDP, the CFP projection is consistent with a continued reduction in public debt, albeit at a slower pace, to 88.2% of GDP. In net expenditure, although the projected growth rate in 2025 (6.4%) and 2026 (5.7%) is above the Government's commitment, given the flexibility provided for in the national derogation clause regarding the increase in defence investment expenditure, the cumulative deviations in the control account for 2025 (0.4% of GDP) and 2026 (0.5% of GDP) are close to, but below, the maximum threshold of 0.6% of GDP. 

The projected growth in net expenditure in 2026 results in an expansionary stance generated by the national budget. The updated CFP projection points to a fiscal impulse of around 0.5% of GDP, higher than the 0.2% of GDP estimated for 2025.

Medium Term Expediture Framework (MTEF)

The draft update of the MTEF for 2025-2029, included in the DSB/2026 Report, still requires legal approval. For 2026, an expenditure limit of €442.1 billion is forecast, of which €175 billion is earmarked for "Public Debt Management". Central government and social security expenditure is expected to grow in the coming years, with around two-thirds financed by taxes. The expenditure limit - considering the elements that can be analysed in the DSB/2026 – namely expenditure and revenue in assets and flows between entities – is arithmetically compatible with the budgetary (0.1% of GDP) and structural (0.2% of GDP) balances estimated by the MF. The presentation of data in a consolidated form and the inclusion of actual expenditure in the MTEF would enhance transparency and improve the assessment of public expenditure trends.

Date of last update: 23/10/2025