Institute for Research in Economic and Fiscal issues

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Fiscal competition
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Portugal turns the page

Portugal has undergone a huge change. There is a completely new political leadership: younger, better prepared, and much more open to the civil society. But even this “right wing” government lack the theory to understand the causes of the crisis Portugal currently faces, and thus seem unable to deliver real change.

A New Government

The new government is one of the smallest ever. Ministers are down from 16 to 11 and the number of secretaries is also down. The team is also quite heterogeneous: 4 from the main party – all very political -, 3 from the coalition partner - younger and more open-minded - and 4 independents - more academical and technical.

Composition of the new Portuguese government

From a liberal standpoint, this is a very good government. Despite having a Keynesian as a Finance Minister and still a Defense Minister, the general idea is that it is a small, technical and a strong government. However, when facing the issues, one cannot avoid becoming skeptical after some blunders like having heavy-weights from PP (the most liberal party in Portugal) saying they are proud to be leftists, and defending the public television - RTP - and the public finance conglomerate should remain public.

A New Parliament

After the revolution against the right-wing dictator Salazar, Portugal became very left-oriented for 11 years. After that period, Cavaco Silva - the current President - ruled with a majority in the parliament for 10 years. Then, in 1995, a socialist cycle started, first with the “dialogue socialism” from Guterres - the current president of the International Socialist - and after a 2 year hiatus with José Barroso, the “ferocious socialism” of Socrates.

With this election, Portugal has entered a new cycle. As with the first right-wing cycle, this also starts after an IMF intervention (Portuguese left takes the Thatcher warning seriously and always use other’s money to the point of no return). The situation is harsher (debt-to-GDP wise), but so are the means at the government disposal: it has a majority in the parliament, a favorable president, a favorable European Commission and a people that understands that many things must be done to cut the state budget deficit. In Portugal, there are 5 parties in the parliament:

Traditionally, the 3 small parties get 10% of the vote, the second most-voted gets 30% and the winner gets 40%, with around 46% being the threshold to get a parliament majority of 116.

A dozen of micro parties exist - including extreme leftists, Maoists, Trotskyists, proletarians, humanists, animal rights, pro-life, monarchists, nationalists, regionalists, meritocrats and traditionalists - but none has a single seat at the parliament.

Troika is the delegation from European Commission, ECB and IMF. The Communists and Leftists refused to meet them and obviously did not sign the agreement on Portugal’s bailout package signed earlier this year.

The Last 6 Years

Under Mr. Socrates, Portugal’s state expenditure crossed 50% of GDP, budget deficit rose to 10% of GDP despite several significant tax increases, state debt rose from 57% of GDP to 94% (highest ever), unemployment rose from a record 7,1% (Portugal is a country of low salaries, thus having traditionally very low unemployment) to close to 12%, emigration was second only to the Africa War period (1960s and early 70s) and GDP grew less than 0,5% average per year.

Mr. Socrates himself was accused of not having a degree (the diploma was passed in a Sunday, a friend in the government examined him in 5 different subjects, he answered his English exam by fax), projecting houses that didn’t pass the mayor’s office criteria (he was a civil engineer), being partner of people arrested for corruption, having authorized a huge shopping-mall - Freeport - in a protected area as Environment Minister, spying on secret Presidential conversations as Prime-Minister, cutting state publicity in unfriendly newspapers, firing civil servants who would speak publicly against him and cutting services from companies who would ask to be listed as state creditors (while the state publishes the list of state debtors).

Unholy Alliances between “innocent” speakers and “less-innocent” campaign-pushers justify many policies (such as the alliance between church and traditional commerce against the opening of supermarkets on Sunday, or cancer institutes and well-established smoking companies against smoking-labels publicity). Mr. Socrates was elected with such an alliance: his speeches convinced the good intentioned - rallying them against capitalist evil-doers -, while with his actions he conquered civil servants, social security recipients and numerous lobbies who would be paid to do their part for the common good.

The private sector has been facing its toughest times: taxes have been going up, with prospects of further increases people has been saving much more (a late-Ricardian Equivalence effect), while the government itself has been cutting where it can: pensions, pharmaceuticals, family subsidies, salaries, and everything that is not “stimulus”, i.e., construction projects built by campaign financiers, one of them being an ex-socialist minister. Given these policies, over 10 000 restaurants closed in 2010, 25% of sport centers closed in the first months of 2011 (VAT over gymnasiums was raised from 6% to 23%), factories relocate as never before and the media seem to have a new poor to showcase everyday.

After losing the elections, Mr. Socrates said all he tried was to “Defend Portugal” - its campaign slogan - from the IMF and from bankruptcy. He said he loves Portugal and his fellow countrymen. He also said he is not going to run for elections “in a near future”, leaving the door open for a Presidential run in 2016. He plans now to study Philosophy in France for the next years.(1)

Campaign Issues

The campaign was basically a referendum on Mr. Socrates, with PSD trying to avoid costly mistakes and Socrates trying to find anything in the speeches of the right-wing candidates to scare people into voting PS. To the extreme-left, the communist party kept its loyal base, while the left block lost half (!) of its members in the parliament as internal disputes weakened its leadership and its image as a different party and a good vote to show revolt against the system.

The main campaign issues were:

>  Tax Mix - the parties who met with the European Troika (Commission, ECB and IMF) promised to lower Social Security contributions and raise VAT, to ease companies’ budgets, raise employment and decrease consumption. But as no number was written, this was a main campaign issue between PS and PSD.

>  Privatizations - another important point in Troika negotiations was which companies to sell and when. As the Troika only defined how much should enter one given year, which companies to privatize was a main issue, with the public television and the public finance conglomerate being the main fighting points for the right (PSD wanted, all other refused, including PP) and the water companies being the main fight for the left. Of course BE and PCP defend the nationalization of all companies previously privatized.

>  State Debt - BE defends Portugal should simply renounce its debt, while the Communist Party claims that the public finance conglomerate should sell all its funds invested on foreign companies to buy state debt. PS positions is that there is no problem with state debt, as it is stimulating the economy and can be paid with enough economic diplomacy while PSD and PP ran to cut the deficit and the debt with the help of the European institutions. PP also defends the “German” solution of including a deficit limit in the Constitution.

>  Deficit Resolution - The extreme left defends high taxes on those “who can pay”, taxes on financial transactions and nationalizations. PS defends higher taxes, tolls on all highways (what proved quite costly in terms of votes) and cuts on social programs. PSD defends a smaller and more efficient state, although it was unable to decide where it would cut.

>  Unemployment - Socrates promised 150 000 more jobs but took the country to the highest number of unemployed people in its history, thus losing all credibility on this topic. The right promised a more flexible labor market, a lower social security contribution and a bigger support for exporting business. The extreme left guaranteed to battle the changes in the labour market with whatever means available, from the big demonstrations and strikes, to constitutionality requests - as many judges have a very widen understanding of the concept of “equality” and what it implies.

>  Administrative Reorganization - Portugal has 308 counties and over 4300 parishes. It is a consensus that this is too many and that the Troika agreement is right when it demands that this numbers should be lowered, but the consensus stop when number of counties to be kept and criteria are discussed.

A Tough Road Ahead

According to the Troika Memorandum of Understanding, the calendar ahead is tough and will be hard to sell to the general population. Although Portuguese people are traditionally more peaceful than others, hundred thousands demonstrations and several political battles seem unavoidable. The first defeat of the prime-minister- the election of the parliament president, which PSD lost and which will force him to present other candidate in the next days - proved nothing is certain and that a lot of compromises must be achieved, even in a majority-supported government.

A resume of the tasks ahead run as follows:

June

> Audit of the Judicial System, to find what makes it so slow (note that it is 6 times bigger than it was in 1974!) - Banks must present a plan of how they are going to finance themselves in the long run.

July

> Report on the ten State companies that represent a bigger solvency riskSelling of BPN, a bank nationalized and already offered for sale before - Application of the principles of Flexicurity (from flexibility and security) to the Portuguese labour market - Reduction of the Social Security Tax - End the “golden shares”, that allow the State to control privatized companies with just a bunch of share.

August

> Report on the budget strategy - Enquiry on all the delayed payments from the State - Analysis of the 20 most important “Public-Private Partnerships” (a vehicle for the State to build highways and hospitals and pay them in 50 years) - Present a budget plan for the next 4 years - Publish all the delayed payments.

September

> Evaluate all the public-owned companies - Increase in the healthcare fees - Increase the judicial fees - Reduce the number of regulated professions.

Until December

> Raise of property taxes (the last low-taxed investment) - Raise of several excise taxes, including cars and tobacco - Unemployment benefit to be maxed at 2.5 times the minimum wage, reduced from 24 to 18 months and decreased after the first 6 months - Reduction of several ta deductions regarding personal income tax, including health and education expenses and housing credit interests - 5% wage cut to all civil servants (on average: cut grows with salary bracket) - Minimum wage freeze (500 Euros goal delayed from 2012 to some point in the future when the IMF intervention is supposed to end) - Pension freeze (and reduction when above 1500 Euros per month) - Defense budget freeze - Reduction of the subsidies to green energy co-generation - Publication of a list of all public institutes, foundations, associations and other organisms - Hire a “Big4” audit company to audit the “Public-Private Partnerships” - Banks must have a Core Tier 1 ratio of 9%, to ensure they don’t go bankrupt in the event of a crisis - New bankruptcy legislation, in which bank deposits have priority over other credits on the bank - Achieve a the State budget deficit lower than 5.9% of GDP.(2)

Conclusion

Portugal has turned a page. The future is better than the pass: without the “ferocious socialist” and with the IMF “helping” in the craft of the policies needed to balance the budget and pay its debts, the Portuguese State seem in a better track for fiscal consolidation. But only time will tell if the IMF program is implementable and, even if implemented, if it is able to keep Portugal from default or leaving the Euro.

(1)To see a funny, albeit quite telling, video on Mr. Socrates, click here.

(2)To see the full IMF agreements, click here.

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