Portugal Fiscal Council raises 2026 growth forecast to 2.2% but projects deficits from 2027

Upward revision for 2026 growth

Portugal's Public Finance Council (CFP) raised its 2026 economic growth forecast to 2.2% in its updated Economic and Budgetary Outlook 2026–2030, published on 24 September 2026. The revision increases the projection from the 1.6% estimated in April, placing the independent fiscal watchdog's outlook above the government's official 2.0% target. The council cited resilience against external disruptions, including Atlantic storms and the energy shock linked to hostilities in the Middle East. Public investment is projected to increase by 22.3% in nominal terms during 2026, driven by the concluding execution phase of the EU Recovery and Resilience Plan (PRR). Private consumption also sustained growth as households tapped savings to absorb higher fuel prices while the labour market remained at full employment.

Energy shocks and inflation pressures

The economic expansion occurs alongside severe external cost pressures that have driven inflation higher. The CFP estimated that energy price increases stemming from the conflict in Iran and the closure of the Strait of Hormuz penalised the Portuguese trade balance by 0.4% of gross domestic product. Annual inflation is projected to reach 3.2% in 2026, exceeding prior forecasts. Other external constraints weighing on the second half of 2026 include resumed military operations in the Persian Gulf, widespread drought affecting approximately half of European Union territory, and a tighter monetary stance from the European Central Bank following interest rate increases.

The council detailed the core factors behind the revised macroeconomic figures in its release.

The macroeconomic projection points to GDP growth of 2.2% in 2026, an upward revision from the 1.6% projected in April, reflecting the economy's resilience in the face of Atlantic storms and the energy shock associated with the conflict in the Middle East and the closure of the Strait of Hormuz, which caused a severe disruption in global oil supplies.

Budget balance and tax measures

For 2026, the CFP expects a public budget surplus of 0.2% of GDP, up from an earlier estimate of 0.1% and exceeding the government's balanced budget target. This calculation accounts for the extraordinary pension supplement scheduled for December for retirees receiving up to 1,611 euros. However, the projection excludes the recently announced personal income tax (IRS) reduction covering up to the sixth bracket, because the updated withholding tax tables have not yet been published. Together, the pension bonus and income tax cuts carry an estimated fiscal cost of 800 million euros. Robust tax and social contribution revenues, higher dividend income, and state real estate disposals partially offset the costs of disaster relief and PRR loan utilisation during the year.

Medium-term deficit path

Public accounts are projected to return to deficit in 2027, reaching 0.2% of GDP under an invariant policy scenario. The CFP forecasts budget shortfalls widening to 0.5% in 2028, 1.0% in 2029, and 1.7% in 2030. Rising debt refinancing costs and the permanent revenue impact of earlier personal (IRS) and corporate (IRC) income tax reductions drive the deterioration. Capital expenditures, including defence equipment purchases funded through the European Union's SAFE programme, account for 0.5 percentage points of the deterioration in 2029–2030. Economic growth will decelerate to 1.8% in 2027, 1.7% across 2028 and 2029, and 1.6% in 2030, while employment growth slows to 1.1% in 2027 and levels off at zero by 2030 due to an ageing population and smaller net migration balances.