Analysis to the National Medium-Term Fiscal-Structural Plan (2025-2028)

The report ‘Analysis to the National Medium-Term Fiscal-Structural Plan’ is an assessment of the budgetary commitments made by Portugal in the MTP. Its analysis focuses on the substantive changes to the preventive arm of the SGP introduced by the recent European economic governance reform. In this new paradigm, the drawing up of a Plan by each Member State over a time horizon of 4 or 5 years, depending on the regular length of the national legislature, is a central element. The committed growth rate for net expenditure is the only operational indicator in this new framework. Its trajectory, which reflects the commitment needed to ensure the sustainability of public debt, is the only budgetary constraint that frames national fiscal policy over the Plan's horizon. A control account will be set up by the Commission in order to record the accumulated upward and downward deviations in terms of net expenditure observed in relation to the trajectory approved by the EU Council. Under certain conditions, these deviations may trigger an Excessive Deficit Procedure (EDP).

The Portuguese MTP has committed to an average annual growth rate in net expenditure of 3.6% for the next four years. Despite coinciding with the Commission's reference trajectory, the inter-annual profile to which the Portuguese government is committed differs from the Commission's reference trajectory, showing a higher growth up by the end of 2026. The Plan attributes part of this divergence to the impact of spending associated with the Recovery and Resilience Plan (RRP) loans. In any case, in cumulative terms, the nominal growth in expenditure between 2025 and 2028 proposed in the MTP (15.4%) is close to the reference path (15.2%).

In a no-policy-change scenario, the CFP's updated projection points to a growth higher net expenditure than the MTP trajectory. An average growth rate of 4.3% is projected for this indicator, 0.7 p.p. higher than in the Plan. If confirmed, this would result in a cumulative gap in the control account of 0.4% of GDP by 2028. The deviation would be higher were it not for the accumulation of a credit in 2024. This deviation itself wouldn't lead to the triggering of an EDP as it is lower than the maximum threshold of 0.6% of GDP allowed.

Annual deviations above the reference thresholds are signalled for both 2025 and 2027. For 2025, under no-policy-change assumptions, a net expenditure growth rate of 6.3% is projected, higher than the government's commitment of 5%. For 2027, the projected rate is 2.7%, compared to 1.2% in the Plan. In annual terms, this leads to deviations of 0.5% and 0.6% of GDP, respectively. These figures are higher than the maximum annual threshold of 0.3% of GDP laid down in Regulation 2024/1264. However, as a surplus fiscal position is projected for both years, failure to fulfil this threshold in annual terms will not lead to the triggering of a debt-based EDP. For 2025, this deviation is mainly determined by the impact of revenue reduction measures which represent 0.4% of GDP, the only year for which information was made available on possible policy measures with an impact on revenue. 

The ability to maintain budget balances close to balance or in surplus appears to be fundamental for the Plan's implementation to be compatible with the new framework. The projection of an annual deviation above the maximum permitted threshold in both 2025 and 2027 would in itself lead to a report under Article 126(3) of the TFEU, a scenario ruled out here by the projection of a budget surplus. This surplus, however, is not immune to unfavourable developments in the economic cycle. Also, an accumulated control account balance close to the upper limit allowed (and sensitive to the estimate for 2024), limits the possibility of approving additional measures to increase expenditure without equivalent compensation (in other expenditure or in revenue). For countries like Portugal, which have a debt ratio well in excess of 60% of GDP, this commitment to a balanced budget position is fundamental in order to avoid triggering a mechanism that could give rise to an excessive deficit procedure, with the adverse consequences this could have in terms of the country's creditworthiness.

There are also materially relevant risks for the evolution of expenditure, the likelihood of which is high. The CFP scenario presented in this report includes the trend development of revenue and expenditure, under a no-policy-change scenario, from 2026 onwards. In addition to this element, as in any exercise with a medium-term horizon, it is possible to list a series of risks or pressures surrounding the central scenario. These risks include the fiscal impact of the Porto-Lisbon high-speed rail, spending on defence and security, in line with Portugal's international commitments, and spending on social functions, specifically health. This non-exhaustive set of pressures corresponds to approximately 1% of GDP. This would add around 2.5% to the level of net expenditure in 2028, creating difficulties in meeting the trajectory without compensatory measures.

An MTP is not necessarily a medium-term budgetary framework. The centrepiece of any MTP is the net expenditure commitment, which can be seen as the identification of a target to be achieved in a top-down exercise, i.e. the setting of a ceiling for the variation in this indicator. The Regulation on the MTPs does not require the presentation of how the Member State plans to achieve these objectives, nor does it require the presentation of the policy measures to be adopted, thus differing from previous stability programmes. For this reason, another piece of reform legislation, Council Directive (EU) 2024/1265, foresees the creation of a ‘true’ medium-term budgetary framework, extending the budgeting horizon beyond one year, which, if realised, will make it possible to spell out the future impact of economic policy measures. This will involve, for example, the identification of measures on the expenditure side with a multiannual impact, similar to what is published in the No-Policy-Change Framework for the following year, or other relevant pressures, making it possible to gauge the structural evolution of expenditure more precisely. 

The CFP will now regularly monitor the evolution of net expenditure. Once approved by the Council of the EU, the Plan enters the monitoring phase. In this regard, the Regulation provides that Member States may request the independent fiscal institution to assess the conformity of the budget outturn reported in the annual progress report with the net expenditure path. Member states can also request an analysis of the factors underlying a deviation from the trajectory. In any case, the CFP will monitor the evolution of net expenditure in the context of its statutory mission and tasks.

Date of last update: 29/10/2024