Defense spending strains public finances, assert economists
Portugal is set to increase its defense spending, with the government announcing plans to allocate more investment to the defense sector than in recent years. This anticipated achievement of the defense spending target will add additional pressure to the budget, but the Prime Minister has stated that this increased defense expenditure will be financed without increasing the budget deficit or public debt, relying on balanced public finances and likely fiscal consolidation or reallocation elsewhere.
If Portugal reaches the 2% GDP defense spending target by 2025, as announced by the government in June 2025—four years ahead of the original 2029 goal—this represents a significant boost from previous levels (1.52% in 2023). The defense budget will increase substantially, including an additional 1 billion euros in investments focused on equipment, infrastructure, and human resources development within the military.
However, there are inherent risks to sustaining this higher level of defense spending, given fiscal constraints, inflation, and supply chain risks, which could challenge maintaining the current equilibrium in public finances if not managed carefully. The government plans a gradual scale-up, aiming to eventually reach 5% of GDP defense spending by 2035, suggesting a long-term fiscal strategy rather than abrupt, deficit-financed spikes.
According to the Council of Public Finances (CFP), reaching a 2% defense spending target by 2029 could exacerbate the budget deficit to 1.2% of GDP. However, Portugal has activated a clause that allows the increase in defense spending up to 1.5% of the GDP between 2025 and 2028 not to be counted in public deficits. The public debt ratio is projected to be 85.4% of GDP under invariant policies in 2029, and 86.6% if the spending target is reached that year.
Despite these potential risks, the Prime Minister has reiterated the conviction that the country will have a budget surplus at the end of the year, maintaining the expectation of a 0.3% surplus of the GDP. The budget for this year will have to take the activation of this clause into account.
In a report on Public Administration Accounts: January to March 2025, the UTAO warned that predominantly downside budgetary risks are accumulating on the budget execution. The alert was also made by BPI Research, which pointed to some factors suggesting a slight budget deficit in 2025, including the anticipation of achieving the defense spending target within NATO.
Nelson de Souza, a former minister, warned that spending on defense will have to go into the State Budget sooner or later. If defense spending is not included in the loan, it will have to be accounted for elsewhere. The Forum for Competitiveness predicted that Portugal could reach a 2% defense spending target by 2025, requiring an average increase of 0.3% of GDP per year until 2035, equivalent to around 900 million euros additional per year at 2025 prices.
In conclusion, Portugal's government projects that meeting the 2% defense spending target as early as 2025, and the later target of 5%, will not worsen the budget deficit or public debt ratio due to prudent fiscal management, though risks remain if external economic pressures intensify. The government's long-term strategy aims to maintain fiscal equilibrium, avoiding deficit or debt spikes.
The government's decision to increase defense spending beyond the recent years, with the aim of reaching a 2% GDP target in defense spending by 2025, could potentially have implications for the nation's general-news landscape, as debates around finance and politics are likely to intensify due to the planned boost in defense spending. To achieve this target, the defense budget is expected to increase substantially, including allocation of over 1 billion euros for equipment, infrastructure, and human resources development in the military, not financed through an increased budget deficit or public debt, but rather through careful fiscal management and likely reallocation elsewhere.
