Prime Minister Accepts Portugal May Run a Deficit in 2026 as Storm Damage and Energy Crisis Bite

Prime Minister Luís Montenegro acknowledged on Thursday that Portugal could slip into a budget deficit in 2026, citing the combined pressure of January’s devastating storms and the ongoing energy price surge triggered by the Middle East military escalation.

Speaking to reporters in Brussels ahead of the European Council meeting, Montenegro framed the potential deficit as a product of “exceptionality” rather than structural mismanagement, and pushed back against what he called an “obsession” with maintaining budget surpluses at any cost.

Two Shocks, One Budget

The government is grappling with two unforeseen crises that have landed squarely on public finances. The first: the storms that battered Portugal in January, damaging infrastructure, homes and businesses across the country and forcing emergency reconstruction spending. The second: the sharp rise in global energy prices following the US-Israeli strikes on Iran and the subsequent Iranian response, which has pushed fuel and electricity costs higher and squeezed household purchasing power.

Portugal had been on a run of budget surpluses, and Montenegro was careful to stress that a single year of deficit would not put the country in breach of EU fiscal rules. “The fact that we may have a deficit does not mean being in an excessive deficit procedure or an imbalance procedure,” he said. “It means that we will not penalise the country in an exaggerated way through an obsession with surpluses.”

A Familiar Refrain With Higher Stakes

The prime minister noted that his governments have faced repeated predictions of returning to deficits, only to deliver surpluses. He expressed confidence that the same could happen again, while acknowledging that the current situation is “very aggravated” by circumstances beyond the government’s control.

The energy crisis has already prompted the government to adopt mitigation measures, including the fuel price mechanism announced earlier this month that aims to shield drivers from the worst of the oil shock. But the costs are mounting. Energy minister Maria da Graça Carvalho told CNN Portugal that it will be “difficult for the global economy to sustain a scenario of elevated prices for long,” expressing hope that the situation resolves in weeks rather than months.

What It Means for Residents

For anyone living in Portugal — whether Portuguese-born or part of the growing international community — the practical implications are worth watching. A deficit does not automatically mean austerity, but it does narrow the government’s room for manoeuvre. Tax policy, social support programmes and infrastructure investment could all face harder trade-offs in the months ahead.

The government has so far resisted cutting back on its reform agenda, including the recently announced ‘Return Law’ for immigrants and continued investment in housing. Whether that balance holds will depend heavily on how quickly the energy situation stabilises and whether reconstruction costs from the January storms remain within initial estimates.

Montenegro’s Brussels statement amounts to a careful exercise in expectation management: preparing the public for a less rosy fiscal picture while insisting that the underlying trajectory remains sound. The numbers, when they arrive, will tell the fuller story.