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Portugal will not let rising defence spending eat up a hard-won budget surplus, its finance minister said, as it resists runaway investment to re-arm Europe following Russia’s invasion of Ukraine.
Joaquim Miranda Sarmento, finance minister in a government facing elections in May, told the Financial Times that defence spending must not threaten Portugal’s fiscal surplus or add to the country’s debt burden. But he insisted it still had room to meet higher Nato expenditure targets, as US President Donald Trump pressures Europe to pay more for its security.
“With real GDP growth of around 2 per cent, the defence spending increase will always be limited by maintaining a small fiscal surplus,” Sarmento said.
Lisbon, an Atlantic-facing EU capital furthest from Kyiv, does not feel the same pressure to increase its military spending as countries closer to Ukraine. Poland’s defence budget, for example, is almost 5 per cent of GDP, the highest among Nato allies.
By contrast, Portugal is seventh from bottom in Nato’s ranking, having spent just 1.6 per cent of GDP on defence last year. It has pledged to reach Nato’s 2 per cent goal by 2029. But Nato leaders at a summit in June are set to raise that target to at least 3 per cent of GDP. Trump has floated 5 per cent as a better goal.
Portugal’s fiscal rectitude stems from years of painful austerity measures linked to an IMF and EU bailout it received 2011. Lisbon is one of the few EU capitals with a budget surplus — equal to €2bn or 0.7 per cent of GDP in 2024 — its second largest in percentage terms in at least 50 years. The finance minister predicted a surplus of 0.3 per cent in 2025.
Sarmento said maintaining a budget surplus was essential to reducing Portugal’s public debt, which stood at 95.3 per cent of GDP at the end of 2024. “We need to go to 80 per cent, or even below 80 per cent, by the end of the decade,” he said.
Under the EU’s fiscal rules, countries need to keep public debt under 60 per cent of GDP, but the requirement was suspended during the Covid-19 pandemic and is now being relaxed to allow for increased defence spending.
A surplus would also provide a buffer so that “if bad economic times arrive in the next years we will be prepared to face them”, Sarmento added.
Fiscal conservatism is bipartisan in Portugal and not up for debate in upcoming parliamentary elections.
But other countries are throwing off the fiscal shackles. Friedrich Merz, Germany’s chancellor-in-waiting, has struck a deal to relax the country’s strict fiscal rules and raise unlimited debt to fund its armed forces and military assistance to Ukraine.
Prime Minister Mette Frederiksen of Denmark — which also has a budget surplus along with Ireland and Cyprus — has urged European leaders to “spend, spend, spend on defence and deterrence”.
Portugal’s population is also more hawkish than other southern European nations. In a Eurobarometer survey last year, 84 per cent of Portuguese supported EU financing of military equipment for Ukraine, versus 55 per cent of Spaniards and 48 per cent of Italians.
Sarmento said Portugal was ready to do more. “The fiscal position of Portugal, combined with flexibility on the EU fiscal rules, will give us a more room to manoeuvre, more space, to increase defence spending in a faster way,” he said.
The Portuguese government was “most likely” interested in using funds from a €150bn loan programme for member states to funnel to their defence industries, the minister said. But Lisbon wanted first to see the terms and how borrowing costs compared with Portugal’s own options in the sovereign debt market.
The yield on 10-year Portuguese government bonds is currently 3.25 per cent, lower than France, Italy and Spain — a sign Portugal is seen as a less risky borrower. The yield on 10-year German bonds is 2.73 per cent.
On spending priorities, Sarmento said it was vital that EU members co-ordinate to nurture specialised industries in each country. Portugal already had strong shipbuilders and the aircraft maker Ogma, which is owned by Brazil’s Embraer. The Portuguese company Tekever, meanwhile, has supplied drones to Ukraine.
Polls suggest the minister’s centre-right Democratic Alliance is in a tight election race against the opposition Socialists with a high chance that neither will be able to form a stable parliamentary majority.
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