Public spending control must not be lost sight of, warns Portugal's fiscal council
Portugal's public finances have become dangerously reliant on strong economic performance and Social Security surpluses that cannot be guaranteed to last, the country's Public Finance Council (CFP) has warned. Nazaré da Costa Cabral, president of the CFP, told Parliament that the state accounts benefited strongly from Social Security, driven by favourable employment and economic activity that boosted contributory revenue beyond expectations.
But this dependence on the economic cycle should cause concern, she cautioned during a hearing on the 2025 General State Account. "That can end," Cabral said, noting that state finances have been "very dependent" on favourable economic behaviour in recent years.
Central Administration shows deterioration
Good revenue performance can create an illusion that public spending is under control, Cabral argued, when Central Administration spending actually deteriorated in 2025. The government body responsible for state administration is projected to run a deficit of 8.23 billion euros in 2026, with the CFP forecasting a deterioration to 2.2% of GDP — the highest level since 2017, excluding the pandemic period.
Cabral called for "great attention" to public spending management in the coming years, particularly on current expenditure — the most rigid component that is harder to reverse.
Health sector flagged as "very critical"
The CFP president singled out health as a sector requiring particular scrutiny, citing difficulties in forecasting and managing expenditure. Government initiatives to combat fraud and review spending in the Serviço Nacional de Saúde (SNS) could represent around 800 million euros in savings, but the CFP lacks sufficient information to evaluate results.
FraudFightSNS, a commission created in late 2025 and led by Judge Carlos Alexandre, began work in February 2026. In eight months, it has identified fraudulent prescription patterns, particularly involving diabetes medication like Ozempic prescribed for weight loss — potentially diverting more than 250 million euros from the SNS between 2020 and 2025.
However, the CFP stated on 7 October that it still cannot assess the financial impact of these anti-fraud measures.
Inflation projection revised upward
The CFP's latest Economic and Budgetary Perspectives forecasts the Harmonised Index of Consumer Prices rising 3.2% in 2026, up 0.3 percentage points from April estimates, driven mainly by energy costs.
Budget projections show Portugal achieving a surplus of 0.2% of GDP this year — revised up from 0.1% — before slipping to a deficit of 0.2% in 2027. These figures do not account for announced IRS tax reductions.
Cabral warned that any future tax cuts must be accompanied by effective spending control. "If there is an intention to actually reduce taxes, they need to be well incorporated into effective expense control, otherwise we will have a problem," she said.
Investment faces post-PRR cliff
Public investment currently benefits from the Plano de Recuperação e Resiliência (PRR), helping overcome Portugal's historical underinvestment problem. But Cabral warned the ending of the EU recovery programme will require additional effort to sustain investment levels.
The Banco de Portugal projects a 14% drop in public investment in 2027 after the PRR concludes, though growth of 5.1% is expected in 2028. The government has set aside 200 million euros in the 2027 State Budget to complete PRR projects that lose European funding, while a new 22.6 billion euro programme — Portugal Transformation, Recovery and Resilience (PTRR) — aims to rebuild infrastructure and strengthen resilience through national, private, and European funds.
The broader European context shows Portugal is not alone in facing fiscal pressures. Countries with pay-as-you-go pension systems across the Mediterranean and Continental models face similar challenges balancing social protection with fiscal sustainability, with EU social expenditure averaging 26.7% of GDP in 2023.
For residents, the message from the fiscal watchdog is clear: the surpluses of recent years are not guaranteed, and decisions on tax relief or spending will directly affect what services the state can deliver in the years ahead.
