Miranda Sarmento Draws Red Line on Budget Deficit — Warns Exceeding 0.5% Would Expose Portugal to EU Scrutiny
Portugal’s Finance Minister Joaquim Miranda Sarmento has acknowledged that the country will likely run a small budget deficit in 2026 — the first after two consecutive years of surplus — but has set a firm ceiling of 0.5 per cent of GDP, warning...
Portugal’s Finance Minister Joaquim Miranda Sarmento has acknowledged that the country will likely run a small budget deficit in 2026 — the first after two consecutive years of surplus — but has set a firm ceiling of 0.5 per cent of GDP, warning that anything higher would leave Lisbon exposed to the discretionary judgement of the European Commission.
‘There is a number that would keep the country considerably more comfortable, and that is for the deficit not to exceed 0.5 per cent,’ Miranda Sarmento said in an interview with RTP Antena 1’s Política com Assinatura podcast, broadcast on Tuesday. ‘Because if it exceeds 0.5, it places us in a certain discretionary space of European Commission decision-making.’
Why the Threshold Matters
The 0.5 per cent threshold is not arbitrary. Under the EU’s reformed fiscal framework, member states that maintain a structural deficit at or below this level are considered to be in compliance with the bloc’s budgetary rules and are shielded from the excessive deficit procedure — a formal process in which Brussels can impose corrective measures and, ultimately, financial penalties.
Portugal recorded budget surpluses of 1.2 per cent of GDP in 2023 and 0.4 per cent in 2024, making it one of the eurozone’s fiscal success stories. A return to deficit territory, even a small one, would mark a psychological shift and could affect the country’s borrowing costs at a time when global capital markets are already jittery.
Miranda Sarmento expressed confidence that the European Commission would not open a formal excessive deficit procedure against Portugal even if the deficit marginally exceeded the threshold, but he argued that staying below it is essential ‘to protect the country and to maintain the good image that allows us to attract investment and financing at favourable rates.’
War, Energy and Revenue Pressures
The shift from surplus to deficit reflects a combination of factors that have converged since late 2025. The escalation of the conflict involving Iran and the resulting pressure on global energy prices have increased the cost of government support measures, including discounts on fuel taxes and targeted subsidies for transport, agriculture and social institutions.
At the same time, the International Monetary Fund last week revised Portugal’s growth forecast downward to 1.9 per cent for 2026 — two-tenths of a percentage point lower than its previous estimate — warning of a ‘shadow of war’ darkening the global economic outlook. Slower growth means weaker tax revenue, further tightening the fiscal space available to the Government.
Spending Pressures Mount
The Finance Minister faces pressure from multiple directions. Defence spending is under scrutiny as NATO allies push for higher contributions. The health service is consuming ever-larger sums on contract workers to cover chronic staff shortages. And the social sector has received a EUR 440 million injection that Prime Minister Luís Montenegro announced earlier this week.
Meanwhile, the opposition has been pressing for more aggressive cost-of-living measures, with the Socialist Party accusing the Government of profiting from inflation through higher VAT receipts while ordinary families bear the brunt of rising prices.
Miranda Sarmento defended the Government’s approach of using targeted tax cuts — particularly on fuel duties — rather than broad-based measures such as a VAT reduction, arguing that the latter would be too expensive and poorly targeted. ‘The State is not collecting more revenue — it is actually forgoing some,’ he said, pointing to ISP discounts currently exceeding 20 cents per litre.
Budget Season Looms
The interview signals the Government’s opening position ahead of what is expected to be a challenging budget season for 2027. With growth slowing, spending demands rising and the geopolitical environment uncertain, the 0.5 per cent ceiling serves as both a fiscal anchor and a political message — to Brussels, to bond markets and to domestic opponents — that Portugal intends to remain one of the eurozone’s more disciplined fiscal actors.
Sources: RTP Antena 1, Correio da Manhã
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