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Adjustments but no advances

Portugal slips deeper into recession, with no significant improvement in its public finances

One differential attribute of the Portuguese government’s behavior is still its strict compliance with the budget adjustment demands imposed by the troika (European Commission, ECB and IMF) in exchange for the bailout of its economy, agreed in May 2011. It has implemented major cutbacks in public spending, substantial tax hikes, price rises in public services and wage reductions. The results, however, are not favorable. The public deficit-reduction target will not be achieved this year, the economy’s growth rate is still contracting, and employment figures keep going up.

Now the conservative government of Prime Minister Pedro Passos Coelho has announced a new turn of the screw in its austerity campaign, entailing a further reduction in the income of most of the population in the form of higher contributions (up from 11 to 18 percent) by public and private-sector employees to the Social Security system. Simultaneously, the quotas payable by companies will be reduced from 23.75 to 18 percent, in order to strengthen their competitive advantages and provide them with greater incentives to hire.

It will not be easy, however, in the present conditions of a slump in demand, both domestically and in that of their principal overseas customers, to induce companies to reverse their prevailing trend toward a reduction of labor costs.

There are reasons to be apprehensive of similar decisions in Spain. The Social Security contributions of Spanish workers are significantly lower — at 4.7 percent — and the idea has often been aired that company quotas, now at 23.60 percent, might be exchanged for a rise in VAT. Allowing for structural differences, both economies share a set of elements which point toward a continuation of their recessions, without the redeeming factor of any significant advances in the restructuring of public finances.

Unequal burden

The evidence is clear: the implementation of budget adjustments or reductions in household income, coming too close together, does not manage to generate the desired confidence in the minds of domestic and foreign investors, and in fact accentuates recession, as well as contracting the potential growth of the economy.

The other obvious consequence of the decisions being made, such as the set of measures now being taken in Portugal, is an aggravation of the unequal sharing of the costs of the crisis, and an acceleration in the regressive distribution of income, coming on top of the inequality already existing before the emergence of the crisis in both economies.

The general weariness of the population, and the skepticism of investors, justify a broad reconsideration of these policies, which are based on an ill-understood conception of austerity. There should at least be some revision of the timing of their implementation, in order to forestall a prospect of depression — not only in a general economic sense, but also in the population’s state of mind, and in its degree of identification with the objective of its integration in the European Union.

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