Essential Business

Government faces difficult horse trading over budget

 In Economy, News, State Budget

The Portuguese Government is facing tough opposition to its State Budget 2022 from both the right and far left in the Portuguese parliament which, if rejected, could sweep its public accounts off course in 2022.

But other external factors which are beyond the ministry of Finance’s control could also derail the finance minister João Leão’s attempts to balance the books.
While the government is banking on the price of oil remaining at around US$68 per barrel in 2022, last week, on the same day that the Minister of Finance delivered the outline State Budget 2022 to the Portuguese parliament for discussion, it hit €US80. That could have an impact on public accounts.
Investment banks reckon that the price of crude could reach US$100 by the end of the year because of a sudden increase in global demand which the larger oil producers won’t be able to meet.
An increase of 20% on the price of crude would have a residual impact on public administration accounts because of a growth in revenues from indirect taxes such as ISP (fuel tax) and VAT and in terms of GDP (+0.1%), as well as an increase in expenses in term of a percentage of GDP (+0.2%) despite a contraction in intermediate consumption and social welfare and unemployment benefits.
The Government also faces a problem if interest rates on Portuguese borrowing in terms of treasury bonds go up significantly. Borrowing costs on public debt have been under pressure in recent months because inflation has been spooking investors and central banks. Bonds with higher interest rates would have negative consequences for the State.
According to Government calculations, Portugal’s public debt will have got worse by 0.5% because of the contraction in GDP.
And regardless of arguments about spiking inflation being either temporary or here to stay (*see ‘Recommended’ article on Mário Centeno, Governor of the Bank of Portugal) , the cost of servicing Government debt has climbed in recent months.
For those countries that are more indebted, like Portugal, increases in interest rates on borrowing are relevant because even modest changes can have significant consequences, particularly as central banks slow down on buying up member states’ sovereign debt.
A permanent increase of 1 percentage point throughout the entire revenues curve would mean an increase in the interest rates that the State would have to pay on debt in 2022 of €185 million on public accounts and €344 on national accounts (around 0.1% and 0.2% of GDP respectively).
And in terms of exports in 2022, if overseas demand were to fall 2 percentage points in relation to estimates, GDP would increase by less than 0.3% according to Government simulations which would mean less revenue coming into the State coffers.
“This impact would result in a lesser growth in exports, with an equally negative effect on the balance sheet of goods and services and reduce Portugal’s capacity to finance its economy because of lower revenues, or as cheaply in terms of overseas borrowing.
And all this is without the principle opposition PSD party making clear that it has “seen enough” to vote against the State Budget 2022.
Last week, both the left PCP and BE parties threatened to vote against the Government’s proposal for the budget. If the Government cannot get agreement on its budget for 2022 then parliament would have to be dissolved and early elections called. Meanwhile, the Portuguese President Marcelo Rebelo de Sousa says he has done what he could to avert a political crisis.


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