Next Government has “two to three years” to cut spending (as a percentage of GDP), warns Governor of Banco de Portugal – Observer

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Regardless of who wins on January 30, the new government that leaves these elections will have to spend at least the first half of your term reducing permanent public spending (as a function of GDP). The alert is from Mario Centeno, governor of the Bank of Portugal, who this Friday redoubled the warnings about the need to reduce indebtedness to more “sustainable” levels and also warned that a Faster rise in minimum wage could exacerbate inflation risks, although this continues to be less of a concern in Portugal than for other countries in the euro zone.

The governor of Banco de Portugal stated that the state has “two to three years” to make a “transition” after the effort made by the public accounts to mitigate the economic impact of the pandemic, an effort that meant more expenditure and more debt. Permanent public spending, as a percentage of Gross Domestic Product (GDP), has increased in recent years, “largely because GDP has fallen”, admitted Mário Centeno, adding that this “means that when we look at these indicators in a multi-year perspective, we should understand that as the economy recovers these indicators must also correct themselves.“.

In other words, “it would be wrong, in my opinion, for us to increase this expenditure – now that GDP is recovering – at the same pace as GDP is recovering. precisely because we didn’t make it fall – and rightly so – when GDP fell“, noted the governor of Banco de Portugal in the presentation of the December Economic Bulletin, a report that maintained the forecast of an economic growth of 4.8% in 2021 and made a small upward revision of the projection for 2022: for 5.8%.

Portuguese economy will grow more than expected in 2022: 5.8%, anticipates Banco de Portugal

Banco de Portugal had released the latest edition of the Economic Bulletin on October 6, but, as it was close to the presentation of the State Budget proposal for 2022 (which would be rejected), this document did not contain updated forecasts for the economy in the next year. At that time, therefore, the estimate of 5.6% growth (for 2022) that had been made in June continued to apply. This time, however, even though there was no new State Budget approved, Banco de Portugal issued new projections that are based on “hypotheses of public finances [que] they essentially assume a scenario of invariant policies”.

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Growth forecast of 5.8% in 2022, more optimistic than the Government


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The forecasts released by Banco de Portugal for 2022 are equal to the most optimistic of the Organization for Economic Cooperation and Development (OECD), which also points to an economic growth of 5.8%, and surpass those of the Government, which expects 5.5% .

The European Commission points to a 5.3% growth in the Gross Domestic Product (GDP) and the Public Finance Council (CFP) and the International Monetary Fund (IMF) are the most pessimistic entities, expecting an increase of 5.1% compared to 2021.

And these are projections that also do not incorporate any type of “political risk”, confirmed Mário Centeno, asked by journalists about the importance of the early legislative elections scheduled for January 30th. Moments after the press conference by Centeno, his successor at the Ministry of Finance, John Lion, started from Banco de Portugal’s forecasts to assert that “the current political situation of early elections has not called into question the confidence of the various institutions in the performance of the Portuguese economy”.

After these two years of “strong growth” (2021 and 2022, which follow the “historic break” of 8.4% in 2020), Banco de Portugal forecasts indicate that the expansion pace will be more moderate in 2023 and 2024 (3.1% and 2.0%), which makes it even more necessary to control indebtedness.

“We predict that at the end of the projection horizon (2024) the Portuguese debt may be, as a percentage of GDP, at levels similar to those in 2019”, says Mário Centeno, arguing that this is a “condition sine qua non for the Portuguese public debt to remain sustainable“. The only way to reach 2024 with these more “sustainable” levels of public debt is to “correction” in public expenditure which, for the governor, has to be made in “two to three years”.

Centeno’s notices, days from the Budget. Public expenditure has to go down (and the “contribution” of interest will be smaller and smaller)

Already in the presentation of the Economic Bulletin in October, Mário Centeno had reminded that Portugal has “a weight of expenditure – removing all the effects of the Covid measures, one-offs [impactos não-recorrentes] and everything financed by European funds – a ratio of current primary expenditure to GDP which will, by the end of this year, be 1.8 percentage points higher than in 2019”. In other words, even without taking into account the measures that were launched specifically to combat the impact of the pandemic, State expenditure began to have a greater weight in national economic activity – now, says Centeno, the reverse movement has to be done.

As usual, Banco de Portugal’s projections for the economy are supported by a set of positive and negative risks: one of the downside risks for economic activity is related to a potential “worsening of the pandemic”. Mário Centeno seemed, however, relatively optimistic about the economic impact of the new wave of Covid-19, in which the new Omicron variant could have a rapid expansion.

Unlike other similar events organized by Banco de Portugal, this time there was no mention of the country’s top position with regard to vaccination. Even so, Mário Centeno noted that, with each new wave, people and economic agents “learned to deal” with the peaks of propagation of the new coronavirus, which leads to believe that any tightening of the restrictions will have a “short term” effect and it is not anticipated that it will be “more burdensome” than previous peaks, even for the most affected sectors such as restaurants and hotels, for example.

Source: Banco de Portugal, December Economic Bulletin

On the other hand, there are also positive risks to economic forecasts, that is, growth could be even more dazzling than projected at this stage. And one of the possible reasons for this is linked to the “use of part of the wealth accumulated by families during the pandemic“. In the Economic Bulletin, Banco de Portugal includes a box where it reveals what families that saved more than usual thanks to the pandemic did with the money.

In 2020, according to the survey carried out, exactly two thirds (66%) of households invested these savings in deposits, State savings products (Saving/Treasury certificates) or cash. For the rest, 18% invested in other financial assets and 14% in real assets – that is, houses and other real estate assets, roughly speaking. Still, 16% used the additional savings to make extraordinary debt repayments.

This additional savings represents one of the biggest unknowns for the economy in the coming years. The way it is used may determine a good part of the evolution of private consumption, an important component of the GDP calculation. And it could also impact the inflation, which has been a “hot topic” in the financial markets in recent months and which surpassed 5% in the eurozone in November, twice the European Central Bank (ECB) (medium term) target twice.

As the ECB did on Thursday, the Banco de Portugal also doubled its inflation projection next year, but in the case of Portugal this means a revision from 0.9% to 1.8%, that is, still below what is considered a desirable rather than excessive inflation rate. In the euro zone, it meant going from 1.7% to 3.2% – which, even so, did not lead the ECB to take any steps towards tightening monetary policy (on the contrary), “a good decision and good news“, commented Mário Centeno.

ECB doubles expected inflation in 2022, from 1.7% (estimated in September) to 3.2%. But it continues to ensure that inflation is “transient”

With regard to inflation risks, referred to in the Bank of Portugal’s Economic Bulletin, these are both in the sense that the rate rises more than expected.. There may be “greater transmission of production costs to consumer prices” and, on the other hand, greater “pressures on wages” (in the sense that they rise more than expected, in labor negotiations, due to inflation expectations) .

Mário Centeno stated at the press conference that “inflation in Portugal has had a more timid trajectory than in the euro area”. “Even so, prices should grow more in 2022 than they did in 2021”, said the governor of Banco de Portugal, adding that “we must, of course, always be concerned with this dimension, because we know how negative it is for economic activity and for families.” there is inflation above 2%.

At this point, “it is evident that wages are always a source of concern in terms of the dynamics they can instill in prices”. But “we do not see this dynamic happening either in the euro area or in Portugal“, assured Centeno. “However, as it is the function of any central bank, it is important to indicate the possible sources of pressure of this order and the evolution in the minimum wage may have a negative in this regard“, he stated, regarding the fact that the Economic Bulletin is written that “any increases in the minimum wage [em Portugal] in 2023-24 they are also an upside risk for inflation“.

Other salaries, prices and IRS exemption. The automatic effects and potentials of raising the minimum wage