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Portuguese Government at risk after State Budget is rejected in Parliament

The Portuguese political landscape is in turmoil following a turnaround in the State Budget negotiations between the Government and its Left-Wing allies in Parliament. After six consecutive years of increasingly difficult agreements between António Costa’s Government, the Portuguese Communist Party and the Left Block, the Portuguese Government was faced with the inability to reach common ground on the 2022 State Budget, leading to a rejection of the initial draft this Wednesday, October 27th, in the first global voting of the document.

The Government and its Left-Wing allies spent the last few days negotiating behind closed doors, with the looming threat of a rejection hanging over the talks from the start. This Tuesday, October 26th, the Portuguese Communist Party confirmed it was voting against the State Budget proposal, joining Left Block in opposing the Socialist Party’s Government for the first time since 2015. António Costa refused to start negotiations with the Right-Wing parties, including the conservative Social-Democrat Party (PSD) which is the biggest opposition party. The possibility of negotiating with the Members of Parliament from PSD Madeira was presented as an option by the press, as was the possibility to advance with the discussion in the Committees without the general voting to buy time for further negotiations in Parliament, but Prime-Minister António Costa promptly rejected both scenarios, as he rejected the possibility of resigning.

The rejection of the State Budget was confirmed this Wednesday in the afternoon, after a very tense discussion which started in the morning and ended with the Socialist Party voting in favour of the draft, abstentions from the three MPs of the Party of Animals and People and two MPs not affiliated with any party, and votes against from the remaining parties – Social-Democrat Party, Christian-Democrat Party, Left Block, Portuguese Communist Party, Green Party and Far-Right Party Chega!. This landscape left the Government just two favourable votes away from approval, a very delicate balance which could be swayed with further negotiations, although the time seems to have run out for António Costa’s Government.

The rejection of the State Budget doesn’t automatically lead to a resignation or loss of power for the Government. In fact, the rejection only forces the Government to review the initial draft and present a new draft within 90 days. However, there is now significant political pressure on António Costa’s cabinet. The Portuguese President, Marcelo Rebelo de Sousa, has already implied that the rejection of the State Budget will force him to dissolve the Parliament, but he will hold meetings with all the Parliamentary parties and the Council of State in the coming days before announcing a final decision. The Council of State’s advice is non-binding, but constitutionally, the President is forced to wait until after the Council meets to make a decision on the dissolution of Parliament, which means that until late on the 3rd of November, date of the next meeting, the President cannot announce a decision.

Possible Scenarios

Scenario 1 – President dissolves the Parliament and schedules national elections (very likely)

Considering Marcelo Rebelo de Sousa’s public statements over the last few days, it seems extremely likely that the Parliament is dissolved and new elections are scheduled. The timetable for the elections is completely dependent on the President’s decision, but considering the need for a campaign period, early 2022 is the only possible choice. The law says new elections must be scheduled between 55 and 60 days after the dissolution of Parliament, so the current question is how early Marcelo Rebelo de Sousa would choose to dissolve the Parliament and schedule the voting.

This scenario creates a new political landscape, with adds a dose of unpredictability to an already unstable Parliament. The Left-Wing parties, which failed to agree on the 2022 State Budget, have repeatedly said they are unfavourable to new elections, but the lack of agreement seems to have forced the President of Portugal to take this route. The latest polls seem to indicate that the Socialist Party is still likely to win the elections, but the Left Block and the Portuguese Communist Party are losing support and would probably lose strength in Parliament. On the contrary, Far-Right party Chega! will inevitably be the biggest winner of the new elections, and the Liberal Initiative may also gain strength, possibly causing a significant shift in the political scale in Parliament. The Social Democrats (PSD) and Christian Democrats will hold internal elections until the end of the year, which are now even more important due to the delay caused by the Council of State.

Until a new Government is chosen by Portuguese voters, António Costa’s cabinet would retain basic powers, ruling with a limited scope of action. Without an approved State Budget, the State will be allowed to spend 1/12 of the 2021 expenses in every month of 2022, guaranteeing that until a Budget is approved, public spending cannot increase.

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Scenario 2 – President doesn’t dissolve the Parliament, allowing for further negotiations (unlikely)

The next few days will be very agitated in the Belém Palace, the official residence of the Portuguese President: Marcelo Rebelo de Sousa will meet with the current Parliamentary representatives and members of the Government and the Council of State. These meetings will allow Marcelo Rebelo de Sousa to assess each party’s perspective and understand whether there is still room to negotiate the State Budget and reach an agreement or for the Government to present a new draft. The rejection of the State Budget in Parliament started a 90 day timer to present a new draft, so there is legislative room to restart negotiations and reach an agreement between the Government and its Left-Wing allies.

However, the Portuguese President seems reluctant to allow for more negotiations without a firm commitment to find common ground, and a stronger agreement to prevent the same issues from arising again until the end of the legislative term. At this time, the Left Block and the Portuguese Communist Party seem unwilling to reach such a compromise.

Scenario 3 – President gives parties a chance to reach a new agreement to form a different Government, without elections (very unlikely)

There is also a third scenario, which has happened only once in Portuguese democratic history and is an extremely remote possibility : when António Costa rose to power in November of 2015. Six years ago, the current Prime-Minister lost the elections to former Government leader Pedro Passos Coelho, but ensured then-President Cavaco Silva that the minority Right-Wing Government would lack the Parliamentary support needed to approve the State Budget. The Left Block and the Portuguese Communist Party signed an agreement with the Government and created a four-year alliance which convinced Cavaco Silva to entrust António Costa with the Government without new elections.

Current President Marcelo Rebelo de Sousa could realize, after meeting with the parties, that there is room to agree on a stable political and economic platform. A new Government could then be formed without even needing to call new elections, using the same Constitutional provision that allowed António Costa to become Prime-Minister. This scenario would allow both a Left-Wing or a Right-Wing agreement to potentially rule the Parliament, but it would likely take a long time to reach such an agreement and the Portuguese voters would likely feel betrayed by not being able to vote directly on the new Government.

Tiago Vidal

Partner and Managing Director LLYC Portugal

Responsible for the operations of LLYC in Portugal, Tiago Vidal leads a team of experts responsible for the development and implementation of Reputation Management strategies, Communications and Public Affairs in leading companies in sectors such as Finance, Real Estate, Energy, Transport and Logistics, Distribution, Automotive, and FMCG. He was previously Head of Corporate Communications at Sonae Sierra, where he led all B2B communication activities in 14 countries. During his 16 years at Sonae Sierra, Tiago was responsible for reputation management, brand, corporate marketing and PR, relationship with stakeholders and crisis communications, including IPO’s, mergers and acquisitions.

Maria Eça

Client Services Director

Maria is responsible for the Public Affairs and Crisis&Risks areas in LLYC in Portugal, working with clients from the banking and insurance sector, health, online gambling and retail. She is advising companies such as Leroy Merlin, Liberty Seguros and Unilever. She has also participated in M&A and foreign investment projects.

With over 8 years’ experience as a journalist, specializing in economics and society, Maria worked at TVI (private television), where she had the chance to follow and report Portugal’s key issues and relevant news about the main companies operating in the country, on a daily basis.