The climate dimension of fiscal policy sustainability: best practices in Green Budgeting and lessons for Portugal

The Green Budgeting technique is being adopted by an increasing number of countries and has the potential to align fiscal policy objectives with climate and environmental goals. Given that the (financial) sustainability of public finances and environmental sustainability are intrinsically interconnected with each other, this paper argues that the traditional public debt sustainability analysis should be expanded to encompass climate and environmental sustainability considerations. Other key elements of a proper budgetary framework, such as fiscal transparency should also be broadened to include the disclosure of the environmental and climate impacts of fiscal policy. Green Budgeting is a growing technique that can be used to expand the scope of such usual fiscal concepts. One of the main tools for its adoption is Green Budget Tagging, which enables citizens to assess the environmental and climate impacts of fiscal policy, on both the tax and spending sides of the state budget. It enables to capture both the positive and negative impacts of fiscal policy. Additionally, it provides more visibility to the amount of resources countries allocate to climate and environment goals and to mitigation and adaptation policies, while allowing the assessment of whether such goals are attained. A proper working fiscal framework, including the adoption of accrual accounting and performance programme budgeting, seems to be instrumental in this domain along with strong political commitment. Portugal already took a few steps, such as recently enacted Climate Law, but still has a long way to go in terms of Green Budgeting. This paper proposes a roadmap for its adoption. To start with, both the completion of the public accounts reform and the full adoption of programme budgeting foreseen in the 2015 Budgetary Framework Law should be attained. The meeting of such two pre-conditions will then lay the foundations for the implementation of Green Budgeting and to disclose the climate and environmental impacts of policy measures, following the international best practices. The adoption of Green Budgeting might also pave the way to the emission of Green Bonds to finance specific environmental and climate related projects. Such bonds might be a cost-effective way to finance the substantial green investment needs in a highly indebted country while contributing to the decrease of global risk.