Portugal’s Balanced Budget, 2% Growth and Falling Debt: What Expats Should Know

Portuguese households and businesses woke up to an unusual piece of good news this week: Brussels believes the country can keep its public finances steady while still squeezing out faster growth than most of the euro area. The European Commission’s autumn update points to vigorous domestic demand, falling public-debt ratios and an economy set to expand by almost 2% two years in a row—figures that stand out at a time when Germany and France are flirting with stagnation.

Momentum that defies the European chill

The Commission now expects Portugal’s gross domestic product to climb 1.9% in 2025 and 2.2% in 2026. That marginal upgrade for next year may look modest, yet it reinforces the perception that the country has found a new, higher cruising speed. Analysts attribute the resilience to a cocktail of rising employment, steady wage gains, more benign interest-rate expectations and the still-sizeable stream of money coming from the Recovery and Resilience Plan. Construction cranes in Porto’s riverside and digital start-ups in Lisbon’s hubs are capitalising on these funds, helping lift private investment at a pace rarely seen since the pre-crisis years. Even tourism, already operating near capacity, keeps edging higher as North-American visitors and Brazilian entrepreneurs flock to the Atlantic coast.

A budget that holds its nerve

Finance ministries across Europe are watching Lisbon’s figures with a mix of surprise and envy. Brussels foresees a balanced budget in 2025—officially 0.0% of GDP—followed by a minor deficit of 0.3% one year later. The trajectory sits well within the revamped EU fiscal rules, which ask member states to keep the growth of net expenditure below their medium-term benchmarks; for Portugal the cap is 3.6% and the current spending plan remains just under that threshold. The real headline, however, lies in debt dynamics: the Commission projects the ratio to fall to 91.3% of GDP in 2025 and below 90% in 2026, a milestone last seen before the sovereign-debt turmoil of 2010. Valdis Dombrovskis, the Commission vice-president in charge of the economy, praised the “very stable budget position” and the “robust growth outlook”, signalling that Lisbon is unlikely to face corrective procedures under the new Stability Pact.

Storm clouds that refuse to leave entirely

Behind the upbeat numbers lurk familiar sources of anxiety. Although headline inflation is predicted to ease towards 2.3% next year, cumulative price increases since 2021 continue to squeeze real incomes, especially in housing finance where mortgage servicing costs have jumped over 80% in four years. The government is under pressure from Brussels to phase out the remaining energy-tax discounts introduced during the war-induced price shock. If those supports fade too quickly, consumer sentiment could falter; if they linger, the Commission warns, the fiscal ledger may slip back into red ink. Added to the mix is the approaching end of the most lucrative wave of EU-funded public works, scheduled to peak in 2025 before tapering off. Economists at the Conselho das Finanças Públicas already flag a risk that structural expenditures are rising faster than revenue once one-off windfalls disappear.

Lisbon’s financial district takes stock

Veteran market observer Carlos Tavares argues that Portugal’s credibility upgrade “buys a cushion” against external shocks, noting that spreads on Portuguese 10-year bonds are at multi-year lows. At the University of Coimbra, professor António Nogueira Leite sees a virtuous circle: lower debt feeds investor confidence, which in turn lowers borrowing costs and frees resources for talent-attraction schemes such as the extended ‘IRS Jovem’ tax relief. Yet not everyone is sanguine. Filipe Santos from Católica-Lisbon warns that the expansionary bias of the current budget—social spending is slated to rise 11% next year—could undermine the consolidation effort if growth undershoots. For now, though, most voices converge on one assessment: Portugal has earned the benefit of the doubt through a mix of disciplined accounts and shrewd use of European funds. If policy-makers can keep the reform momentum alive as global trade cools, the country might finally leave its “fragile club” reputation behind.