The new Stability Program (SP) for the period 2023-2027 (SP 2023-2027) will be sent to the Brussels and Portuguese parliamentarians on 17 April.
The legal deadline is April 15, but since this falls on a Saturday, the law moves to the next business day (Monday the 17th).
This document, which is the responsibility of Fernando Medina’s Ministry of Finance, will contain the new macroeconomic and budgetary forecasts for this year and the following years, in a context of great uncertainty and volatility.
This EP will also have to demonstrate and prove to the European Commission (EC) that the government is fully committed to the Stability Pact, which will be fully applied again in 2024.
This means that the safeguard clause regarding compliance with the deficit and debt rules, which was activated in 2020, with the pandemic, and which is still in place today, will be deactivated next year.
All countries will thus again have to comply with the rules of fiscal discipline that were in place until the pandemic (2019). The announcement was made in May last year.
Now it is formalized in Brussels. Yesterday, the Commission reaffirmed that the framework of public accounting discipline will be fully restored next year and that the new 2023-2027 stability programs to be delivered in April should, of course, already address this.
The EP is the starting document for this new cycle of the European Semester, which will already include measures for 2024 to reduce deficits and debt and meet the requirements of the Pact.
The EC also reiterated that the “guidance” for fiscal policy for 2024 “will be updated as necessary as part of the European Semester spring package in May 2023”.
Therefore, in two months’ time, Brussels, already in possession of the national programmes, will “invite” all eurozone governments to reflect these guidelines in their respective stability programmes.
At the end of March last year, about a month after the start of Russia’s war against Ukraine, João Leão, Medina’s predecessor in finance, presented the EP 2022-2026 with a plan to reduce a deficit of 1.9% of gross domestic achieve income. Product (GDP) in 2022, 0.7% in 2023, 0.3% in 2024 and zero balance in 2025.
Medina leaves with a deficit and a smaller debt
However, the 2022 starting point will be “more favourable”, Finance says, as the deficit should be lower, in the order of 1.4% or 1.5% of GDP.
In the current National Budget (OE2023), the deficit target for 2023 has been slightly increased to 0.9% of GDP.
In terms of debt, too, the government went beyond the projected reduction: it would have been 115% of GDP, but remained at 113.8%.
As for 2024, Medina does the math, but it’s already clear that it won’t deviate much from the route set a year ago. He wants to keep up the pace of consolidation and the “certain accounts” that Brussels loves.
In terms of the deficit, the aim is to continue with austerity and reach balance in 2025. And try to reach the end of the legislature with a debt of 100% or even lower.
The EC reiterated yesterday that, in light of the EP due to be released in April, it will already “propose country-specific recommendations on fiscal policy for 2024”, demanding that multi-annual budget plans be “in line with budgetary objectives”. established by the Member States in their stability programmes”.
That such targets are “in line with the assurance that the government debt-to-GDP ratio is on a downward path or remains at a cautious level and that the medium-term budget deficit is below the 3% of GDP reference value”.
And that public debt, if it is too high, as in the Portuguese case, should be reduced by means of the limits of the development (or even reduction) of net primary expenditure, the new indicator introduced last year in the reform guidelines of the Commission was proposed.
Secure accounts with an uncertain economy
Nevertheless, with prospects for weaker economic growth and the obligation to reduce spending and debt in 2023, the starting point of government accounts is, as mentioned, more favorable than previously thought, which could also serve to absorb additional demands for Brussels in 2023 .
With GDP growing faster than expected last year, the deficit could be lower, as could the debt ratio, Medina said.
The Prime Minister, António Costa, has already revealed that the government deficit for 2022 is “smaller than expected”. “We predicted the deficit would be 1.9% of GDP and it will be 1.4% or 1.5%.”
The PE to be unveiled on April 17 will update all of these estimates and the benefits of maneuvers they could mean for the 2023 bills.
At that point, depending on how fast the TAP file unfolds (expected revenues from the reprivatization, final cost to taxpayers), Treasury may proceed with revised public accounts targets.
If they stick to it, it means that the pace of fiscal consolidation could actually pick up, even with a weaker economy.
Medina reiterates his desire for “certain bills” and that he will do everything possible to bring Portugal budgetary results that satisfy Brussels and the markets and are in line with the Stability Pact (this will be reactivated next year). To protect the country, to give more confidence and security to the Portuguese, the minister waved.
How is the Portuguese economy doing?
If, on the one hand, there are recent signs that parts of national economic activity are succeeding in resisting the recessive impact of inflationary effects and the interest rate hike by the European Central Bank (ECB), on the other hand, other less favorable signals, such as the tightening of family and business budgets due to rising living costs and interest rates.
While the weight of government debt measured as a percentage of GDP is falling, as is the government deficit, interest costs are rising sharply due to the price effect (ECB rates), posing a major budgetary challenge this year and the next.
Portugal has a high public debt in European terms, despite the continued decline.
Finance Minister Fernando Medina highlighted the “impressive drop” in debt in 2022 to “pre-Troika levels”. About 113.8% of GDP, he said.
It remains the third or fourth highest ratio in Europe (and the eurozone) — it depends on what Spain manages to lower — putting the country under the radar of greater demands for containment and fiscal discipline (from the European Commission and the other EU institutions).
This will be one of the focus points of the analysis of the European Semester’s new cycle of economic and budgetary reviews, which will examine the plans of the government of António Costa on the basis of the new EP.
It should be noted that the debt burden fell in 2022 because nominal GDP grew much more than debt.
“In nominal terms, GDP will have increased by 11.5% in 2022 to around EUR 239 billion,” said the National Institute of Statistics (INE).
Debt also continued to rise, but at a more moderate pace. According to the Bank of Portugal, the value of the debt in euros increased by 1.2% last year to EUR 272.6 billion.
It was down 0.5% in 2021, but neither last year’s slight increase nor the reduction in 2021 offset the significant increase recorded in the first year of the response to the Covid-19 pandemic, when debt of the taxpayer increased by 8.2%, the highest since the first year of the troika in Portugal (11.9%).
The nominal value of the debt, even if it stabilizes, implies an interest bill (payable to creditors) that is not negligible and that is directly attributed to government spending, thus feeding the deficit.
In January, this debt service increased by 35%. The Ministry of Finance explicitly refers to this risk in the explanatory notes to budget implementation for the first month of the year.
“Interest spending is once again putting pressure on the budget balance,” “rising 34.6% in January 2023, reversing the downward trend of recent years,” said Medina’s tutelage.
This is happening because the price of debt, the interest rate, is rising at a gallop as the ECB decided to raise interest rates in the Eurozone and halt the monetary assistance programs that resulted from the Euro crisis and the pandemic crisis.
After a year 2022 blown up by the first inflation shock, the most depressing consequences of very high inflation are beginning to reveal themselves.
Insecurity. And investment and employment falter
There are uncertainties when starting many investments, there are considerable delays in the implementation and disbursement of European funds (namely in the PRR – Recovery and Resilience Plan), employment is starting to falter and unemployment is flat.
As Dinheiro Vivo wrote a few days ago, according to INE data up to January this year, released on Wednesday, March 1, employment has virtually ground to a halt since November (over the past three months, the average year-on-year rate of change was 0.02 %) and the burden falls entirely on the group of workers over the age of 25, where jobs have been destroyed ever since.
In January (still preliminary data), total employment increased by only 0.1% compared to the same month last year, after falling by 0.4% in December.
It is necessary to go back to March 2021, when the country emerged from the most deadly phase of the pandemic, to see a drop in employment (then the drop was 0.3%).
The unemployment rate, the percentage of people without work in the total active population, reached 7.1%, the highest value since the worst days of the covid-19 pandemic. In January 2021, the rate was also of this magnitude.
The national unemployment rate has risen steadily since last July, when it stood at 5.8%.
This raises doubts about economic growth this year. In the OE2023, the government (Ministry of Finance) forecasts real growth of 1.3% this year. This was in October.
That same month, the IMF forecast 0.7%. In November, the OECD assumed 1% in 2023. In December, the Bank of Portugal forecast 1.5%, but in a scenario of stagnation in total employment (0%).
This year, in February, the European Commission already forecast GDP growth of 1%, an environment of “high uncertainty” about the length of Russia’s war on Ukraine and what that means for the slowdown in European economies and others outside Europe .
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
