Portugal's 2025 Budget Surplus Beat Forecasts by 0.7 Percentage Points — Why Did the Bank of Portugal Get It So Wrong?

Portugal's fiscal year 2025 did not just deliver a budget surplus larger than the government projected. It revealed an unprecedented disconnect between the Finance Ministry and the country's key economic institutions—particularly the Bank of Portugal—that raises uncomfortable questions about forecasting credibility and institutional alignment.

Finance Minister Joaquim Miranda Sarmento projected a surplus of 0.3 percent of GDP in the 2025 state budget. The final number, released by INE last week, was 0.7 percent—more than double the initial estimate.

But while the government was conservative, the Bank of Portugal and the Public Finance Council were strikingly pessimistic. Both institutions maintained deficit projections throughout the year that ended up missing the actual result by 0.7 to 0.8 percentage points—the largest forecasting gap in recent memory.

Centeno vs. Sarmento: A Forecasting Standoff

In December 2024, the Bank of Portugal projected a deficit of 0.1 percent for 2025, citing concerns over rising current primary spending driven by public sector career agreements.

By mid-2025, as Sarmento publicly assured that the surplus would be "at least" 0.3 percent, then-Governor Mário Centeno doubled down on his skepticism. In June, the Bank maintained its forecast of a deficit, even as revenue trends suggested otherwise.

Only in the final Economic Bulletin of 2025, published days after a new governor took office, did the Bank revise its estimate—but only to zero, still 0.7 percentage points below the final result.

The Public Finance Council (CFP) was similarly off the mark. Both its April and September projections called for a balanced budget, a 0.7-point miss from the actual surplus.

A Pattern Break

This divergence stands in stark contrast to prior years. In 2024, the Bank of Portugal projected a 1.0 percent surplus in June and revised it to 0.6 percent in December—hitting the final number exactly. In 2023, it forecasted -0.1 percent in June and improved it to 1.1 percent in December, also an accurate call.

The CFP's track record has been similarly reliable. In 2024, it projected a 0.5 percent surplus in April, revised to 0.7 percent in September, landing within 0.1 points of the 0.6 percent final result.

So what changed in 2025?

Revenue Outperformance and Investment Underexecution

The surplus was driven by two familiar trends. Tax and social security revenue rose 6.7 percent to €108.7 billion, outpacing nominal GDP growth of 5.9 percent. The tax burden rose 0.2 percentage points to 5.4 percent of GDP—a reflection of strong labor market performance and economic activity above expectations.

Meanwhile, public investment once again fell short. Gross fixed capital formation totaled €9.2 billion against a budgeted €10.2 billion—an 89 percent execution rate, better than 2024's 84 percent, but still a structural underperformance that flatters the fiscal balance.

Total government spending rose 6.6 percent to €130.9 billion, with current expenditure up €6.3 billion (5.6 percent), driven by public sector wage increases (+7.6 percent) and social benefits (+6.2 percent).

Why the Forecasting Gap Matters

The 2025 forecasting miss is not just a technical curiosity. It reflects deeper uncertainty about Portugal's fiscal trajectory at a time when the government faces mounting pressures: energy price shocks from the Middle East conflict, storm damage reconstruction needs, and declining EU cohesion funding.

If the Bank of Portugal and CFP systematically underestimate revenue performance—or if the government systematically under-executes investment—the credibility of fiscal projections erodes, complicating budget planning and market confidence.

The final surplus of €2.06 billion was nearly €1.8 billion higher than the pre-conflict forecast. That gap—equivalent to the entire public health system's annual pharmaceutical spending—is too large to ignore.

Looking Ahead

For 2026, the Bank of Portugal has already slashed its growth forecast to 1.8 percent, citing energy shocks and falling consumer confidence. The government's own budget projections assume a more optimistic 2.2 percent.

Whether the fiscal institutions have learned from 2025's miss—or whether Portugal is entering another year of dueling narratives—will be one of the defining questions of this budget cycle.