Portugal delivers “war chest budget”

Portugal’s finance minister will deliver Portugal’s Proposed State Budget for 2023 today (Monday 10 October) with a €3.8Bn raft of financial and other provisions to act as a buffer to shield companies and families against expected shocks from inflation, unstable energy supplies and the threats of a looming recession.

The Government’s strategy is to promote continued post-pandemic growth (Currently running at 6.9% for Q2), although the Bank of Portugal estimates it will be 6.7% by the end of this year)
The economy is forecast to slow to +1.3% growth while the deficit is on track to fall to 0.9% of GDP. Portugal’s public debt will be 110.8%.
This forecast reflects a stronger recovery in the crucial tourism industry and higher private consumption, but it has signalled a slowdown in 2023.
The Minister of Finance is also buoyed by a GDP surplus of 1.9% (€1.104,6Bn) for the first half of the year, inverting an increasing deficit trend of 5.6% registered in the like-for-like period in 2021.
Not only that, the State has so far enjoyed an increase in its tax revenues which should bring in around €4Bn (more than the €3Bn expected), while by August the increase in tax revenues was already above €6Bn.
Lawyer, politician and commentator, likened the State Budget 2023 to “war budget” to counter the “greatest lack of uncertainty faced in the country’s democratic history”.
He said that the financial part — the deficit and debt — was “prudent and positive” but rather “bold” and that the government was “over optimistic in its estimates for growth and inflation”.
And with 80% of the €16.6Bn of ‘bazooka’ funds still to transfer to companies, the government is betting on investing its way out of the spectre of recession.
It is these revenues that have also encouraged the government to press ahead with plans to support companies and families with the €3.8Bn package.
In its budget, the Government is also factoring in Covid emergency measures being extended to 2022 and the last capital injection into TAP of €990 million.
The Government is also banking on a one-off pensions windfall of €1Bn for 2023 which will be paid today (Monday, 10 October) which will mean 0.4% less in expenditure, but will not be repeated next year.
Fernando Medina’s goal for 2023 aims to satisfy investors, lenders and international financial institutions, including ratings agencies, by taking Portugal off the ‘black list’ of EU countries with the highest public debt. (Greece and Italy are on the list)
This is important too because the higher Portugal’s public debt, the more interest investors will want in exchange for lending the State money. Portuguese sovereign bonds could already see interest rates rise in 2023 from the 2% now.
But there are risks too for spending to grow because of external factors. This comes from Portugal’s economic growth forecast of 1.3% in real terms and a nominal GDP of 4.9% with a GDP deflator of 3.6%.
The Governor of the Bank of Portugal already warned last week that inflation could reach 7.8% this year, which threatened to put the breaks on Portugal’s economic recovery.
On the one hand there are the risks continuing pressures of inflation and ECB further interest rate hikes, on the other the increasing risk that two of Portugal’s largest trading partners Germany and France are likely to go into a recession this year. (the UK, also an important trading partner, is already all but in recession)
In other words, Portugal’s spending plans at home to boost economic growth could fall flat in 2023 because its economy totally depends on the macroeconomic situation in Europe and the wider world.