2014 State Budget. The Economy does not thank you

Public finances normally pursue two objectives: the first, provision of public goods and income redistribution. O […]

Public finances normally pursue two objectives: the first, provision of public goods and income redistribution. The second, economic stabilization.

Fiscal policy in Portugal has always focused almost exclusively on the first objective, and there is rarely an extension to the function of stabilizing the economy, including its growth.

This separation from the strictly accounting vision of public revenues and expenditures, from a more strategic global vision of economic development, was only altered in the programming of public investments and, in some cases, in fiscal policy. Even in the Salazar era, policy makers were aware of the strong link between public spending and economic growth.

The Portuguese economy, due to its size and its relative closure to the outside world, still depends on an economic policy with a strong “Keynesian” bias.

Each economic system has its own characteristics, many of them strongly structuring, which must always be considered. The growing opening of the economy to the outside world is a correct policy, but it still takes some time to be sustainable.

This is due to the current public budget management framework under the Economic and Financial Assistance Program (aka “Agreement with the Troika”).

The persistent deficits in the Public Administration accounts (Central, Regional and Local) and the consequent growing accumulation of the public debt “stock” led to a situation of uncertainty about Portugal's capacity to meet its public debt commitments and by drag debts of public and private companies.

The solution was a financial restructuring program, guaranteed and controlled by an international commission representing the interests of creditors (Troika).

Debt reduction will only be possible with the creation of positive primary balances. These balances are obtained by the difference between public revenues and public expenditures (the interest on the public debt does not enter the latter).

So far, everything is rational and similar to what happens with the financial restructuring of a company, conducted by a banking union. A good valuation by a banking entity should consider as the main guarantee the perspective of the company's profitability, that is, its capacity to create value (net income) and corresponding cash balance, which allows it to pay interest and amortize the outstanding capital.

In the case of the economy (in the macro sense), the solvency situation is similar. Only with growth and income creation is it possible to generate a surplus in public accounts to pay the debt.

In this context, the 2014 State Budget proposal maintains the recessive effect on the economy, mainly due to the decrease in disposable income. The only element favorable to growth is the foreseeable increase in net external demand of 1.1 percentage points.

However, this effect, which depends on the economic situation in the rest of the world (whose behavior has been very variable), can be canceled out by the aforementioned negative evolution of domestic demand (with a multiplier effect on the decrease in income and increase in unemployment).

Using precisely the multipliers described in a recent study by the European Commission (“Fiscal Consolidation and Spillovers in the Euro Area Periphery and Core”, DG ECFIN) of, on average, 0.8, which corresponds to the same value already advanced last year by Professor Vítor Gaspar , the negative effect of austerity in 2014 could affect around 1.4% of GDP

This calculation, regardless of the accuracy of the figure, demonstrates the persistent error of current fiscal policy. Indeed, not only is the country impoverished, but the difficulty in meeting the budget criteria (deficit and debt) to which we are obliged as members of the Eurozone increases..

This is the main difficulty of the current policy centered on the State Budget, which has to be resolved by the Portuguese Government, but also by the European Commission, whose inability to develop a global development policy for Europe is, to say the least, embarrassing.

In addition to the persistence of error in economic and budgetary policy, there is still a crisis of confidence of citizens and companies in national and community political leaders and in the respective institutions.

It is up to each one of us, technicians, politicians, businessmen or simple citizens, to insist on a more realistic budget policy, more coherent and more responsible with regard to the economic and social consequences for the country.

Such a policy will necessarily have to go through changing the terms of consolidation and the form and maturity of the debt, but also through more competence in public management.

 

Author Adriano Pimpão
Member of the National Board of the Order of Economists and Member of the Economic and Social Council.
He was Rector of the University of Algarve, President of the Council of Rectors of Portuguese Universities and Secretary of State for Regional Development (1995-1997), among many other public positions and professional achievements.

 

NOTE: O Sul Informação begins today to publish opinion and analysis articles by renowned economists, under the established protocol between our newspaper and the Algarve Regional Delegation of Order of Economists.

 

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