Before the government moved to bring forward its target, projections from the Public Finance Council (CFP) warned that reaching defense spending of 2% of Gross Domestic Product (GDP) by 2029 could escalate the budget deficit to 1.2% of GDP.
A projection based on a four-year linear convergence, with an annual increase of 0.125 percentage points (p.p.) of GDP until defense expenditure reaches 2% by 2029, suggested the budget deficit could rise by 0.6 p.p. of GDP over projections under unchanged policies, and public debt ratio could worsen by 1.3 p.p. of GDP.
April’s estimates from the CFP suggested that in a scenario with unchanged policies, the estimated deficit is 0.6% of GDP. However, including the increase in defense spending to 2% of GDP, the deficit would rise to 1.2%.
The public debt ratio is projected to be 85.4% of GDP in 2029 under unchanged policies and could increase to 86.6% if the spending target is met.
The CFP concluded that the direct impact on public finances from this increase would entirely reflect in primary expenditure, worsening both the budget balance and public debt.
More recently, in the report on Public Administration Accounts from January to March 2025, UTAO warned of prevailing downward budgetary risks impacting budget execution.
Among these risks is “the strengthening of defense expenditure to meet the 2% GDP allocation target for defense, in accordance with the NATO criteria, by 2025,” according to UTAO.
The Forum for Competitiveness highlighted that “Portugal could reach 2% of GDP for defense in 2025, which would imply an average increase of 0.3% of GDP per year until 2035, approximately 900 million euros more annually, at 2025 prices.”
“We insist that unless reforms to enhance economic growth potential are made, there will be considerable budgetary pressure on other public expenditures, particularly pensions, health, education, and other sectors over the next ten years,” reads the bulletin.
BPI Research also issued a warning in an analysis note that various factors, including “the anticipation of meeting the NATO defense spending goal,” could lead to a slight budget deficit in 2025, placing additional pressure on finances.
Former minister Nelson de Souza cautioned at the Defense Economy conference in late June that “spending on defense must eventually be incorporated into the state budget,” stressing that “if not at the time of the loan, it will have to be added later.”
“This mirrors the situation with the PRR [Recovery and Resilience Plan], which was not included when it should have been and will result in expenditure, potentially increasing the deficit, by 2026,” he warned.
Thus, while the measure may prevent Portugal from being penalized under the excessive deficit procedure, it continues to influence external perceptions due to the debt ratio figures, he noted.
Despite these warnings, the government remains optimistic about achieving a 0.3% GDP surplus. On Monday, the Prime Minister upheld the belief in an end-of-year budget surplus and emphasized that future budget management must prioritize increased defense investment beyond the recent tradition.
Portugal has activated the clause allowing defense spending increases up to 1.5% of GDP between 2025 and 2028 to be excluded from the public deficit calculations, which must be considered in this year’s budget planning.
