By Sergio Goncalves

LISBON (Reuters) – Portugal’s government expects the economy to grow at an annual rate of about 2% in 2024 and 2025 and foresees small budget surpluses in both years even as spending will increase, a source familiar with the matter told Reuters on Tuesday.

The projections, which are slightly softer than last year’s outturn, are part of the economic outlook for the draft 2025 budget that the centre-right minority government has been presenting to opposition parties, the source said. The government declined to comment.

Since it took over in April, the new government has suffered several setbacks in parliament as opposition parties teamed up to block some of its fiscal proposals, raising doubts about the approval of the budget bill later this year, which would be the administration’s first major survival test.

However, Prime Minister Luís Montenegro and main opposition Socialists’ leader Pedro Nuno Santos have said recently that they were open to negotiating the budget to avoid another election after two early general elections in as many years.

The source said the government expected a budget surplus of 0.3% of GDP this year and 0.2% in 2025, despite a projected rise in primary spending, which excludes debt servicing costs, of 8% this year and 4%-5% in 2025. Tax revenues are seen rising between 4% and 4.5% each year.

Last year, the economy expanded by 2.3% and the budget surplus reached 1.2% of GDP – the country’s strongest in 50 years of parliamentary democracy.

The new administration has increased pensions and public sector salaries and promised tax cuts for the middle class, young people and companies in the hope of boosting growth.

Portugal’s economy grew by a mere 0.1% in the second quarter from the previous three-month period, when it expanded 0.8%, hit by weaker net exports and a slowdown of private consumption.

(Reporting by Sergio Goncalves; Editing by Emelia Sithole-Matarise)