REPORT FROM THE COMMISSION Portugal Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Portugal, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 537 final  REPORT FROM THE COMMISSION Portugal  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Portugal 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1.  INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 
6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of  Regulation 
(EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic 
downturn.  In  its  Communication,  the  Commission  shared  with  the  Council  its  view  that, 
given  the  expected  severe  economic  downturn  resulting  from  the  COVID-19  outbreak,  the 
current  conditions  permit  the  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data notified by the Portuguese authorities on 31 March 2020 and subsequently validated by 
Eurostat1 show that Portugal’s general government balance was a surplus of 0.2% of GDP in 
2019, while the general government gross debt-to-GDP ratio was 117.7%. According to the 
notified data, Portugal was then planning a general government surplus of 0.2% of GDP for 
2020 – on the basis of the 2020 State Budget adopted before the outbreak of the COVID-19 
pandemic –  while  it  expected  the  general  government  debt-to-GDP  ratio  to  decrease  to 
114.9%. Portugal’s 2020 Stability Programme, which was not submitted within the deadline 
laid  down  in  Article  4(1)  of  Regulation  (EC)  1466/97,  did  not  include  a  planned  general 
government balance for 2020. 

In  contrast  to  the  notified  data,  according  to  the  Commission  2020  spring  forecast  – which 
reflects, among other factors, the expected economic and budgetary impact of the COVID-19 
pandemic –,  a  general  government  deficit  of  6.5%  of  GDP  is  projected  for  2020,  while  the 
general  government  debt-to-GDP  ratio  is  set to  increase  to  131.6%.  All  available evidence, 
including  statements  by  the  Portuguese  authorities  about  the  extent  of  the  reaction  of 
budgetary policy to the severe economic downturn associated with the COVID-19 pandemic, 
points to a general government deficit significantly in excess of the Treaty reference value of 
3%  of  GDP  in  2020.  In  its  letter  of  7  May  2020,  the  Commission  invited  the  Portuguese 
authorities to clarify the size of the planned general government deficit in 2020. In their letter 

1   https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

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of  13  May  2020,  the  Portuguese  authorities  did  not  provide  the  requested  clarification  and 
alluded  to  exceptional  conditions  related  to  the  COVID-19  pandemic.  Taking  those  factors 
into account, the Commission considers its current forecast of a general government deficit of 
6.5% of GDP in 2020 as sufficiently compelling prima facie evidence of an excessive deficit 
as defined by Article 126(2)(a) of the Treaty. 

Against this background, the Commission has therefore prepared this report, which analyses 
Portugal’s compliance with the deficit and debt criteria of the Treaty. It takes into account all 
relevant  factors  and  gives  due  consideration  to  the  major  economic  shock  linked  to  the 
COVID-19 pandemic.  

Table 1. General government deficit and debt (% of GDP) 

Note:   MLSA refers to the “minimum linear structural adjustment”; EDP refers to the “excessive deficit 

procedure”; and, n.r. stands for “not relevant”. 

Source:  Eurostat, Commission 2020 spring forecast. 

2.  DEFICIT CRITERION 

According to the Commission 2020 spring forecast, Portugal’s general government balance is 
expected to be a deficit of 6.5% of GDP in 2020. Specifically, while the budgetary cost of the 
measures taken by the Portuguese authorities to tackle the COVID-19 pandemic is estimated 
at 2.5% of GDP, the operation of the automatic stabilisers is expected to contribute more than 
4%  of  GDP  to  the  projected  general  government  deficit  in  2020.  The  Commission  forecast 
for  the  general  government  deficit  in  2020  is  above  and  not  close  to  the  Treaty  reference 
value of 3% of GDP. 

The forecast excess over the Treaty reference value of 3% of GDP in 2020 is exceptional, as 
it results from a severe economic downturn. Taking into account the impact of the COVID-19 
pandemic, the Commission 2020 spring forecast projects a contraction of real GDP by 6.8% 
in 2020. 

The  forecast  excess  over  the  Treaty  reference  value  would  be  temporary  according  to  the 
Commission 2020 spring forecast, which projects the general government deficit to fall under 
3%  of  GDP  in  2021.  However,  those  projections  are  surrounded  by  an  exceptionally  high 
degree of uncertainty. 

2 

20202021COMCOMDeficit criterionGeneral government balance-1.9-3.0-0.40.2-6.5-1.8General government gross debt131.5126.1122.0117.7131.6124.4Gap to the debt reduction benchmarkIn EDPn.r.n.r.n.r.3.5-0.2Change in structural balancen.r.0.40.70.4n.r.n.r.Required MLSAIn EDP0.0-0.3-1.8n.r.n.r.2019Debt criterion201620172018 
 
 
 
In sum, the Commission forecast for the general government deficit in 2020 is above and not 
close  to  the  Treaty  reference  value  of  3%  of  GDP.  The  forecast  excess  is  considered  to  be 
exceptional as defined by the Treaty and the Stability and Growth Pact, while the nature of 
the excess is currently considered temporary. All available evidence, including statements by 
the Portuguese authorities about the extent of the reaction of budgetary policy to the severe 
economic downturn associated with the COVID-19 pandemic, points to a general government 
deficit significantly in excess of the Treaty reference value of 3% of GDP in 2020. In its letter 
of 7 May 2020, the Commission invited the Portuguese authorities to clarify the size of the 
planned general government deficit in 2020. In their letter of 13 May  2020, the Portuguese 
authorities  did  not  provide  the  requested  clarification  and  alluded  to  exceptional  conditions 
related  to  the  COVID-19  pandemic.  Taking  those  factors  into  account,  the  Commission 
considers  its  current  forecast  of  a  general  government  deficit  of  6.5%  of  GDP  in  2020  as 
sufficiently  compelling  prima  facie  evidence  of  an  excessive  deficit  as  defined  by  Article 
126(2)(a) of the Treaty. Hence, the analysis suggests that prima facie the deficit criterion as 
defined in the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3.  DEBT CRITERION 

The  general  government  debt-to-GDP  ratio  decreased  from  122.0%  in  2018  to  117.7%  in 
2019. That decline in 2019 mainly reflected the debt-reducing impact stemming from a solid 
primary  surplus  (of  3.2%  of  GDP)  and  a  favourable  nominal  GDP  growth-interest  rate 
differential,  whereby  the  combined  effects  of  real  GDP  growth  and  inflation  (of  4.6% 
altogether) offset the sizeable – yet gradually diminishing – interest burden on the high debt 
overhang (of 3.0% of GDP). The stock-flow adjustment was nevertheless positive in 2019 (at 
0.5% of GDP). 

Following  the  abrogation  of  the  excessive  deficit  procedure  in  June  2017,  Portugal  was 
subject to a three-year transition period to ensure sufficient progress towards compliance with 
the  debt  reduction  benchmark.  The  transition  period  started  in  2017  and  ended  in  2019.  In 
order to ensure continuous and effective progress towards compliance during that transition 
period, the following two conditions should be respected simultaneously: 

a.  The annual structural adjustment should not deviate by more than ¼% of GDP from the 
minimum  linear  structural  adjustment  (MLSA),  ensuring  that  the  debt  reduction 
benchmark is met by the end of the transition period; 

b.  At  any  time  during  the  transition  period,  the  remaining  annual  structural  adjustment 
should not exceed ¾% of GDP (unless the first condition implies an annual effort above 
¾% of GDP). 

The  notified  data  show  that  Portugal  made  sufficient  progress  towards  meeting  the  debt 
reduction  benchmark  in  2019,  as  the  structural  balance  is  estimated  to  have  improved  by 
0.4% of GDP last year, compared with the applicable MLSA of -1.8% of GDP. 

The  analysis  thus  suggests  that  the  debt  criterion  is  fulfilled  based  on  the  2019  outturn 
budgetary data. 

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4.  RELEVANT FACTORS 

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”. 

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. 

As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards complaince with the 
deficit criterion in 2020, since the general government debt-to-GDP ratio exceeds the Treaty 
reference value of 60% and the double condition of the overarching principle is not met – i.e. 
that the general government deficit remains close to the Treaty reference value of 3% of GDP 
and that its excess over the that reference value is temporary – those relevant factors cannot 
be  taken  into  account  in  the  steps  leading  to  the  decision  on  the  existence  of  an  excessive 
deficit for Portugal.  

In  the current  situation, a key additional  factor to  take into  consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial effect on the 
budgetary  situation and results  in  a highly uncertain  outlook. The pandemic has  also led to 
the activation of the general escape clause. 

4.1.  COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those  measures  will  contribute  to  substantially  higher  general  government  deficit  and  debt 
positions. 

4.2.  Medium-term economic position 

The  Portuguese  economy  was  on  a  gradually  moderating  path  before  the  outbreak  of  the 
COVID-19 pandemic, with real GDP growth slowing to 2.2% in 2019, from 2.6% in 2018. 
The economy performed strongly in the first two months of 2020. 

According to the Commission 2020 spring forecast – which reflects, among other factors, the 
expected economic impact of the COVID-19 pandemic – economic activity is now projected 

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to fall sharply in 2020, when real GDP is expected to contract by 6.8%. As regards domestic 
demand, while private consumption is projected to drop at a slightly lower rate than GDP – as 
policy measures partly offset losses in household income –, investment is expected to be the 
hardest  hit  due  to  lingering  uncertainty  and  despite  the  newly  introduced  flexibility  in 
European  Structural  and  Investment  Funds.  As  regards  external  demand,  both  exports  and 
imports  are  projected  to  decrease  at  double-digit  rates,  with  the  former  being  especially 
affected by the expected disruption in foreign tourism. The unemployment rate is set to rise 
from 6.5% in 2019 to 9.7% in 2020.  

Although  real  GDP  is  expected  to  recover  by  5.8%  in  2021,  the  aftershocks  are  likely  to 
linger  in  some  sectors, particularly tourism.  As  a  consequence,  GDP  is  projected  to  remain 
below its 2019 level until 2021. 

The macroeconomic outlook is marked by an exceptional degree of uncertainty related to the 
duration of the COVID-19 pandemic and its ensuing economic impact. Country-specific risks 
are  also  tilted  to  the  downside  given  the  reliance  of  the  Portuguese  economy  on  foreign 
tourism,  which  is  expected  to  be  strongly  hit  by  the  COVID-19  pandemic.  They  are 
mitigating  factors  in  the  assessment  of  Portugal’s  compliance  with  the  deficit  criterion  in 
2020. 

4.3.  Medium-term budgetary position 

Portugal’s general government balance turned into a surplus of 0.2% of GDP in 2019, helped 
by  strong  revenue  performance  – especially  in  social  contributions  and  indirect  taxes –  and 
continuously decreasing interest expenditure. Public investment stabilised at 1.9% of GDP in 
2019  – compared  with  an  observed  general  government  surplus –,  below  government  plans 
and  the  Union  average  of  3%  of  GDP.  Excluding  the  impact  of  a  further  activation  of  the 
Novo Banco contingent capital mechanism (of 0.5% of GDP last year) and other one-offs, the 
general government balance reached a surplus of 0.8% of GDP in 2019. 

On  13  July  2018,  Portugal  was  recommended  to  ensure  that  the  nominal  growth  rate  of 
primary government expenditure, net of discretionary revenue measures and one-offs, did not 
exceed  0.7%  in  2019  (the  ‘expenditure  benchmark’),  corresponding  to  an  annual  structural 
adjustment of 0.6% of GDP.2 Based on the outturn budgetary data and the Commission 2020 
spring  forecast,  the  growth  rate  of  net  primary  expenditure  was  well  above  the  applicable 
expenditure  benchmark,  thus  pointing  to  a  significant  deviation  of  1.0%  of  GDP  from  the 
requirements in 2019. At the same time, the structural balance is estimated to have improved 
by  0.4%  of  GDP,  thus  pointing  to  some  deviation  from  the  recommended  structural 
adjustment  path  towards  the  medium-term  budgetary  objective  in  2019.  An  overall 
assessment confirms the significant deviation from the requirements of the preventive arm of 
the Stability and Growth Pact in 2019, and over 2018 and 2019 taken together. 

Data  notified  by  the  Portuguese  authorities  on  25  March  2020  indicate  that  Portugal  was 
planning a general government surplus of 0.2% of GDP for 2020 – on the basis of the 2020 
State  Budget  adopted  before  the  outbreak  of  the  COVID-19  pandemic.  However,  it  is 
expected  that  the  economic  and  social  consequences  of  the  pandemic  will  cause  a  sizeable 

2   Council  Recommendation  of  13  July  2018  on  the  2018  National  Reform  Programme  of  Portugal  and 
delivering a Council opinion on the 2018 Stability Programme of Portugal (OJ C 320, 10.9.2018, p. 92). 

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deterioration  in  the  general  government  balance  in  2020,  reflecting  the  operation  of  the 
automatic stabilisers and the need for significant fiscal policy support. 

The  Stability  Programme  provides  information  on  substantial  measures  to  reinforce  the 
response  capacity  of  the  health  system,  protect  jobs,  provide  social  support  and  safeguard 
firms’ liquidity. The overall direct budgetary cost of those policy measures was estimated at 
around  2.5%  of  GDP  at  the  cut-off  date  of  the  Commission  2020  spring  forecast  (23 April 
2020).  The  medium-term  budgetary  position  is  subject  to  an  unusually  high  degree  of 
uncertainty  and  risks  are  tilted  to  the  downside,  linked  to  the  surge  in  public  contingent 
liabilities stemming from some public corporations and the private sector, including through 
the possible calling of the State guarantees to firms and self-employed in the aftermath of the 
COVID-19  pandemic.  Those  risks  are  on  top  of  non-negligible  pre-existing  levels,  partly 
related to potential further budgetary impacts of additional bank support measures. 

4.4.  Medium-term government debt position 

Portugal’s  general  government  debt-to-GDP  ratio  declined  to  117.7%  in  2019,  helped  by  a 
solid  primary  surplus  and  a  favourable  nominal  GDP  growth-interest  rate  differential. 
According  to  the  Commission  2020  spring  forecast,  a  sudden  primary  deficit  and  the 
projected dynamics of real GDP will weigh on the general government debt-to-GDP ratio in 
2020, when it is set to rise to 131.6%. The general government debt-to-GDP ratio is projected 
to drop to 124.4% in 2021, thereby resuming its gradual decreasing path on the back of the 
expected economic recovery. 

The debt sustainability analysis has been updated on the basis of the Commission 2020 spring 
forecast. Overall, the debt sustainability assessment indicates that notwithstanding risks, the 
debt  position  remains  sustainable  over  the  medium  term,  which  takes  account  of  important 
mitigating factors notably linked to the debt profile and the historically low level of interest 
rates. Importantly, while the government debt position deteriorates as a result of the COVID-
19 pandemic in the short term, the debt-to-GDP ratio in the baseline is still expected to be on 
a sustainable (declining) trajectory over the medium term.3 

3   The baseline is based on the Commission spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy  is  assumed,  consistent  with  the  EU  economic  and  fiscal  coordination  and  surveillance  frameworks. 
Real  GDP  growth  is  projected  according  to  the  so-called  EPC/OGWG  t+10  methodology.  In  particular, 
(real) actual GDP growth is driven by its potential growth and affected by any additional fiscal adjustment 
considered  (through  the  fiscal  multiplier).  Inflation  is  assumed  to  converge  gradually  to  2%.  Interest  rate 
assumptions  are  set  in  line  with  financial  market  expectations.  Under  the  adverse  scenario,  higher  interest 
rates  (by  500  bps.)  and  lower  GDP  growth  (by  -0.5  pps.),  with  respect  to  the  baseline,  are  assumed 
(throughout the projection horizon). 

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Graph 1. Government debt-to-GDP ratio, Portugal, % of GDP 

Source: Commission services. 

4.5.  Other factors put forward by the Member State 

On  13  May  2020,  the  Portuguese  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities.  In 
their  letter,  the  Portuguese  authorities  stressed  the  positive  evolution  of  Portugal’s  fiscal 
position in the years running up to the outbreak of the COVID-19 pandemic, with the general 
government balance having improved to a surplus in 2019 and the general government debt-
to-GDP  ratio  having  remained  on  a  steady  downward  path.  While  the  2020  Stability 
Programme did not include either a macroeconomic scenario or budgetary plans for at least 
2020, and the letter did not clarify the size of the planned general government deficit in 2020, 
the  Portuguese  authorities  reaffirmed  their  commitment  to  submit  that  information  in  the 
context of the budgetary process in Portugal, by the end of the first semester of 2020. 

5.  CONCLUSIONS 

According to the Commission 2020 spring forecast, Portugal’s general government balance is 
projected to be a deficit of 6.5% of GDP in 2020, above and not close to the Treaty reference 
value of 3% of GDP. The forecast excess over the Treaty reference value of 3% of GDP is 
considered to be exceptional and currently considered to be temporary. 

All available evidence, including statements by the Portuguese authorities about the extent of 
the  reaction  of  budgetary  policy  to  the  severe  economic  downturn  associated  with  the 
COVID-19  pandemic,  points  to  a  general  government  deficit  significantly  in  excess  of  the 
Treaty reference value of 3% of GDP in 2020. In its letter of 7 May 2020, the Commission 
invited the Portuguese authorities to clarify the size of the planned general government deficit 
in  2020.  In  their  letter  of  13  May  2020,  the  Portuguese  authorities  did  not  provide  the 

7 

8090100110120130140150201920202021202220232024202520262027202820292030BaselineAdverse scenario 
 
 
 
requested  clarification  and  alluded  to  exceptional  conditions  related  to  the  COVID-19 
pandemic. Under those circumstances, the Commission considers its current forecast for the 
general  government  deficit  in  2020  as  sufficiently  compelling  prima  facie  evidence  of  an 
excessive deficit as defined by Article 126(2)(a) of the Treaty. 

The  general  government  gross  debt-to-GDP  declined  to  117.7%  in  2019,  above  the  Treaty 
reference  value  of  60%.  Portugal  made  sufficient  progress  towards  meeting  the  debt 
reduction benchmark in 2019. 

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance 
with the deficit criterion in 2020, however, since the general government debt-to-GDP ratio 
exceeds  the  Treaty  reference  value  of  60%  and  the  double  condition  of  the  overarching 
principle  is  not  met  – i.e.  that  the  general  government  deficit  remains  close  to  the  Treaty 
reference value of 3% of GDP and that its excess over the that reference value is temporary – 
those relevant factors cannot be taken into account in the steps leading to the decision on the 
existence of an excessive deficit for Portugal.  

Overall,  the  analysis  suggests  that  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation (EC) No 1467/1997 is not fulfilled. 

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