The new European budgetary rules, which come into force this week, define a rate of reduction of 1% of GDP in public debt for countries with an indicator above 90%, such as Portugal. In practical terms, the country will be forced to cut 2.8 billion euros to reduce debt, the equivalent of defense spending or 800 million euros more than justice in 2024.
With the new European budgetary rules, which come into force this Tuesday, Portugal will be forced to cut 2.8 billion euros annually to reduce public debt, the equivalent of 1% of its GDP per year during four or seven years, depending on what is agreed between the Government and Brussels until mid-September, when Member States must present their medium-term budgetary plans. The amount of debt reduction, compared to the GDP forecast of 277 billion euros this year, is equivalent to that budgeted for the area of national defense and represents more than 800 million of the annual expenditure on justice.
Last week, the European Parliament approved new budget restrictions for the euro bloc, culminating a discussion that had been going on for many months. Changes to the economic governance model place public debt at the center of the issue of sustainability of national accounts, providing more flexibility to European budgetary adjustment processes. Along these lines, each country will begin negotiating specific debt reduction rates with the Commission, although the benchmark has already been defined. In the Portuguese case, the cut in public debt is practically equivalent to the total expenditure of 2,850.1 million euros for National Defense, foreseen in OE2024 and is 839 million euros above the 1,961 million euros budgeted for the Justice sector.
For Member States with a ratio above 60% and below 90%, the rule now involves a reduction equivalent to 0.5% of GDP annually, on average, over a four-year horizon (extendable to seven in the case the country adopts reforms in the areas of climate, digitalization, the European pillar of social rights or defense). As they are average values, there may be fluctuations between annual values.
For countries with public debt greater than 90% of GDP, the reduction rate will be 1% of GDP. Despite the notable decline last year, Portugal recorded a ratio of 99.1% at the end of 2023, placing the national economy in this group. As such, and looking at the GDP forecast by the Government for this year, of 277 billion euros, it can easily be concluded that the country will have to reduce its debt, on average, by 2.77 billion in the next four (or seven) years.
Comparing with the State Budget for 2024 (OE2024), this value is very close to the total consolidated expenditure for 2023 for defense, which reached 2,850 million euros, or the expenditure on internal security, which amounted to 2,592 million. The area of justice recorded an expenditure of 1,962 million euros last year, a difference of around 800 million euros to the amount that the State will have to withdraw from the debt in the coming years.
Margarida Marques, socialist MEP and one of the co-negotiators of the new rules together with the Dutch Esther de Lange, speaks to JE in a framework that “centers the point on the issue of public debt” and “gives more investment capacity to Member States”, highlighting some points that he considers positive for the national economy.
On the one hand, these are changes that give “a strong social dimension” to budgetary policy, by encouraging Member States to “make significant investments in public services or in European priorities”, that is, in the areas of the environment, digital transition, defense and European pillar of social rights. On the other hand, there are less notable changes with increased relevance for Portugal, such as national counterparts for European funds not being counted as net expenditure, an exclusion without a ceiling for this financial framework and future ones.
The expectation is that the new regulation will be published on April 30th, this Tuesday, in the Official Journal of the European Union, so that it can come into force in May.
Afterwards, the European Commission will publish, on June 21st, the reference trajectories for each Member State with regard to reducing the public debt ratio, after having heard the States interested in participating in the preparation and negotiation of the same. Each country will have until mid-September to draw up its adjustment plan, at which point it will have to present it in Brussels.
Budget surplus helps negotiations with Brussels
The adjustment plan to be negotiated with the European Commission will have to be presented by September 20th and Portugal is in a “very well positioned” position to guarantee a favorable deadline and expenditure limit, considers MEP Margarida Marques.
The increased flexibility conferred by the new budgetary rules translates, among other elements, into variable deadlines for the budgetary adjustment of each Member State depending on investment in public services and/or reforms made in the priority areas defined by Brussels (climate transition , digital transition, European pillar of social rights and defense). Given the recent positive budget balance, the margin for making these investments is greater than at other times in national economic history.
“It is up to the Government and Portuguese institutions to decide how to use this room for maneuver – whether by reducing revenue, increasing expenditure, paying off debt. These are national options”, points out Margarida Marques. “In the Portuguese case there is great room for maneuver in these options, it is important to highlight”, she adds.
On the other hand, Member States will now be able to negotiate the spending ceiling with Brussels – and Portugal, having recorded a budget surplus, will even be able to exceed this limit without any penalty. This is another change related to the increased importance that net primary expenditure will have, which will require a reduction of 0.4% per year in the structural deficit if the budget balance is negative by more than 1.5% of the GDP.
With a budget surplus forecast for this year of 0.3%, the expectation is that the Government will maintain the possibility of exceeding the expenditure limit without any penalty.
“The budgetary rules, given the current situation, allow the development of a set of policies to increase public expenditure. But the Government will have to decide its policies in terms of reducing taxes, as it is proposing, increasing spending and looking at debt”, summarizes Margarida Marques.
