The Portuguese economy should avoid a recession in 2023, according to data from the finance minister broadcast yesterday by several deputies who met Fernando Medina in parliament, but it will be the second biggest drag in recent history (since 1995). , the largest to follow until the first year of the covid-19 pandemic (2020).
Medina’s data, quoted by parliamentarians, estimates record real growth could reach 6.5% this year, benefiting from the surge in inflation (which should reach an unprecedented 7.4% in 2022), but in 2023 the pace is expected to cool significantly to just 1.3%.
Despite the expected slowdown in gross domestic product (GDP) growth, which could reach 5.2 percentage points in 2023, the government is not giving up on the route of fiscal consolidation.
According to some deputies who were with the minister, the government deficit target to be included in the 2023 state budget proposal (OE2023) due next Monday, October 10, will be 0.9% of GDP, a percentage point less than the estimated deficit for this year (1.9% of GDP). The equivalent of minus 1% of GDP.
In other words, Finance wants to repeat this year’s global fiscal consolidation effort next year, which should see the deficit fall from 2.9% (in 2021) to the aforementioned 1.9%. Minus 1% of GDP.
The scenario proposed by the Finance team is unfavorable because it is highly uncertain and overshadowed by inflation and the war in Ukraine, all variables that are effectively beyond the government’s control.
The basic idea, therefore, is to reach a deficit of 0.9% by the end of next year and further reduce the weight of government debt (which should fall from 115% to about 110% to 111% of GDP in 2023, according to the deputies who have met with the Minister of Finance).
Both indicators are crucial for the Republic to stay afloat, on the good side of the ratings, and not to face unwanted and aggressive interest rate hikes in 2023, as the European Central Bank (ECB) programs are no longer in effect.
Next Wednesday, two days after the unveiling of the OE2023, Portugal will go to the markets to request new debt (bond issuance).
These central bank government debt purchase programs were all shut down in 2022 and key interest rates are rising rapidly.
But the ECB has pledged to ‘reinvest’ government bonds, that is, it has not dumped them on the markets. This makes it possible to contain the value of bonds and the sharp rise in interest rates.
It is an important tool as far as Portugal, with debt of almost 120% of GDP (about 110% in 2023, Medina is said to have said at parliamentary meetings), continues with an annual interest bill of about 5 billion euros. Much more than the estimated deficit, which is around 4.4 billion euros this year (the so-called 1.9% of GDP).
Medina has said several times, like its predecessors João Leão and Mário Centeno, that Portugal must consolidate its accounts if it is to continue financing public services, social support and businesses, growth and jobs. And of course continue to pay off the huge debt at decent prices.
So even as the economy slows, the executive is betting on a deficit reduction equal to that of 2022. This consolidation in 2023 is taking place in a context of inflation easing that, according to the minister during the meetings in the AR, should decrease from 7.4% to 4.1%.
The opposition accuses the government of being too optimistic about price developments. But not completely. Less inflation is also partly playing against the government’s bills.
By assuming a decline in inflation, the government also assumes that the manna of tax and social security revenues – driven by this year’s very high inflation and which allowed the deficit to be reduced to 1.9% , even in a context of galloping crisis – will disappear next year.
And it wasn’t just excessive revenues that made it possible to reduce the deficit in 2022. The implementation of public investment was also strongly influenced by the general uncertainty caused by the war and inflation and by the significant delays in the implementation of European funds, namely the Recovery and Resilience Plan (PRR). This helped curb this year’s spending.
Deficit reduction in 2023 equal to 2022. But how?
And how can a deficit reduction in 2023 equal to 2022 be explained? The President of the Republic, Marcelo Rebelo de Sousa, has not rested with the implementation of the PRR. Nor Mário Centeno, the governor of the Bank of Portugal.
The OE2023 will try to calm the two and show the start of the funded and so-called “structuring” investments for the country.
The big savings Medina believes is the cessation of aid to families and businesses this year due to inflationary pressures.
For example, the Families First package (worth 2.4 billion euros in the national accounts is earmarked for 2022, as it is a spending obligation) should be phased out or completely discontinued in 2023, because the government assumes a détente scenario in inflation, which is high, but drops to 4.1% in 2023, which should come in the new OE.
It may be little (the Finance Council has recently calculated and predicts 5.1%), but less inflation, less support.
Just ending the Families First plan would save 1% of GDP. This one won’t happen in 2022, but could be carried over to 2023. Even if support doesn’t stop completely, here’s a break that Medina wants to use.
But the future is highly uncertain. If a recession comes, as is said in Germany, the largest economy in the euro, OE2023 will quickly become obsolete and will have to be adjusted to increase new spending authorizations – new social aid, unemployment benefits or public company capitalizations, whatever . The depth of the crisis in 2023 will dictate.
Source: DN
