Portugal: Parliamentary elections to bring policy continuity despite political fragmentation
– Democratic Alliance is expected to emerge victorious, supported by the far-right Chega.
– Broad policy continuity should be ensured, though with a larger emphasis on pro-market initiatives in the economy of Portugal.
– Gridlock in politics in Portugal is a key factor to watch in the case of a pact with Chega falling through.
March early elections after a corruption scandal
On 10 March, the country will head to snap parliamentary elections. The vote was to be held in 2026, but President Marcelo Rebelo de Sousa called an early election after the Socialist Party’s (PS) Prime Minister António Costa resigned. Costa’s third stint as prime minister was clouded by scandals and political instability—including the resignation of multiple government members—and was cut short on 7 November in the wake of a corruption inquiry into his inner circle. The election is a two-way contest between the PS, now led by former Minister of Infrastructure and Housing Pedro Nuno Santos, and the center-right Democratic Alliance (AD)—a coalition between the Social Democratic Party (PSD) and two minority parties—led by long-time Parliament member Luís Montenegro. That said, the backdrop of political instability has driven a sharp increase in support for the far-right populist party Chega, which could emerge as the third-largest party in Parliament after the elections.
Politics in Portugal to see more fragmentation
The PS and AD are virtually level in the polls. However, neither is set to obtain a majority alone, meaning a new government will likely rely on support from parties at the extremes of the political spectrum. Currently, the right-wing camp is anticipated to hold a majority in Parliament, with the AD likely requiring support from Chega to govern effectively. Montenegro has insisted that a pact with Chega is off the table; still, it might be the only viable alternative to a minority government or repeating elections.
Economy of Portugal to remain relatively stable
Parliament approved the 2024 budget in late November. Thus, near-term economic policy is already outlined; in particular, the budget envisions fiscal loosening worth over 1% of GDP—similar to 2023’s expected 0.8% surplus—through tax cuts and public wage increases. The fiscal balance should still register a slight surplus, and the public debt-to-GDP ratio should fall compared to 2023.
Beyond 2024, Portugal should continue to meet EU public debt and budget deficit targets, as both main parties have committed to fiscal prudence; this should boost investor confidence and allow the new government to secure further inflows of post-pandemic EU recovery funds.
That said, an AD-led government would see more emphasis placed on pro-market economic policies. The AD has pledged to reduce the corporate tax rate from 21% to 15% by 2026, lower the income tax rate for young people, and grant a tax-free equivalent of one month’s salary to outperforming workers. The AD candidate expressed that such reforms will allow for annual economic growth to pick up from the past decade’s average.
In the event that Chega secures a role in the AD-led government, we would expect a bigger spotlight on immigration, healthcare and reforms to reduce corruption; around a third of the party’s proposals concern the justice and health systems.
A PS-led government would ensure the maximum degree of policy continuity in the post-Costa era economy of Portugal. Santos has pledged to increase the minimum wage to EUR 1,000 by 2028, which would bring the total increase to around EUR 500 since the Socialists took office in 2015. Moreover, the party aims to boost productivity through incentives for industries with greater value-added and higher salaries.
Insight from our analysts
Analysts at the EIU commented on the electoral outcome and economic policy continuity:
“We continue to expect the snap general election on March 10th 2024 to result in greater political fragmentation and polarisation. […] The most likely outcome is a PSD-led government supported by the far-right populist Chega (Enough). All main parties are committed to fiscal prudence, which should ensure that Portugal will continue to meet EU budget deficit and public debt targets and secure a continued flow of post-pandemic recovery funds.”