Lisbon, July 17, 2025 (Lusa) - The Portuguese commitment made to NATO to invest 2% of GDP in defence this year and 5% by 2035 will put pressure on public accounts and could compromise the surplus, warn economists and national institutions.
Before the Government decided to bring forward the target, the Public Finance Council (CFP) estimated that if spending on defence reached 2% of gross domestic product (GDP) in 2029, this could worsen the budget deficit to 1.2% of GDP.
In a projection based on linear convergence over four years, considering an annual increase of 0.125 percentage points (p.p.) of GDP until 2% of defence spending is reached in 2029, ‘the budget deficit would reach 0.6 p.p. of GDP higher than projected under unchanged policies, and the public debt ratio would worsen by 1.3 p.p. of GDP’.
According to CFP estimates released in April, in a scenario of unchanged policies, i.e. if no new measures are taken, the estimated deficit is 0.6% of GDP, while if the increase in defence spending to 2% of GDP were included in the accounts, the deficit would be 1.2%.
The public debt ratio is projected at 85.4% of GDP under unchanged policies in 2029, and at 86.6% if the spending target is achieved in that year.
‘In terms of the direct effect on public finances, this increase is entirely reflected in primary expenditure, worsening the budget balance and public debt,’ concludes the CFP.
More recently, in its report on Public Administration Accounts: January to March 2025, the Technical Budget Support Unit (UTAO) warned that "downward budgetary risks on budget execution are increasing".
Among these risks is "the increase in defence spending, aimed at ensuring compliance, by 2025, with the target of allocating 2% of GDP to defence in accordance with the “NATO criterion”, which will have an impact on the rest of the year," the Technical Budget Support Unit indicated.
The Forum for Competitiveness also pointed out that "Portugal could reach the 2% of GDP in defence spending in 2025, which should mean an average increase of 0.3% of GDP per year until 2035, around €900 million additional per year, at 2025 prices".
"We insist that if reforms to increase the economy's growth potential are not carried out, this will put very strong budgetary pressure on other public spending, particularly spending on pensions, health, education and other sectors over the next ten years," the bulletin reads.
The warning was also made by BPI (bank) Research, which wrote in an analysis note that some factors point to a slight budget deficit in 2025, including "the early achievement of the defence spending target under NATO", which is expected to "exert additional pressure".
Nelson de Souza, a former minister, also warned at the Defence Economy conference at the end of June that "the expenditure has to go into the state budget sooner or later", and that "if it is not at the time of the loan, it has to go".
"This is what is happening with the RRP [Recovery and Resilience Plan], which did not happen when it should have and in 2026 will land as expenditure and even increase the deficit," he warned.
Thus, although the measure is positive for Portugal not to be penalised in terms of the excessive deficit procedure, for the external image, the debt ratio figures continue to count, he stressed.
Despite these warnings, the Government maintains its expectation of a surplus of 0.3% of GDP.
On Monday, the prime minister remained convinced that the country will have a budget surplus at the end of the year and stressed that, in the future, the government "will have to manage the budget in such a way as to allocate more investment to defence than has been the tradition in recent years".
Portugal has activated the clause that allows an increase in defence spending of up to 1.5% of GDP between 2025 and 2028 not to be counted in public deficits, so it will have to take this into account in this year's budget.
MES/AYLS // AYLS
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