Portugal Faces EU Scrutiny Over Exceeding Expenditure Control Rules

Portugal Under EU Scrutiny for Expenditure Breaches

Portugal is currently facing potential sanctions from the European Union due to concerns that it may violate the bloc's expenditure control rules. Projections indicate that the country's net expenditure growth for 2025 and 2026 could exceed the limits set by the new European budgetary framework, potentially leading to an 'Excessive Deficit Procedure' (EDP) by the European Commission.

Understanding the EU's New Fiscal Framework

The reformed EU economic governance framework, which came into force on April 30, 2024, introduces stricter rules for Member States' fiscal policies. Central to these are multi-annual expenditure variation trajectories. Under these rules, net expenditure growth cannot exceed 0.3% of GDP per year, with a maximum cumulative limit of 0.6%. An EDP can be initiated if a country's budget deficit surpasses 3% of GDP or if its public debt exceeds 60% of GDP and is not decreasing at a satisfactory pace.

Projected Breaches in Portuguese Expenditure

According to recent assessments, Portugal is among the countries expected to exceed these newly established expenditure limits. The European Commission has warned that Portugal 'runs the risk of significantly exceeding' the maximum ceiling for net expenditures.

• For 2025, Portugal's net expenditure is projected to increase by 5.8%, surpassing the recommended maximum growth rate of 5.0%. This represents a deviation of 0.3% of GDP.
• For 2026, net expenditure is estimated to increase by 5.2%, slightly above the recommended 5.1%.
• Cumulatively, compared to the 2023 base year, Portugal's net expenditure is estimated to increase by 26% in 2026, exceeding the recommended 23.4%. This results in a cumulative deviation of 0.7% of GDP, which is above the 0.6% ceiling.

This deviation is partly attributed to higher-than-expected expenditure in 2024, which saw a 0.5% of GDP deviation, carrying over into subsequent years. While Portugal was authorized to activate a safeguard clause for increased defense spending, providing some flexibility, the overall cumulative deviation still exceeds the threshold.

Budgetary Context and Commission's Outlook

Despite these expenditure concerns, Portugal has shown positive trends in its overall budget balance and public debt reduction. The European Commission's forecasts for Portugal's general government balance indicate a 0.0% of GDP balance for 2025, turning into a 0.3% of GDP deficit in 2026 and 0.5% in 2027. These figures are more pessimistic than the Portuguese government's own forecasts, which project surpluses of 0.3% in 2025 and 0.1% in 2026.

Portugal's public debt-to-GDP ratio is also projected to continue its decline, from 93.6% in 2024 to an estimated 91.3% in 2025 and 89.2% in 2026, moving towards the 80% target by 2030. The European Commission has acknowledged that Portugal's 2026 draft budget is 'in line' with fiscal policy obligations under the Stability and Growth Pact, expecting a budgetary position 'close to balance' that contributes to debt reduction.

However, the EC's 'more prudent estimates of expenditure growth' remain a point of divergence. If the projected expenditure figures are confirmed by the National Statistics Institute (INE) by the end of March 2026, the European Commission will be required to prepare a report under Article 126 of the Treaty on the Functioning of the European Union, marking the initial step towards a formal Excessive Deficit Procedure.