João Leão right in the days when he was running the country's spending

War obliges government to re-think 2022 State Budget

This is just one of the headlines this weekend illustrating the collateral effect of war in Ukraine.

Portugal’s 2022 State Budget is already desperately ‘late’ (in that its veto last October prompted legislative elections which have still not yet resulted in a new government being sworn in).

During the electoral campaign, prime minister António Costa intimated that as soon as it was, it planned to re-present the budget proposal, more or less as it stood back in October.

This is now not just unlikely, but would make little sense: too much has changed in four tension-filled months.

As reports here explain, the average price of oil is already more than 89 dollars a barrel, which is 30% higher than the basis of the budgetary proposal. “It’s certain the situation will evolve; the market is very volatile” and things could calm down in the months ahead. “But if the war continues, there is a problem”.

Add to this “accelerating inflation, rising interest rates, a global shortage of raw materials, exports in check due to the new international crisis, and a climate of pessimism that will put off businesspeople and investors.

“The pandemic hasn’t even ended and now we have war on the edge of the European Union”, explains dinheirovivo: “Portugal is very vulnerable”, in spite of the physical distance from these latest horrors – and the government is already radically “rethinking the main lines of its OE2022 proposal”.

Says the online, the baseline used last year “seem to have expired”: the economy, in spite of its progresses in terms of renewable energy, is still heavily dependent on oil – and, by tragic happenstance, this is a year of extreme drought, which has limited the production of hydro-power.

All in all, the country is a long way from the scenarios on which it based its original draft budget, and no-one can tell how much further away events will take it.

Dinheirovivo warns: “Portugal wants to comply with the rules of the Pact (European pact on excessive deficits) which will once again be activated in 2023. The deficit has to be below 3%, the debt needs to converge to 60% of GDP. Portugal is a long way from this objective which will demand persistent, annual budgetary effort of great dimensions: something that is not suitable in times of crisis and war”.

One potentially ‘saving’ factor is that 2021 went “better than expected”, and there is something of a surplus (described in the press yesterday as €1834 million) which will help accommodate the effects of a new crisis. 

Even so, Portugal “needs the economy to grow well in the coming years, to heal the wounds of the pandemic and resolve the negative legacies of recent decades, like excessive debt and weak productive potential.

“The war is contaminating Europe and will simply delay the effort and confuse the financial and economic arsenal that was being drawn up to power Portugal to recovery”, says DV.

There are other countries where State Budgets are not quite so relevant, but in Portugal they have historically been the cornerstones serving to “guide the economy and the expectations of families and businesses”.

Thus this is a hugely tense moment, with no guarantees that any re-equationing will come up with the right results.

As this text went online, and Russia’s president had ordered his nuclear forces to be on maximum alert, it seemed likely that negotiating teams for both sides of the conflict would be meeting shortly on the Belarus-Ukraine border.

natasha.donn@algarveresident.com