Defense. Almost everything fits in the data sent to NATO
Economists contacted by Observador ask for more information on what is sent to NATO to answer whether the current budget accommodates more spending.
“The State Budget for 2025 foresees a positive budget balance of 0.3% of GDP, which represents a very small margin to accommodate an increase of this size in Defence, without additional revenue, cuts in other items or methodological changes. In other words, it would be necessary to resort to a different accounting, similar to what many European NATO member countries already do, especially through the inclusion of critical infrastructures that, although with civilian use, may have occasional or recurring military use in the future”, Paulo Monteiro Rosa, senior economist at Banco Carregosa, stated in statements to Observador, adding that “in this sense, this increase could be partially accommodated through the reprogramming of expenditure within the available margin, the reclassification of dual-use expenditures (such as infrastructure and civil protection with a military function) and a phased implementation adjusted to existing resources - all this without compromising the budgetary balance, if managed rigorously”.
Paulo Monteiro Rosa highlights that, according to a NATO report, Portugal will have spent around 1.58% of its GDP on defence in 2024, but in the State Budget for 2025, the consolidated expenditure currently forecast for Defence is 3,065 million euros. In other words, with an estimated nominal GDP growth of 4.8%, this should amount to 294,271 million euros, which means that defence expenditure corresponds to only 1% of GDP - still quite far from the 2% target. However, “the disparity between the 1.58% of GDP estimated by NATO and the approximately 1% indicated in the State Budget for 2025 results from differences in accounting criteria”.
“While Portugal’s budget only includes expenditure directly related to the Defence budget programme, NATO follows broader criteria, which also include investments with military utility outside the Defence programme, international missions and dual-use infrastructures (civil and military). For this reason, Portugal’s real effort in defence is greater than what is reflected in the national budget, which has led several voices to advocate a review of the national criteria to align with those of the other countries of the Atlantic Alliance”.
The Public Finance Council (CFP) left a less optimistic note regarding the impact on public accounts of this reinforcement in defense and there was still no indication from Montenegro that it intended to reach 2% by 2025. “NATO's requirements for member countries to allocate at least 2% of GDP to public spending on defense pose significant challenges to Portugal, which currently appears as one of the European countries with the lowest spending in this area (around 1.5% of GDP)”.
In the CFP's document on economic and budgetary perspectives 2025-2029 , the target of 2% in 2029 was still indicated. “In this exercise, linear convergence was assumed in 4 years, considering an annual increase of 0.125 percentage points of GDP until reaching 2% of defense expenditure in 2029. In terms of direct effect on public finances, this increase is reflected entirely in primary expenditure, worsening the budget balance and public debt. Therefore, based on these assumptions, in 2029 the budget deficit would be 0.6 points of GDP higher than projected under invariant policies and the public debt ratio would worsen by 1.3 points of GDP”. And the deficit would be reached by 2026.
Contacted by Observador, the CFP did not anticipate the impact of this decision to bring forward the 2% to 2025.
Portugal requested activation of the safeguard clauseThe European Commission has moved forward with the relaxation of European budgetary rules for defence spending. In other words, any increase in these expenditures will not be counted for the purposes of the so-called excessive deficit procedure. In other words, the impact it has on the budget balance will not be taken into account for this assessment, particularly if the country has a deficit above 3%, or for the limit on the increase in net primary expenditure defined in the National Medium-Term Budgetary-Structural Plan (POENMP) for 2025-2028.
According to the rules agreed between Brussels and Portugal, between 2025-2028 the growth in net expenditure must be contained to 3.6%, on average over the four years, with a control account with Brussels that allows a deviation of 0.3 points of GDP from these values or 0.6 points over the years as a whole. The Public Finance Council and the Bank of Portugal have already warned that, given the growth in expenditure forecast for 2025, it may be difficult for Portugal to meet this target.
Countries had to request the activation of the national derogation clause and Portugal did so. The previous government of Luís Montenegro announced this communication to Brussels, having assured that it had done so in consensus with the PS. This happened before the elections of 18 May.
Precisely to ensure that defence spending is not diverted from other expenditure , the European Commissioner for Economic Affairs, Valdis Dombrovskis, warned: “We need to ensure that we do not have defence washing, where suddenly everything is defence spending.” The point of order came after Spain proposed an extension of the concept of defence to include spending on civil climate protection and cybersecurity costs. But this extension is actually being considered within the framework of NATO.
In addition to Portugal, Belgium, Bulgaria, the Czech Republic, Denmark, Estonia, Greece, Croatia, Latvia, Lithuania, Hungary, Poland, Slovenia, Slovakia, Finland and Germany (which will also do so but has not yet entered the medium-term plan, due to the early elections) have requested the exception. According to the first analysis by Brussels, it is concluded that the increase in defence spending will require a greater adjustment effort in the period following the new medium-term plan, from 2029, in order to maintain budgetary sustainability.
A document from the European Commission's Directorate-General for Economic Affairs and Finance states, as anticipated by Jornal de Negócios , that the increase in defence spending (by 1.5% of GDP) will lead to an increase in deficits of 1.3 percentage points in 2028 and a worsening of debt as a percentage of GDP of 2.6 points, which will imply an additional effort of 0.4 points on average in the next period of medium-term plans. Portugal is not one of the most penalised. In 2028, it could see a worsening of 1.2 points in the budget balance and 2.1 points in the debt.
Thus, the European Commission estimates that Portugal will have to make an additional budgetary adjustment effort in the primary balance of 0.2 points over a four-year period or 0.1 in a seven-year plan, which is permitted by Brussels subject to conditions.
But while the European Commission warns against defense washing , NATO allows many expenses to be included in the reported data. And, as the CFP explains, this is different from national accounts. “ The NATO definition corresponds to a cash concept and not to national accounts, and is broader than the defense function of the functional classification of expenditure. A very considerable difference between perspectives occurs in relation to the moment in which expenses are recorded, in particular the acquisition of military equipment: from a cash perspective, the various advances (or post-delivery payments) are recorded at the moment in which they are actually paid, whereas in national accounts the full value of the equipment is recorded at the moment of its delivery”.
In NATO documents consulted by Observador, it is explained that defense expenditure is defined by the organization as “ payments made by a national government (excluding regional, local and municipal authorities), specifically to meet the needs of its armed forces, the Allies or the Alliance”.
An important component is payments to the Armed Forces — in Portugal there are three branches: army, air force and navy — financed by the budget of the Ministry of Defence. According to NATO, the Armed Forces include “land, sea and air forces, as well as joint formations, such as administration and command, special operations forces, medical service, logistics command, space command, cyber command” . But they can also include parts of other forces, such as the troops of the Ministry of Internal Affairs, national police forces, coast guards, among others.
However, NATO points out, “in such cases, expenditure is included only to the extent that forces are trained in military tactics , equipped as a military force, can operate under direct military command and can realistically be deployed outside the national territory in support of a military force”. In other words, the definition is broad, and may be in other ministries. And this is even stated: “Defence expenditure also includes expenditure on forces that are the responsibility of ministries other than the Ministry of Defence” .
Expenditure on the military component of mixed civil-military activities may also be included, but only “when the military component can be specifically accounted for or estimated”. Examples include aerodromes, meteorological services, navigation aids, joint procurement services, research and development. In the case of research and development expenditure, it should be noted that project expenditure may be included even if it does not result in the construction of equipment.
NATO allows the inclusion of pensions paid directly by the government to military and civilian employees of military departments and subsidies to active personnel in expenditure. According to the General Directorate of Public Administration and Employment, at the end of the first quarter there were 29,537 employees in the Defense. The Armed Forces had 27,607 people, with more than 6,800 officers, 7,900 sergeants and 8,000 enlisted men. The security forces had 44,980 employees. Pensions registered with the General Pensions Fund indicate that, in 2023 (latest data), there will be 7,763 people retired from the Army; eight thousand from the Navy; and more than 4 thousand from the Air Force. In addition, there are 19,600 from the GNR (which is a military force).
These amounts also include expenses for the creation of war stocks , such as military equipment or other supplies of goods and services for use by the Armed Forces.
But that’s not all. All expenses for operations, missions, commitments or other activities that are included in the defense budget are accounted for, as well as expenses for humanitarian and peacekeeping operations , “paid for by the Ministry of Defense or other ministries”. Or even the destruction of weapons, equipment and ammunition and the costs associated with inspections and control over this destruction.
NATO also states that military and financial assistance from one NATO ally country to another, in particular to support the defence effort of the beneficiary, should be included in the defence expenditure of the donor country and not in that of the beneficiary. This support may include contributions to eligible trust funds administered by NATO that are related to defence projects; but also military equipment and weapons donated to a partner country, as well as assistance in military training. However, in this case “resources from government departments other than the Ministry of Defence, through other international organisations or in the form of direct military aid, are not eligible”. On the other hand, expenditure on common NATO infrastructure is included, to the extent of the country’s net contribution.
In other words, the scope of expenditure considered for the purposes of NATO's objective is broad and countries can take this into account. The Portuguese government has not revealed what it includes. However, while reaching 2% may be easy, considering the President's statements, with these inclusions, increasing it to 5%, as is already being discussed, may be more difficult. And the impact on Portugal, due to the proposal by Mark Rutte, NATO's secretary general — who will discuss it at the summit at the end of the month — could be more significant. Even so, this 5% includes 3.5% for traditional military defence and 1.5% for expenditure “related” to defence, which also leaves a large margin here. There is still no timetable for this new increase.
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