State Budget Proposal 2017: focusing on four priorities


Page created: Tuesday, 8 November 2016 15:39 GMT

Government deficit  Primary balance  Public Debt   State Budget  State Budget Proposal

Families’ income, investment, social protection and innovation are the main Government priorities.

The Budget policy goals are: recovery in household income, promoting investment and sustainable economic growth, welfare state development, and society qualification through science and culture. The Portuguese Public Finance Council assessment concluded that the macroeconomic scenario has plausible statistical projections, and points to the trade balance and investment forecasts as the main risks, which the Council considers as the key-variables for the projected scenario performance.

The State Budget Proposal for 2017 was published on 14 October by the Ministry of Finance (MF) and was approved by Parliament on the whole on 4 November. The final voting is scheduled to take place on 29 November, the day after the line-by-line discussion.

Four priorities are highlighted in the Budget Proposal: recovery in families’ income, investment promotion, social protection development and innovation boost. For the first priority, the Government proposes to apply a set of measures focused on maintaining the recovery in families’ income. These measures consist of gradually eliminating the personal income surcharge, increasing all the lower pensions, updating the social support index, reintroducing the income support allowance, as well as increasing the family allowance and reinstate public servants wages. The second priority focuses on promoting investment and sustainable economic growth, more precisely on the capitalization of companies by extending and facilitating access to fiscal credit, and also by promoting public investment in various infrastructures, such as hospitals, railroads and national security-related structures. For the area dedicated to social protection, the Government will sponsor free school manuals to all primary school students and put forward universal preschool attendance. This priority goal aims to expand primary healthcare facilities, and provide family doctors to 500 thousand more users. Furthermore, the Government hopes to expand the long-term care network, especially with regard to mental healthcare, in addition to creating incentives to boost the birth rate and fight child poverty. The innovation priority entails policies targeted to qualify society in general through science and culture. Therefore, the policies intend to rejuvenate higher education human resources, while also providing support for artistic creation with the goal of reaching new audiences. Finally, the Government proposes the conservation, requalification and recovery of the national heritage with touristic potential.

The Government predicts a deficit reduction from 2.4% in 2016 down to 1.6% in 2017, and a fall of the structural deficit by 0.6 p.p. in 2017.

Regarding the debt over GDP ratio, a drop from 129.7% in 2016 to 128.3% in 2017 is expected. Hence, the financing capacity of the Portuguese economy is predicted to improve from 1.7% over GDP in 2016 to 2.2% over GDP in 2017, and an increase of 0.9 p.p. in the primary balance, changing from 1.9% over GDP in 2016 to 2.8% over GDP in 2017.

Concerning the fiscal framework for 2017, the prediction is for a reduction of 0.1p.p on tax revenue, although the tax burden is expected to remain the same as in 2016. The ratio of direct and indirect taxes will be maintained for the same period at 10.2% and 14.8% over GDP, respectively.

Regarding job creation the Government estimates a 1% growth rate (0.8% in 2016), which will make the average unemployment rate fall to 10.3% in 2017 (11.2% in 2016).

The Government GDP growth forecast maintains the upward trend recorded in previous trimesters, with the expected growth of 1.2% in 2016 and 1.5% in 2017. The most dynamic component of internal demand is expected to be investment, with the forecast showing an increase of 3.1% on total investment and a 21.9% growth rate in public investment in 2017, the latter changing from 1.9% of GDP in 2016 to 2.2% of GDP in 2017. However, exports are estimated to be the most positive component of GDP in volume for 2017, changing from 3.1% in 2016 to 4.2% in 2017. This positive outlook is based on high growth estimates from foreign demand of 1.8p.p, changing from 2.4% in 2016 to 4.2% in 2017, due to increases in demand from countries such as Angola, Brazil, the United States and Belgium.

On 14 October, the Portuguese Public Finance Council published a report on the macroeconomic scenario underlying the Budget Proposal. The Council points out two conclusions: firstly, that the macroeconomic scenario underlying the Budget Proposal has plausible statistical projections; and secondly, that the main risks involving the macroeconomic scenario are the trade balance and investment forecasts, which the Council regards as the key-variables for the Government Budget to perform.

Concerning the investment growth forecasts of 3.1% for 2017, the Council considers it to be aligned with the other institutions average forecasts (3.3%). According to the Council, the greatest threats to the investment forecast are the changes in access to financing, uncertainty, and the economic agents’ expectations concerning the Portuguese economy.

In terms of the trade balance forecasts for 2017, the Government estimates a growth rate of exports and imports of 4.2% and 3.6%, respectively. In both cases, the Government forecasts show significant divergence from the average predictions of other institutions, with exports being overestimated in 0.3 p.p. and imports being underestimated by 0.5 p.p.. The Portuguese Public Finance Council warns about the high degree of uncertainty over external demand forecasts that could threaten the 2017 GDP growth forecast.


On a final note, the Council stresses the important changes expected for the trajectory of the Portuguese economy vis-à-vis what was presented in the 2016 State Budget, namely, the slowing down of the economy since the second semester of 2016 and the change from private consumption to exports and investment as the main drivers of economic growth.

The Budget Technical Support Unit and, more recently, the European Commission have requested additional information regarding the Budget Proposal. The questions raised are concerning the structural deficit, tax revenues and social security revenue forecasts. Regarding the structural deficit forecasting, the Minister of Finance, Mário Centeno, argues that the European Commission is undervaluing the potential GDP growth, and he assures that the European deficit goals will be achieved. As for the fiscal revenue forecast, the Minister claims that the projections are “conservative” because nominal GDP is growing at a faster pace than fiscal revenues. Lastly, and in response to questions concerning the social security revenue forecast, Mário Centeno stated that “This is a conservative estimate, since we have projected the same drop of the unemployment rate for both years.”

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