Mr Socrates has been forced to accept his mistake
Portugal's public finances
The apology of Sócrates
Austerity belatedly comes to Portugal
SPANISH matadors kill bulls in the ring; the Portuguese put them down after the fight. When the Greek debt crisis threatened to engulf Iberia in May, Spain went in for the kill, slashing spending and freezing pensions. The more measured approach of José Sócrates, Portugal’s prime minister, involved limiting wage cuts to politicians and senior civil servants, increasing value-added tax and postponing big infrastructure projects. Spain’s quick moves helped it escape the storm. But Portugal’s borrowing costs soared to a euro-era record in September. Now Mr Sócrates has been forced to accept his mistake with a new austerity package at least as tough as Spain’s.
Mr Sócrates’s measures, now before parliament as part of his minority government’s 2011 budget proposals, have reassured investors that Portugal can meet its target of cutting the budget deficit from 9.4% of GDP in 2009 to 4.6% next year (see chart). Described as “brutal” by the unions, which have called a one-day national strike for November, the bill will cut public-sector wages by 5%, increase VAT again, freeze state pensions and chop welfare payments.
The opposition Social Democrats, who have enough seats to defeat the government, want fewer tax rises and more spending cuts. A messy compromise is likely in the next few weeks. But Mr Sócrates’s main challenge is how to return the economy to growth. That a recession will follow the fiscal tightening seems obvious to all except the government, which projects 0.2% growth in 2011, after about 1% this year. Barclays Capital expects the economy to contract by 1.1% next year.
Yet it was in the name of growth that Mr Sócrates doggedly resisted more drastic measures until the bond markets forced his hand. He argues that, unlike some other troubled euro-zone countries, Portugal suffered neither a housing nor a banking crisis. Greece, Ireland and Spain all have bigger deficits and lower growth. To keep government borrowing costs manageable, however, he has been forced to take an axe to the deficit.
Painful austerity is an essential condition for lasting growth, but it is not enough on its own. According to the OECD, the only way for Portugal to improve competitiveness, reduce its debt burden and fulfil its growth potential is through structural reforms: tackling the inflexible labour market, improving the schools and boosting the efficiency of the legal system. Portugal may at last have bowed to the markets but there are plenty more battles to come.
The Economist
The apology of Sócrates
Austerity belatedly comes to Portugal
SPANISH matadors kill bulls in the ring; the Portuguese put them down after the fight. When the Greek debt crisis threatened to engulf Iberia in May, Spain went in for the kill, slashing spending and freezing pensions. The more measured approach of José Sócrates, Portugal’s prime minister, involved limiting wage cuts to politicians and senior civil servants, increasing value-added tax and postponing big infrastructure projects. Spain’s quick moves helped it escape the storm. But Portugal’s borrowing costs soared to a euro-era record in September. Now Mr Sócrates has been forced to accept his mistake with a new austerity package at least as tough as Spain’s.
Mr Sócrates’s measures, now before parliament as part of his minority government’s 2011 budget proposals, have reassured investors that Portugal can meet its target of cutting the budget deficit from 9.4% of GDP in 2009 to 4.6% next year (see chart). Described as “brutal” by the unions, which have called a one-day national strike for November, the bill will cut public-sector wages by 5%, increase VAT again, freeze state pensions and chop welfare payments.
The opposition Social Democrats, who have enough seats to defeat the government, want fewer tax rises and more spending cuts. A messy compromise is likely in the next few weeks. But Mr Sócrates’s main challenge is how to return the economy to growth. That a recession will follow the fiscal tightening seems obvious to all except the government, which projects 0.2% growth in 2011, after about 1% this year. Barclays Capital expects the economy to contract by 1.1% next year.
Yet it was in the name of growth that Mr Sócrates doggedly resisted more drastic measures until the bond markets forced his hand. He argues that, unlike some other troubled euro-zone countries, Portugal suffered neither a housing nor a banking crisis. Greece, Ireland and Spain all have bigger deficits and lower growth. To keep government borrowing costs manageable, however, he has been forced to take an axe to the deficit.
Painful austerity is an essential condition for lasting growth, but it is not enough on its own. According to the OECD, the only way for Portugal to improve competitiveness, reduce its debt burden and fulfil its growth potential is through structural reforms: tackling the inflexible labour market, improving the schools and boosting the efficiency of the legal system. Portugal may at last have bowed to the markets but there are plenty more battles to come.
The Economist
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