The budget balance is foreseen at -1.1% of GDP for 2025, 1.2 p.p. lower than the small surplus recorded in 2019. This deterioration occurs despite the projected reduction in interest expenditure (1.1 p.p.) and in the detrimental effect of temporary measures (0.6 p.p.). According to the estimates, the impact of the economic cycle contributes with 1.6 p.p. for the reduction in the budget balance over the years 2020 to 2025. This effect compensates for the abovementioned impact of interests and temporary measures. Therefore, the projection is compatible with a decline in the structural primary balance of 1.4 p.p. signalling a loosening fiscal policy for the period as a whole.

An adequate balance between the risks of an early withdrawal of measures in response to the pandemic crisis and the sustainability of public finances will be decisive in the coming years, in particular due to the high public debt ratio.

For more details see box 3 “Medium-term fiscal outlook”, part I of the Economic Bulletin for June 2021, Banco de Portugal.

Prepared by Lara Wemans. The analysis, opinions and results expressed herein are those of the author and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

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