The climate-fiscal timebomb: Portugal

08 March 2026

Fiscal outlook

Portugal recorded 0.5% surplus and a debt-to-GDP ratio of 93.6% in 2024. It also has falling debt and Fitch upgraded the sovereign to ‘A’ on 12 September 2025.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

Summer 2025 delivered an extreme wildfire season across Iberia: attribution scientists report ~260,000 hectares burned in Portugal, which is five times the usual area by early September. In the south, the Algarve’s structural drought keeps forcing emergency measures, including providing water equivalent to a year’s urban usage there. A 2022 study found the Iberian Peninsula is experiencing its driest climate in at least 1,200 years. An unprecedented series of storms hit the country at the end of January 2026 which killed at least 16 people and left thousands without electricity. Damages are estimated to amount to €755m, leaving many homes destroyed as well as infrastructure such as the country’s main motorway.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Portugal’s GDP declining by 14% by 2050 and 20% by 2070 under current policies. Our modelling shows the following:

Under current policies (BAU – business as usual), Portugal’s debt is 72 pps higher than the climate-agnostic baseline in 2050 and 230 pps higher in 2070.

With early EU mitigation and sufficient adaptation spending, debt is 57 pps higher in 2050 and 86 pps in 2070.

Delayed EU investments and insufficient adaptation results in higher debt levels of 69 pps in 2050 and 113 pps in 2070.

EU early action combined with global cooperation results in 6 pps higher debt levels than the climate-agnostic baseline in 2050 and 19 pps lower levels in 2070.

Progressive taxation, such as a wealth tax, combined with EU early action would increase debt by 14 pps in 2050 and reduce debt by 1 pps in 2070 compared to the climate-agnostic baseline.