This brings it well below the EU limit of 3% and allows it to exit the Commission's excessive debt procedure.
After its 2011 bailout, Portugal saw austerity policies under a centre-right government until elections in 2015.
Since then, a Socialist-led coalition has reversed those austerity measures.
EU economy commissioner Pierre Moscovici said the outcome was "extremely good news" for Portugal.
The Portuguese finance ministry hailed the Commission's decision, calling it a "turning point".
"It expresses the evaluation of the Commission that Portugal's excessive budget deficit has been corrected in a sustainable and lasting way," the ministry said in a statement.
"Confidence in the Portuguese economy is beginning to be reflected by international institutions."
Under EU rules, member states are not supposed to run annual deficits greater than 3% of their total economic output.
Portugal now complies with those rules, but some other member states are less fortunate.
On Monday, the Commission, which has the power to oversee Eurozone countries' draft budgets, said France and Spain were still subject to the disciplinary procedure.
France's deficit hit 3.4% last year, while Spain's was even worse at 4.5%.
Although all EU countries are required to observe the 3% limit, only the 19 countries that use the euro as a currency can be fined.
Source: BBC World News