S&P Skeptical as Lisbon Vows 2026 Budget Surplus

Portuguese officials keep repeating that next year’s budget balance will turn black again, yet the numbers coming from New York continue to hint at a different shade of ink. The latest update from Standard & Poor’s still pencils in a small deficit for 2026 even after upgrading the country’s credit rating. That tension between domestic optimism and external caution frames the debate now occupying Lisbon’s policymakers, investors and ordinary taxpayers.

A Caution Flag Amid Record Ratings

The headline in August was undeniably positive: S&P pushed Portugal up to A+, the highest level since the sovereign-debt crisis, citing a “solid external position” and a debt ratio expected to fall below 84 % of GDP by 2028. But buried in the same report, analysts projected a –0.6 % fiscal gap for 2026. Those two signals—better creditworthiness but weaker budget arithmetic—sound contradictory at first glance. In practice, they mean that international markets acknowledge Portugal’s structural progress yet still see spending pressures building faster than revenue growth two years from now.

What Drives S&P’s More Somber Math?

The agency flags three main currents. First, a planned uptick in defence outlays as NATO pushes members toward the 2 % spending target. Second, the Next Generation EU programme, whose accelerated rollout will front-load public-investment cash. Third, the lingering costs of an ageing population—from pensions to hospital pharmaceuticals—that rarely shrink in election years. Put together, these items could erode roughly €1.5 B of fiscal space, enough to flip a narrow surplus into a modest deficit even if the economy expands by 2.2 % as forecast.

Government Bets on Growth and Tax Cuts

Finance Minister Joaquim Miranda Sarmento insists the state can still land a +0.1 % surplus in 2026. His blueprint counts on 2.3 % GDP growth, driven by larger public works and a suite of targeted tax cuts. Corporate income-tax rates are scheduled to fall to 19 % next year and personal-income brackets will be trimmed by 0.3 percentage points in the middle scale. The cabinet argues that a healthier labour market—unemployment below 6 % and steady wage gains—will keep the Tax Authority’s coffers full. At the same time, ministries have been ordered to pursue program-based budgeting, scrap so-called “budget riders” and squeeze procurement costs in areas like non-urgent patient transport. Officials confront one limitation of their own making: the minister warns there is “little margin” for sweeteners that could jeopardise debt reduction to 87.8 % of GDP by 2026.

How Do Other Watchdogs See 2026?

Brussels, Washington and rival rating shops are not reading from the same score. The European Commission labels Portugal’s medium-term plan “solid” but also projects a –0.6 % balance for 2026, mirroring S&P. Fitch is slightly gloomier at –0.7 %, while DBRS Morningstar assumes a wafer-thin +0.1 %, converging with the government’s goal. The IMF splits the difference with –0.1 %, and the Banco de Portugal recently moved to –1.3 %, its most cautious stance in five years. What unites all actors is recognition that Portugal’s debt trajectory points down, even if the slope varies. The divergence lies in how each institution weighs investment front-loading, social-security commitments and the ability of a still-small economy to absorb external shocks.

Why the Gap Matters for Households and Borrowers

For citizens, the clash of forecasts is more than accountancy. A sustained surplus would open room for steeper IRS relief, quicker repayment of pandemic guarantees and perhaps lower municipal surtaxes. A deficit, even a mild one, leaves less oxygen for such giveaways and could translate into slightly higher yields on sovereign-bond auctions—costs that filter down to mortgage spreads and SME credit lines. Investors have already noticed the tug-of-war: Portuguese 10-year paper currently trades about 24 basis points above Spain’s, a gap that narrowed after the rating upgrade but widened again when S&P confirmed the 2026 shortfall.

Looking Ahead: Can Lisbon Prove Wall Street Wrong?

Historically, Portugal has outperformed external predictions eight times in the past decade, tightening the belt faster than Brussels thought possible. That record gives policy-makers confidence they can do it again. Yet the arithmetic is tougher this time. Defence bills, EU-fund co-financing and demographic ageing are structural, not one-off shocks. If Lisbon wants to convert scepticism into actual surplus, it will need to deliver every line item of its spending-efficiency agenda and keep the economy humming at or above 2 % growth. Otherwise, the small red number in S&P’s spreadsheet may become the figure that investors, households and opposition parties keep quoting all the way to the 2026 budget vote.