The Portuguese economy should maintain its growth rate, accelerating slightly from 2% this year to 2.3%, job creation will slow down to around half (from 1.7% in 2025 to 0.9% in 2026), but the government is warning that the path is narrow in public accounts, which obviously the margin for new measures, in addition to those that fit into the new Budget, “is close to zero”.
The Minister of Finance, Joaquim Miranda Sarmento, presented this Thursday the proposal for the State Budget for 2026 (OE2026) after delivering it to Parliament where, he hopes, there will be common sense so as not to derail the “balance”.
The Noble Hall was packed with people, many journalists and professionals from television, radio, websites, plus dozens of Finance workers who Sarmento thanked many, many times for their commitment to preparing the OE 2026 proposal. He was applauded several times by the employees who were standing and by those who managed to get a seat, too.
PRR and Defense expenditure
According to the governor, it is necessary to sustain the engine of this growth, investment, now heavily supported by the public component (and funds from the PRR – Recovery and Resilience Planwhich drive the expense), and guard against dangers and expenses that may arise, such as the almost guaranteed reinforcements in the area of Defensewhich could amount to 1.2 billion euros, the government official quantified. This is in a situation that, he conceded, is less conducive to exports due to the trade war and tariffs from the United States (from Donald Trump’s government).
The Finance scenario for 2026 is still largely based on the increase in taxes, which takes place in a context of fewer benefits in the IRS (compared to this year), but more in the IRC, which will continue to fall, as the government already promised in the program with which it won the elections.
Miranda Sarmento explained that “a budget surplus of 0.1% of the Gross Domestic Product (GDP)” gives “around 230 million euros”, so “if the country does not want to go back into a deficit, obviously the margin is close to zerobecause the numbers are what they are.”
At the press conference, the minister added that “Parliament will have to decide if it wants to maintain the balance of public accounts”, he stressed that “there is not exactly room for additional measures”, but this is a decision that will emerge from the parties in Parliament.
“The parliamentary groups and single deputies will make the amendment proposals they see fit”, he commented.
But what is good to see, he continued, is that “in 2023 public debt closed at 97.9% of GDP, last year 24% at 95.9%, this year in 2025 very close to 90% and next year slightly below 88% of GDP.
This is “an effort that the country has been making since the sovereign debt crisis and since the adjustment program and that the country must continue to make”.
“It is essential, at this stage of the economic cycle, in which we have growth, in which we are close to full employment, to continue to have budgetary balance and to reduce public debt by three, four percentage points per year, in order to reach the end of the decade with a public debt below 80% of GDP“.
For Sarmento, “only this will protect the country from external shocks and the instability that we know exists and, above all, the vulnerability that may arise in the markets due to the fact that large European countries currently have public debt situations not only above 100% of GDP but, in some cases, with upward public debt trajectories of growth rather than reduction, as is the case in Portugal”. He would certainly be thinking of France, the second largest country in the Eurozone, but he didn’t name it.
Regarding the upcoming expenditure, which conditions the budget balance and requires containment in other areas, the Minister of Finance argued that “if we didn’t have PRR loans, we wouldn’t be carrying out some projects and some expenditure”, “we would have a margin of 0.8% of GDP”.
But, “if we want to compete for the entire PRR [executar tudo do pacote destinado a Portugal, avaliado em mais de 22 mil milhões d euros a executar até meados de 2026] and maintain budgetary balance”, the government needs to have “a positive balance of around 230 million euros”, as mentioned.
Regarding the need to reinforce the military sector, as a result of the obligations agreed with NATO to respond to the threat from Russia and others, Sarmento recalls that “defense has, in its budget program, a significant reinforcement” and “it also has 1.2 billion euros in the allocation of chapter 60, which is a reserve that exists in the Ministry of Finance”.
Therefore, “in this year 2025 we will reach 2% of GDP in Defense expenditure and in the next year the percentage will continue to rise, SAFE loans [fundos europeus dedicados à área militar e tecnológica] will take place over several years, the program is not yet closed, but it must remain closed by the end of the year”.
The expenditure that is planned for next year in Defense “can either have budget financing or SAFE financing, it is something that will be closed until the end of the year”.
Budget reserve/captivation of 5% for everyone
To make room for Defense and other government priorities, Finance invented a new captivation scheme.
With OE 2026, there will no longer be exceptions as there were until now in Health and Education. All ministries must reserve 5% of their budget, at the head, and then each minister will decide. The Minister of State for Finance will also have a lot to say about this.
Sarmento explained that “what existed in 2024 was a sectoral reserve in which percentages under certain expenses were identified and a set of entities in each ministry, or in some of the ministries, that were excluded from these captivation percentages”.
In 2025, “we began to change this process to provide more budgetary and management flexibility to ministries”. With this OE 2026, “we no longer include excluded entities in the Budget Law”.
“What we do now is, instead of defining what percentages are captive in certain expenses, we say that there is a percentage of 5%, which is the reserve of each ministry, to be used in case of need or depending on what each minister’s priorities are.”
Effects on housing known “in due time”
As for housing, the biggest Gordian knot in the Portuguese economy (and beyond), Miranda Sarmento replied that “housing measures are in the final legislative process and therefore, in due time, we will know their impacts”.
“In any case, the IRS measures will only have an impact in 2027, as they will apply to income from 2026 and income taxation is made in the IRS declaration, at the autonomous rate of 25% or now 10% for moderate incomes, and the tax deduction is also made in the declaration”. “Therefore, these are measures that will come into force in 2026, but will only take effect when people submit their 2026 IRS declaration”, in April-May of next year.