Portugal’s State Budget proposal for 2026 (OE 2026) was generally validated by the European Commission (EC), the pressure for the government to end the ISP discount seems to have eased a little, but there is a “significant” risk of the country violating the main metric rule of the Stability and Growth Pact (the evolution and weight of net expenditure), warned the European executive, this Tuesday.
According to the EC, in the new edition of the biannual evaluation cycle of the budgetary policies of European Union countries (European Semester, autumn edition), the 2026 OE proposal sent by the Portuguese government to Parliament in October – the original version, from the Ministry of Finance, still without the changes that have occurred in the meantime and which may occur until the final vote next Thursday – is “in compliance” with the policy criteria defined at the level of the European Union (EU).
It should also be noted that, in the “opinion” on the budget proposal, the EC omits any consideration of the measure still in force to subsidize the price of fuel, via the tax on petroleum and energy products (ISP).
In recent months, the Commission has been urging Portugal and other countries to end this support once and for all, which distorts the market and encourages the consumption of more polluting energy, argues Brussels.
According to the Technical Budget Support Unit (UTAO), the end of support (fiscal expenditure) in the ISP and the updating of the carbon tax could generate additional revenue of around 600 million euros in OE 2026. The Public Finance Council (CFP) even says more: around one billion euros.
In the European Semester document dedicated to Portugal, this Commission requirement is now not included, contrary to what has happened in recent communications and studies over the last few months.
But the Economy Commissioner, Valdis Dombrovskis, chose to maintain the pressure, verbally speaking.
“It has been a general recommendation that we have been making to all Member States. We know that many were implementing energy support measures following the crisis following Russia’s invasion of Ukraine, but, at this moment, the situation has stabilized and we consider it necessary for States to gradually eliminate these measures to improve budgetary sustainability”, said Dombrovskis, in response to Lusa, at the press conference that took place in Strasbourg.
The Commission gave its opinion “on the proposals for budgetary plans for 2026 from 17 euro area Member States”. Twelve “were considered compliant and Member States were invited to continue implementing fiscal policies in 2026 as planned”.
The countries that scored well in this assessment are: “Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Portugal and Slovakia”.
The EC also recalls that, as has been the norm since the review of the Stability Pact rules, which came into force at the end of April 2024, the assessment “focuses on the growth of net expenditure, the only operational indicator in the economic governance framework”.
Here, in this part, there are nuances of the net expenditure indicator (a value not directly observable, calculated synthetically).
First, the Commission considers that the budgetary plan drawn up by the government of Portugal for next year “complies with the obligations in terms of budgetary policy set out in the Stability and Growth Pact, as the budgetary situation for 2026 is expected to be close to balance, thus contributing to a reduction in the ratio of public debt to GDP”.
But then, the EC did some calculations and, regarding this new and only operational indicator to guide public finances and to be respected by countries (governments), it says that after all there are risks of slippage in Portugal.
“According to the Commission’s 2025 autumn forecasts, which take into account the Budget proposal, the growth rate of Portugal’s net expenditure in 2026, in accumulated terms, is higher than the maximum growth rate recommended by the Council. Taking into account the flexibility provided for by the national escape clause, the projected accumulated deviation is 0.7% of GDP”, one tenth above the maximum “limit”, established at 0.6% of GDP.
This year, the same thing. “Portugal’s net expenditure is expected to increase by 5.8% in 2025, a value higher than the maximum growth rate of 5% recommended by the Council”, a value that “corresponds to a deviation of 0.3% of GDP in 2025”.
Conclusion: “the Commission considers that Portugal’s Budget proposal complies with the budgetary policy obligations of the Stability and Growth Pact, as the budgetary situation for 2026 is expected to be close to balance, thus contributing to a reduction in the public debt/GDP ratio”, but, “at the same time”, the EC notes that Portugal runs the risk of significantly exceeding the maximum growth in net expenditure foreseen in the Council Recommendation approving the medium-term plan”.
In any case, it should be noted that this criticism is, for now, just a warning for navigation. At this stage, Brussels does not require immediate corrective measures.
If this turns out to be the case, these types of demands will be voiced six months from now, during the European spring semester cycle, in May, with so-called “recommendations” by country.
The Commission also revealed that in the case of Portugal and other countries, the new assessments already take into account the discount that will be made to military expenses, which therefore no longer count, temporarily (for now, until 2028), for the purposes of evaluating public accounts.
“For the 16 Member States for which the Council activated the national safeguard clause, the assessment takes into account flexibility for increases in defense spending”, he explains.
“To date, 16 Member States have requested the activation of the national escape clause. They are: Belgium, Bulgaria, Czechia, Denmark, Germany, Estonia, Greece, Croatia, Latvia, Lithuania, Hungary, Poland, Portugal, Slovenia, Slovakia and Finland.”