With a "weak track record" in public investment, especially in the years of the Troika and the PSD-CDS until 2014 and the PS until 2019, Portugal can now move up in the ranking: going from last to fifth worst next year, says Brussels.
In 2022, Portugal will continue to be among the countries in Europe with the weakest levels of public investment, even with the substantial help of European funds, including the funds from the Recovery and Resilience Plan (PRR).
The chronic problem of lack of this type of investment remains. This expenditure item has contributed a lot to reducing the deficit in recent years, but has now reemerged as fundamental in the European political discourse in terms of sowing the seeds of a new productive and sustainable era in post-pandemic Europe.
The conclusion about Portugal's weaknesses in this type of investment comes from the European Commission itself in the new autumn economic forecasts, released yesterday (11 November 2021).
According to the study, Portugal goes from last in the European (EU) ranking of public investment (in 2020) to fifth worst next year. The greatest help for this 'improvement' comes from European funds and PRR grants, as mentioned.
But it's not much, especially when you compare the other European pairs. The weight of public investment used to hover around 4% to 5% of gross domestic product (GDP) until the country fell into bankruptcy and reached the Troika and the PSD-CDS government, which implemented the adjustment program. In 2014, public investment would fall to 2% of GDP.
But it didn't stop there. The first year of PS governance was responsible for the lowest value of the public investment ratio in the official series (Commission and INE) dating back to 1995.
In 2016, public investment would touch a minimum of 1.5%, indicates the EC. And for three straight years (from 2017 to 2019) it would be chained to 1.8% of GDP. It was decisive for the shine in public accounts and for the budget surplus of 0.1% in 2019. But then came the pandemic.
With European funds and the emergency to get out of the pandemic crisis, almost all politicians turned to public investments as the main engines of recovery, helping companies as well, as they create and expand markets. In Portugal, the plan is to increase the weight from 1.8% (last place in Europe) to 3% next year (the fifth worst in Europe).
In the new autumn forecasts, Brussels notes that, at the European level, the ratio of public investment to GDP is expected to increase from 3% of GDP in 2019 to 3.5% in 2023.
"Much of this increase is linked to EU-funded investments, especially through the Resolution and Resilience Mechanism" and "almost all states are expected to spend more on public investment than they did before the pandemic", argues the EC.
Portugal: poor track record
"Portugal's public investment record is weak, but it should be reversed over the forecast horizon [until 2023], boosted by the new projects foreseen in the PRR", expects the European Commission.
Even so, downside risks remain and if something goes awry, the upturn can be short or bumpy.
In its assessment of Portugal, the EC warns that the Portuguese recovery could be strong this year and next, but the experience should be short-lived.
Even with the Recovery Plan in progress and a State Budget in 2022 (OE2022) similar to what was failed, the EC considers that the economy could even grow 5.3% next year (a little less than the 5, 5% forecast by Finance in the OE2022 lead), but in the following year the recovery collapses in half, to around 2.4%.
"Lead of the OE has consequences"
At the press conference, the European Commissioner for Economy, Paolo Gentiloni, referred to the case of Portugal, saying that "one of the countries presented a budget proposal that did not pass, as the government was in a minority in Parliament". It means that "the Commission will have to assess an upcoming new draft budget plan". For the commissioner, "obviously these events have consequences for the economy".
The panorama anticipated by the Commission may be short and an anemic start for a country such as Portugal, which comes from two decades of near stagnation, with a very serious debt crisis in between, a four-year austerity program and, more recently, a very deep recession due to the pandemic.
Despite the strong impulse expected from public investment, the economy tends to lose gas from 2022 and in 2023 Portugal stops converging with the euro zone and Europe, that is, it stops growing at a higher rate, as happened recently.
Brussels says that the balance of risks is more negative than positive "due to the large scale of foreign tourism, where uncertainty remains high".
On the bright side, the Commission highlights "Portugal's high vaccination rate, which reduces internal risks related to the pandemic".
Well behaved in public accounts again
Public accounts, on the other hand, are the ones that move towards greater discipline. Portugal appears here as a good student, it seems.
This year, the deficit may already fall to 4.5% of gross domestic product (GDP), then ease to 3.2% next year (as predicted by the government in the OE that was rejected by Parliament) and in 2023, even with the economy growing close to 2%, Portugal is once again complying with the Stability Pact, with a deficit below 3% (2.8%, according to the new forecasts).
"The phasing out of crisis mitigation measures and the growth of rising tax revenues will drive the deficit reduction," explains the Commission.
The EC advises that this forecast "incorporates expenditure financed by grants from the RRP fund, which is expected to gradually increase from a contribution of 0.3% of GDP in 2021 to 1.5% of GDP in 2023".
However, this forecast "is surrounded by uncertainties linked to the adoption of a 2022 budget" and, moreover, "the risks remain tilted to the downside, due to the accumulation of contingent liabilities due to public guarantees related to the crisis".
Twice in this new study, the EC laments the "uncertainties related to the approval of a 2022 Budget". "It's an additional risk factor," he says.
Article by Luís Reis Ribeiro
